We can say this in the knowledge that over long periods the purchasing power of gold is remarkably stable, while those of fiat currencies are not. This is why everyone should examine their exposure to credit, which is always fiat usually with systemic risk thrown in (unless you hold cash notes). But we are all human, and from time to time worry that the headline values of our gold or silver might fall and we have missed a selling opportunity.

Having broken into new high ground, there is no doubt that there’s much speculation embedded in gold and silver prices. While we should not tie events together to tightly, this build up has been ahead of the BRICS summit in Kazan next week, with speculation that a new trade settlement currency backed by gold might be announced. Well, President Putin said on Friday that “talk of creating a single currency for the BRICS grouping was premature”. It is not ruled out, only it is not for this agenda

That would suggest that this coming week will see profit-taking in gold and silver and perhaps a shake-out of speculative longs as their stops are triggered on Comex. But Putin made his statement deferring the introduction of a new currency on Friday, after which gold and silver soared higher. It was probably wrong therefore to associate rising prices for gold and silver with speculation about a new BRICS currency.

The other material statement was that Putin was open to admitting new members. A few weeks ago, I suggested that this could be accelerated by creating a class of associate members as a stepping stone to full membership and I would take this to now be the case. Could that have been behind the surge in gold and silver?

We cannot know. But looking at last night’s Commitment of Traders figures for last Tuesday and adjusting for Open Interest since then it is clear that gold is now in overbought territory, but could go further.

A consolidation here would be the healthy outcome, at least from a technical point of view. We can bet that central banks and other statist interests would welcome the opportunity to pick up some cheap bullion, underwriting the market. And recently, Russia announced that it was in the market for silver bullion. That’s our last chart.

I wouldn’t rule out a back-test, maybe to $30.50 or so. But the bullish message of the chart is clear. And even that might not happen.

Reprinted with permission from MacleodFinance Substack.

To a large extent, fundamentals are in the eye of the beholder, whose opinions in any situation can vary from positive to negative and everything in between. But even for the economic optimists, there are gathering clouds on the horizon likely to continue undermining the global economic outlook, the dollar, and all financial asset values. Fiat currencies are being downgraded relative to real money, which is gold.

Current thinking is that inflation is a diminishing problem and that the interest rate spike is over. In this article, I point out where inflation expectations err and the mistake of believing that interest rate control is the solution.

It follows therefore that G7 debt traps are a more serious problem than generally realized. Furthermore, China and Russia are aware of the likely impact of current events on G7 currencies, and this is why they have accumulated hidden gold reserves.

In short, we face a transition between failing fiat and emerging gold-backed currencies, which might explain why gold’s technical position looks so positive.

If you are a chartist, you will judge the current market position for gold to look very bullish. The closely followed moving averages in the chart above are in a bullish sequence, both rising and the 55-day turning sharply higher. The current decline in the gold price should find strong support at its current level, which is between $1910—$1923. A follower of Elliot Wave Theory might say the most likely interpretation is there was a three-leg flat consolidation commencing in August 2020, completing in November 2022, lasting slightly more than 13 months which is a Fibonacci number. The subsequent move is the start of a new bull market.

Despite the backward-looking nature of technical analysis, the bullish argument is compelling, particularly in the context of heightened tensions in the Middle East and a looming global recession. The plain fact is that going into a recession we see G7 government finances (with the sole exception of Germany’s) already mired in debt traps, likely to lead to a series of funding crises. These funding crises inevitably drive up bond yields and divert investment capital from private sector actors to government debt, worsening the economic outlook. And since government revenue depends on profitable economic activity, the funding squeeze ends up undermining government finances.

It is a situation that echoes the 1970s when currency instability led to gold rising from the previously established Bretton Woods level of $35 to $850 on 21 January 1980. At the same time, the Federal Funds Effective Rate rose from a low of 3.3% in February 1972 to a high of 13.8% when gold peaked, going on to over 19% the following year. Today, the idea that both gold and interest rates can rise together is dismissed by the banking and investment establishment. Yet, since August 2020 the Fed Funds Effective Rate has risen from the zero bound to 5.33% currently and gold priced in dollars is roughly unchanged — hardly the negative correlation upheld by the establishment.

Due to the dollar’s relative strength, priced in other currencies, gold is now higher than it was when it first peaked on 6 August 2020, illustrated in the chart below.

In the case of Japan’s yen, it is 35% higher, 4% higher in euros, and 1% higher in sterling while in dollars it is 6% lower. The yen has been particularly weak, due to the Bank of Japan’s monetary policy keeping its deposit rate negative.

With it being widely recognized that the global economy faces an economic downturn, there is also a misconception about the consequences for consumer prices. It is assumed that a recession reduces demand leading to a glut of goods and therefore lower prices. That being the case, they say that with their improving purchasing power currencies might be expected to strengthen against gold. This misconception dates back to the early 1930s when goods were effectively priced in gold because the dollar was tied to it at $20.67 to the ounce. The fact that the dollar was devalued 40% by President Roosevelt in 1934 confirms that the monetary strength was in gold, not the dollar currency. And in the 1970s when the dollar and all other currencies were detached from gold, recessions were accompanied by escalating rates of consumer price inflation.

These and other issues need to be addressed in order to understand why the gold chart looks so positive, and what that implies.

Why consumer prices fell in the Depression

As mentioned above, the experience of the early 1930s was of a significant decline in consumer prices. Between December 1929 and June 1932, the consumer price all items index is estimated to have declined by 8.3%, with food worst hit, down 13%. This echoed the fall in the general level of prices in the 1920—1922 slump when the CPI declined by 9.7%.

Based on this experience, economists in the late 1930s concluded that in a recession prices would always decline and that Say’s Law, which was the basis of classical economics was incorrect. Certainly, there are items that appear to escape the strictures of Say’s Law, such as commodity and raw material prices which experience a decline in demand in a slump. But even that assumes commodity outputs are not curtailed in response to falling demand, which Usually is not the case. Essentially, mismatches between supply and demand are just a timing issue.

In both the early 1920s and early 1930s depressions, food prices were further undermined by the rapid mechanization of farming which boosted output. But as was the case in the 1920—1922 slump, the economic difficulties of the early 1930s were the washing out of excess credit generated in the previous credit boom.

The point about Say’s Law is that it posits that we produce to consume. Therefore, there cannot be a general slump because production will decline with consumption. One can go further, and state that apart from destocking (which today with just-in-time inventory management has been minimized) employees will lose their employment first before they reduce their consumption.

In his desire to promote statist intervention, Keynes had to dismiss Say’s Law which he did on spurious grounds:

“Thus, Say’s Law that the aggregate demand price of output as a whole is equal to its aggregate supply price for all volumes of output, is equivalent to the proposition that there is no obstacle to full employment. If, however, this is not the true law relating the aggregate demand and supply functions, there is a vitally important chapter of economic theory which remains to be written and without which all discussions concerning the volume of aggregate employment are futile.”

This is a wilful misrepresentation of an obvious truth that was never intended to be more than a generalization, and certainly not to be justified in a mathematical equation which is effectively Keynes’s argument. But today, Keynes’s General Theory is the vade mecum for mathematical economists and misleads them about the relationship between a slump in business activity and prices.

As we saw in the early-1930s, prices did fall by 8%. Commodity prices for farm products declined by 60% between 1929 and February 1933, which compares with the decline of food prices in the CPI of 13%, indicating that food production costs actually rose offsetting most of the decline in product values to farmers. The reasons for these declines are explained more fully below.

The February 1935 Survey of Current Business on wholesale commodity prices also noted the following:

“Another classification of the Bureau of Labor Statistics series is given in chart 3 [reproduced below], showing the 10 commodity groups arranged according to the degree of decline in the different groups. As shown therein, the prices of three groups, metals and metal products, house furnishings, and chemicals and drugs, declined slightly less than 25 percent from 1929 to the lows which were reached in the early part of 1933, and the prices of building materials only a little more than 25 percent.”

Yes, these are declines in the general price level, but not as severe as we have been led to suppose today. And they can be easily explained without denying Say’s Law. In 1929—1932 there was the stock market crash, a series of regional banking panics in 1931 and 1932, and in March 1933 the commercial banking system more or less collapsed. Demand deposits contracted by 35% between 1929—1933. In all, some 9,000 banks failed and there was no deposit insurance.

At that time, the dollar was freely exchangeable for gold, so the contraction of credit in the economy had the price effect of a sudden and widespread scarcity of gold. Clearly, it was this scarcity that drove prices lower. Furthermore, allowing for deposit contraction amounting to 35%, non-food commodities in the chart above on average didn’t fall at all (see the last column — “Other than farm products and food”).

The position today is completely different. Currencies are no longer tied to gold and are freely inflated by central banks when deemed necessary. Bank credit is contracting, but the quantities so far are minor. In the event of bank failures, there are deposit guarantees and we can be certain that rather than fail, banks will almost always be rescued by their respective authorities.

In short, there is no certainty over the future purchasing power of today’s fiat currencies. But we are getting to the nub of why the general level of prices will rise in the looming recession: if anything, the future expansion of central bank credit to offset a recession, potential bank failures, and the inevitable unwinding of malinvestments are together set to dilute the purchasing power of all G7 currencies, even to the point where the public’s faith in them becomes undermined.

This brings us to the role of interest rates in the context of currencies. As we saw in 1981, Fed Funds Rates of over 19% ended the bull market run in gold and led to a long decline in dollar interest rates. It worked because foreigners saw a positive return at those rates after allowing for the anticipated loss of future purchasing power in dollars. They will make the same judgment today, only their holdings of dollars and dollar assets in the US financial system at $33 trillion are even greater than the US GDP. To this must be added offshore dollar credit estimated by the Bank for International Settlements at a further $85 trillion, and a further $10 trillion for Eurobonds. Prospective instability in the dollar’s purchasing power could easily lead to unrestrained foreign liquidation of these massive quantities.

There can only be one conclusion: despite the current optimism in financial markets, prices will continue to rise at far above the central banks’ mandated rate of 2% and interest rates will rise with them. And if the 1970s does turn out to be a precedent for the 2020s, we can expect far higher interest rates in the coming years.

The futility of economic management by interest rates

In an attempt to stave off inflation, central banks jacked up interest rates, destroying all government, banking, and business models. The problems caused are obvious to everyone down to the lowly householder facing higher mortgage payments and credit card debt. Naturally, there is a backlash with mechanical monetarists and others saying that the authorities have gone too far. In their search for price stability, mainstream economists are now trying to determine the natural rate of interest, which today they term r*. It will be no surprise that the answer they come up with is that it should be lower.

The concept originates with the analysis of Knut Wicksell, who in 1998 explained that a natural rate of interest represented the rate of interest on loans that equilibrate with respect to commodity prices, neither raising nor lowering them. His conclusions came at a time when gold standards were ubiquitous, and applied to monetary systems where credit in the form of currencies was regarded credibly as gold substitutes.

It should be noted that the concept did not apply to the purchasing power of gold solely, which was determined as a fully objective international average, but to credit redeemable in gold plus interest in a national context. It was the nationally determined rate of interest redeemable in gold that made the difference between the value of gold in one center versus another, arbitrage ensuring that prices did not stray significantly from their international norm.

As noted above, Wicksell’s proposition was made at a time of universal gold standards. He described the natural rate of interest required to bring the domestic relationship between gold and commodities in line with the international average value of gold’s purchasing power. However, the situation with unstable fiat currencies is entirely different, a fact that is ignored by economists who believe that fiat currency relationships with commodities are no different from that of gold.

But r* is entirely theoretical and cannot be defined. For this reason, even Fed officials disagree, with the New York Fed estimating it at 1.13%, and the Richmond Fed at 2.2%. But all this fiddling with theoretical numbers, as was the case with the closely associated Taylor Rule is irrelevant and flies in the face of empirical evidence. Even before Wicksell, the use of interest rates to stabilise demand for commodities, which we can also imply extends to other production inputs, led to enormous problems. The management of interest rates was always aimed at the wrong objective. An illustration of this important point is called for.

In 1799, there was a financial crisis in Hamburg which drove the discount rate there to 15% (equivalent to an interest rate of over 17.5%), attracting gold away from the Bank of England. This was because traders could redeem sterling for gold at the Bank giving up an interest return on sterling of just a few percent and ship it to Hamburg where it would earn an extra return because of the discount. After the perils and costs of shipping, a trader would make a clear profit of over ten percent — redeemable in gold.

At the time, this arbitrage was little understood by the authorities framing banking law, and they made the same mistake in the 1844 Bank Charter Act. Consequently, there were three failures in 1847, 1857, and 1866 when the Bank of England had to suspend its gold exchange obligations under its charter. The root of all these failures, including the run on gold reserves in 1799, was that the Bank was managing interest rates with an eye to economic factors and not the level of monetary reserves. In the conflict objectives of interest rate setting between satisfying currency and domestic economic stability, the wrong choice was always made.

Today, gold reserves are not involved, replaced by an unstable currency regime. This leads the authorities into a further dilemma: should each central bank use interest rates to stabilise their currencies against the dollar, or should they use them to stabilize their currencies against commodities as Wicksellian theory demands? Clearly, they are beholden to following the dollar. And if the dollar is the replacement for the barbarous relic, surely the interest rate objective for the dollar must be one that equilibrates with respect to commodity prices, neither raising nor lowering them.

You would think that by focusing on consumer prices it is indeed the Fed’s interest rate objective. Debating Wicksellian theories and r* assumes that dollars are the new gold and that while other currencies should manage their interest rates with a view to their dollar exchange rates instead, the Fed’s objective is to achieve that Wicksellian stability. But this leaves the Fed with the problem that no one can agree on what the theoretical r* should be, let alone what it should be in the future. And no one in the monetary and credit establishment appears to understand that Wicksell’s theory was between one commodity which happens to be universally accepted as physical money without counterparty risk in a domestic context and all other commodities. This is not the same as the relationship between commodities generally and detached credit, which is what a fiat currency represents, whose future value is not tied to commodities at all but to the market’s faith in future monetary and fiscal policies.

Under a gold standard and without central bank intervention, undoubtedly Wicksellian theory makes sense. But even then, the situation is dynamic, with events elsewhere influencing interest rate outcomes as the 1799 experience with Hamburg illustrated. r* as a concept can only be set by markets and events, and this is even truer in the case of unstable fiat currencies, whose value with respect to gold and therefore the general value of commodities is completely subjective. If one was to guess at the current dollar r* it would be over 4.5% (the current yield on the 10-year US treasury benchmark), not the 1.13% guess by the New York Fed. Instead, Fed officials optimistically take forward interest rate expectations as their basis for determining r*, which they themselves set by indicating their future interest rate expectations.

Consequently, we can see that the mistakes in US credit policies with respect to the dollar’s own future are at the most fundamental level. And because all other currencies are dependent on the dollar for their relative values, they are tied to the dollar’s ultimate failure. And it’s not just US monetary policy: the prospect of soaring US fiscal deficits debasing the dollar transmits into the debasement of all the other currencies as well.

Even to this day, the relationship between gold and commodities has remained stable, as the chart below of the most fundamental unit of energy, oil, priced in both dollars and gold clearly demonstrates. This is not true of the dollar.

I have run similar charts in other commodities and found the same applies. Combined with the erosion of the dollar’s purchasing power since the Bretton Woods Agreement was suspended in 1971, we can see that it is gold that retains its international role as money and not the dollar, whose purchasing power is both volatile and rapidly eroding. It is a submission to statist propaganda for economists to maintain that gold is no longer money, replaced by the dollar.

The mistaken approach to interest rates by the US monetary authorities, together with the US Government’s soaring fiscal deficits confirms the technical conclusion of the headline chart to this article: that the dollar and all other fiat currencies’ purchasing power will continue to decline, reflected in higher prices measured in them for gold.

Funding budget deficits

One of the problems encountered in the 1970s was the reluctance of foreigners to fund government budget deficits at low interest rates. This hit the UK particularly hard, where a left-wing government was committed to destroying personal wealth and running budget deficits.

At that time the US was in a far better position. Between 1971 and 1980, the sum of budget deficits for the US Government over the ten years was $421,823 million, 15% of 1980’s GDP. By way of contrast, the total budget deficit for the last ten years totaled $12,918 billion, 47% of 2023 GDP. Furthermore, US debt to GDP in 1970 was 34%, while today it is 122%. That is the difficult starting point for US deficits going into a recession. With continual and accelerating deficit financing in prospect, the question arises as to what level will the US’s debt to GDP ratio rise, and what will be the consequences for the borrowing rates required to keep foreigners recycling dollar trade balances into US Treasuries when they are already heavily overexposed to dollar credit.

Out of the G7 countries, US government finances are not the worst. Japan heads the list at over 260% debt to GDP, followed by Italy at 144%. The Japanese position is particularly alarming in a global context. Currently, the government’s budget deficit at 6.4% of GDP is estimated at U37,250 billion. A one percent increase in average borrowing costs adds U15,000 billion to the deficit. It is hardly surprising that the Japanese strongly resist increasing bond yields, let alone because of the impact on the Bank of Japan’s balance sheet which owns an estimated 53% of all government bonds.

Japan’s putative financial crisis is important for the rest of the world, partly because Japanese institutions have invested in other markets in order to enhance returns, and partly because negative short-term rates are a highly attractive source of leveraged funding in other markets. So long as this situation persists, not only are there leveraged profits to be made between different treasury bill markets but there has been a substantial bonus from the yen’s decline. Consequently, on rising yen interest rates — which are now inevitable — not only will Japan be plunged into crisis, but it will lead to a significant contraction of global credit flows.

These aspects of G7 debt traps are just one side of the equation. It is not only soaring deficits driving debt-to-GDP relationships but the consequences for GDP itself. GDP is bolstered by government deficits as well as by changes in the level of outstanding commercial bank credit. These facts make GDP a badly corrupted indicator of economic activity, allowing government agencies to propagandize economic growth and conceal evidence of declining underlying economic activity. Other government statistics such as employment surveys are notoriously inaccurate, and one suspects are used to tell anything but the truth. But perhaps the best indicators are of logistics, and these tell us of multiple bankruptcies in the US trucking industry. A further indicator is US tax revenues, which have declined sharply since the peak in 2022’s Q2.

The consequences of many years of ultra-cheap borrowing costs followed by a substantial rise in interest rates cannot be denied. Not only have they thrown the entire banking system into a global crisis, not only have they sprung debt traps on high-spending governments, not only have they undermined personal and corporate wealth, but they have exposed massive industrial malinvestments on a global scale. Inevitably, the changed interest rate situation will continue to lead to bankruptcies and bank failures for years to come, many of which will demand state support for fear of a total collapse of the global credit system.

The unwinding of these distortions has become inevitable, leading to a credit contraction in the private sector, made worse by the demands of governments for yet more credit. This redeployment of credit from genuine economic activity to government finances worsens the situation by compromising government revenues even more. Declining tax revenues contribute to soaring deficits. This increasing shift of economic resources to the financing of runaway government deficits is bound to come at the expense of fiat currency dilution and yet higher bond yields.

Unless it can be stopped, a total collapse of the fiat currency credit system will be the end result. The only solution is to tie credit credibly to gold, making credit exchangeable for bullion and coin on demand. But how can this be achieved by governments whose gold reserves are depleted, and when perhaps as much as one-third of them are double counted so don’t exist? How can governments reverse a century of progressive intervention? How can the political class stop minding everyone’s business, when they are elected to do just that?

Undoubtedly, it was an early understanding of this increasingly inevitable endpoint that persuaded the Chinese and then the Russians to accumulate enough gold to protect themselves and their populations from the follies of G7 fiat currency management.

China, Russia, and BRICS+

Do not be misled by China’s official gold reserves. China has been accumulating gold since the Peoples Bank was appointed under China’s Regulations on the Control of Gold and Silver, dated 1 July 1983. For nineteen years, China accumulated gold during a prolonged bear market as Swiss banks and others gave up on gold and sold down bullion holdings for their customers. Western central banks reduced their holdings and leased gold into the market, never to return. Only when the Peoples Bank had accumulated enough gold that it finally rescinded the ban on personal ownership, opening the Shanghai Gold Exchange in 2002, subsequently advertising to encourage people to acquire gold. And in all that time, China invested heavily in mine production and refining capabilities, importing enormous quantities of bullion from the West and doré for refining. For forty years now, China has been a Hotel California for gold, with virtually no bullion leaving.

Why this obsession? Between hidden stocks and the private sector, I estimate that between the state and the people China could have accumulated over 50,000 tonnes, representing roughly 25% of all gold mined throughout history. This gold habit has spread beyond China to Asian partners in the Shanghai Cooperation Organisation. And belatedly, Russia began following the same course as China in the wake of sanctions imposed on it by the West in early 2022.

Russia tried to get a gold-backed trade settlement currency on the BRICS agenda at the Johannesburg summit last August. It was a move that appeared to have been supported by some nations, presumably frustrated at the devastating costs to their own economies of the lack of credibility in their own currencies and a desire to be paid for their exports in something better than other BRICS members’ currencies.

China and India were not so keen. The inscrutable Chinese take a long view, letting the Americans make all the monetary policy mistakes, from which they have ultimately protected themselves by accumulating a huge chunk of the world’s above-ground gold stocks. China does not wish to be blamed for destabilizing the dollar by being party to such a radical step as backing any official gold substitute currency. Furthermore, paying for commodity imports in her own fiat currency is preferable to her than paying in renminbi backed by gold.

India remains thoroughly Keynesian in its monetary policies, and her increase in gold reserves has been minor in the context of both her population and economy. The Indians are not fellow travelers. But Russia takes on the presidency of BRICS from January, so her proposals to incorporate gold into trade settlement will get another airing.

New BRICS members include Saudi Arabia and the United Arab Emirates who certainly prefer gold-related payments for their oil and gas exports to national fiat currencies. Interestingly, almost all the Shanghai Cooperation Organisation members, associates and dialog partners attended the Johannesburg BRICS summit, strongly suggesting that BRICS and the SCO will be merged.

That being the case, we can expect Iran and other oil and gas exporters to join. Russia’s case for a gold-backed trade settlement currency is likely to be advanced again. Furthermore, Russia herself would benefit enormously from backing the rouble with gold, allowing her to reduce interest rates from current crippling levels.

Not only has Russia accumulated the fifth largest official gold reserves at 2,330 tonnes, but she can mobilize bullion held in two state funds believed to total a further 10,000 tonnes. Furthermore, the lesson of how Hamburg drained the Bank of England of its gold in 1799 by interest rates being raised to 17.5% gives us (and the Russians with interest rates nearly at a similar level) a clue as to how to bolster her reserves on a gold standard even further, draining western capital markets of their physical liquidity.

Conclusion: the fundamentals for gold appear to fully support the technical case in our headline chart.

• See https://www.bls.gov/opub/mlr/2014/article/one-hundred-years-of-price-change-the-consumer-price-index-and-the-american-inflation-experience.htm
• Ibid.
• See https://fraser.stlouisfed.org/files/docs/publications/SCB/pages/1935-1939/2755_1935-1939.pdf

With G7 national finances spiraling out of control, debt traps are being sprung on all of them, with the sole exception of Germany.

Malinvestments of the last fifty years are being exposed by the rise in interest rates, increases which are driven by a combination of declining faith in the value of major currencies and contracting bank credit. The rise in interest rates is becoming unstoppable.

Do not be surprised to see a US Government deficit exceeding $3 trillion this fiscal year, half of which will be interest payments. And in the run-up to a presidential election, there’s every sign of deficit spending increasing even further.

We now face America and her allies being dragged into another expensive conflict in the Middle East, likely to drive oil and natural gas prices higher; far higher if Iran becomes a target. With the Muslim world united against Western imperialism more than ever before, do not discount the closure of Hormuz, and even Suez, with unimaginable consequences for energy prices.

The era of interest rate suppression is over. G7 central banks are all deeply in negative equity, in other words technically bankrupt, a situation which can only be addressed by issuing yet more unproductive credit. These are the institutions tasked with ensuring the integrity of the entire system of bank credit.

This is not a good background for a dollar-based global credit system that is staring into the black hole of its own extinction.

The end for the dollar is nigh

There are a number of events coming together that suggest we are about to undergo a major upheaval in world economic, financial, and monetary affairs. It’s like one of those bush fires, which you fight in front of you, only to find that suddenly the flames are behind you as well, then on your right and your left. It becomes so hot that things are spontaneously combusting all around you and there is no escape. This is the condition currently faced by central bankers.

Just when interest rates have risen to a peak, they seem to be rising again. Surely, investors argue, the firefighting central banks must lower rates to save debtors, to save the banks, and to save themselves. But they do not control interest rates. They are being set by debt traps and over-leveraged banks trying to control lending risk. Accelerating demand for credit to pay higher interest rates is meeting a growing reluctance to lend. And to top it all, an alliance of Russia, the Saudis, and Iran are deploying control of the global oil supply, with the intention of forcing prices higher. Energy is the lifeblood of any economy. The last thing the West needs is another war in the Middle East. And now we look like having that as well.

The history of the dollar as the world’s reserve currency has been one of struggling from crisis to crisis on a worsening trend. Recent history saw the credit bubble of the nineties ending with the dot-com madness and its collapse, followed by what was commonly termed the Great Financial Crisis of 2008—2009. Given our current predicament, that description seems like mere hyperbole, because we now face an even greater crisis. Is it possible to kick the tin can down the road once again?

It seems unlikely, even allowing for the past experience of successful statist rescues from financial crises: somehow, the authorities have always been able to calm a crisis. But this time, the Global South, the nations standing to one side of all this but finding their currencies badly damaged by unfavorable comparisons with a failing dollar, a dollar forced into higher interest rates in a world that knows of nowhere else to go — this non-financial world is on the edge of abandoning American hegemony for a new model emerging from Asia.

The transition from the global status quo is bound to be a difficult affair. That the US Government is ensnared in a debt trap and is being forced to borrow exponentially increasing amounts just to pay the interest on its mountainous debt is not the fault of other nations. But many of them in turn are being forced to pay even higher interest rates, irrespective of their budgetary positions, and irrespective of their balance of trade. Yet their currencies continue to weaken even against a declining dollar.

The lesson for all of them is to not listen to the mathematical economists spouting Keynesian and monetary theories. The Russians with a trade surplus and a debt-to-GDP ratio of under 20% even when it is at war compare extremely well statistically with the US Government. If it wasn’t Russia, we would rate its financial condition highly. But the rouble still collapses, forcing Russia’s central bank to raise its short-term interest rate to 15%. The reason is simply that no one trusts roubles, but they still believe in the dollar as a safe haven.

However, there is every sign that the 52-year era of the purely fiat dollar is ending. Some foreign governments appear to be liquidating their US Treasury holdings to protect their own currencies. Japan, which is fighting to keep its yen from further collapse, has been selling recently, as has China (though for her there may be political reasons as well). The knock-on effects of the dollar’s debt trap are vividly apparent in weakness for the yen, yuan, rupee, and euro whose charts against the dollar are shown below. The effect of the dollar’s strength on lesser currencies is even worse.

Everyone assumes that the Fed must and will end this madness, not least because of the consequences for overindebted American businesses, the banks, and the Treasury itself. But what if the Fed is powerless, what if the situation is escalating beyond its control, and what if by reducing its funds rate the dollar would simply weaken pushing up consumer prices? And what if the Treasury finds funding the Government’s massive borrowing difficult even at higher interest rates?

Suddenly, that appears to be increasingly likely. The global south, which is the new name for those either in the Asian hegemons’ camp or considering joining it will need to find an alternative to being compared unfavourably in the foreign exchange markets with a failing dollar. The pressure for a whole new monetary system for the emerging nations is increasing.

In the past, currency boards linking a failing currency firmly to the dollar have been an effective solution. The problem for all currencies not formally tied to the dollar is that they will always be secondary forms of fiat. There is only one answer, and that is to abandon the dollar and return to tried and trusted gold standards.

Gold is real legal money internationally, whose value is constant over time. The world is learning the hard way that it is unattached credit which is unstable. And as the US sinks deeper into its debt trap a fiat currency credit crisis is just beginning.

In this article, we look at the major moving parts that are leading to the end of the entire fiat currency system. It is not just the dollar in crisis. By following the same monetary and economic policies, the Eurozone, Japan, and the UK are in similar difficulties, not to mention a host of other advanced nations.

The US Government’s debt trap

Last May, the Congressional Budget Office forecast a budget deficit of $1.5 trillion for fiscal 2023, which ended last September, including net interest payments on government debt of $663bn. The St Louis Fed’s chart below shows that the interest element was wildly underestimated. The outturn was actually $981bn, 48% higher than the CBO expected.

In its debt interest forecast, the CBO estimated the net interest rate to be 2.7%. At the time the forecast was published, the 3-month T-bill rate was over 5%, but the yield curve was deeply negative, with the 10-year US Treasury note yielding 3.7%. In the current fiscal year, the CBO estimated the interest cost to average 2.9%. But with the current year’s deficit likely to be considerably higher, and $7.6 trillion of maturing US Treasury debt required to be refinanced at current and potentially higher rates, official estimates of interest costs are far too low. In fact, the CBO didn’t expect interest costs to exceed 3% until fiscal 2030.

More realistic estimates will emphasize the debt trap danger. The deficit outturn was officially stated as $1.69 trillion, to which a further $300bn must be added back because when President Biden’s proposal to pay off student loans was rejected by the Supreme Court, the money “saved” was simply added back as a reduction in expenditure. A truer figure for the 2023 deficit was $2 trillion.

Nevertheless, at $981bn debt interest was approaching half the total deficit. The deficit for the current fiscal year commences with interest on $33.5 trillion of which $26.3 trillion is in public hands, and the average interest rate is not going to be the CBO’s estimate of 2.9%. Already, we see the cost of funding the $7.6 trillion of debt being refunded this year plus the $1 trillion of existing interest costs having risen to over 5%, adding an extra $200bn on interest costs alone.

To this must be added additional interest costs for the underlying budget deficit this year. There is no knowing how high this will be. But allowance for the consequences of higher interest rates must be made, which are essentially recessionary. Much has been made of recent figures showing US GDP growing persistently, with the third quarter outturn up 4.9%, leading to the Fed’s tight monetary policy being justified. But there are fundamental errors in this way of thinking which radically affects the budget outcome.

If we look at raw GDP figures, we see that in the 2023 fiscal year, GDP increased by just under $1.9 trillion. Including the student loan accounting trick, this is remarkably close to the $2 trillion budget deficit. While we cannot equate the two numbers absolutely, particularly when nearly half the deficit is interest expense, we should not ignore the fact that some of this interest enters the real economy, there are additional deficits from state governments, and that the rest of the deficit contributes almost entirely to GDP.

Therefore, instead of nominal GDP increasing 7.5%, private sector GDP probably increased hardly at all. But the rate of CPI inflation for the fiscal year was recorded at 3.6%, or according to Shadowstats.com based on the original 1980-based calculation method about 12% — take your pick. We can therefore say that despite the bullish growth headlines and allowing for CPI inflation, the US is already in recession.

This is the background to the US Government’s revenue income and expenditure prospects for fiscal 2024, confirmed by business surveys and anecdotal evidence. Already, we can see that estimates of tax revenue will fall short because profits decline in a recession and unemployment rises (with respect to unemployment, government statistics are notoriously unreliable and can be safely disregarded). While tax revenue declines, mandated welfare and other costs increase. Taking the last fiscal year’s ex-interest deficit of about $1.1 trillion as our base, the current year’s deficit will be significantly more due to the recessionary consequences of higher interest rates. And President Biden is trying to get a revised version of student loan relief past the courts, emblematic of yet more increases in government spending. After all, the current fiscal year is the last in the Presidential election cycle when traditionally electors are bribed with extra government spending.

Let’s pencil in a reduction of revenue by $500bn and an increase in outgoings of a similar amount to increase the deficit ex-interest by about $1 trillion to $2 trillion.

The interest bill is already growing exponentially. We can see that the funding requirement for new debt will be $2 trillion in excess spending, plus at least another $1.3 trillion of interest (allowing for the $7.6 trillion of debt to be refinanced), totaling over $3.3 trillion in total. Clearly, it won’t take much more of a credit squeeze and the increasing likelihood of a buyers’ strike to push the interest bill to over $1.5 trillion.

Higher interest rates are accelerating the debt trap

I have recently written about why in a world of fiat currencies interest rates do not represent “the cost of credit” except perhaps to borrowers. It is more about what a depositor thinks the purchasing power of the currency will be at the end of a loan period, plus something for counterparty risk, and plus another something for the temporary loss of the use of the depositor’s funds, the last of which is known as time preference. Unless the Fed understands this (and there’s not much evidence that this is so) then interest rate policy is fatally misguided.

There are two categories of lenders to consider — domestic who are generally captive, and foreign who are not. The reasons foreigners hold dollars and dollar assets are to do with trade settlement requirements, including the purchase of commodities which are nearly always priced and valued in dollars, and investment. On both these grounds, their requirements are changing, probably for the worse. Higher interest rates are hitting global production, leading to less demand for trade dollars, and at some stage higher interest rates will lead to portfolio losses and widespread portfolio liquidation of dollar assets by foreign investors.

Foreign interests in dollars are split as shown in the following table.

Other than the short-term debt of $7.293 trillion, the rest of these financial assets are highly interest rate sensitive, equities acutely so which is the largest investment category. The next chart shows the valuation gap that has already opened up between rising bond yields and equities represented by the S&P 500 Index (arrowed).

The chart shows the tight negative correlation between the yield on the long bond (right-hand scale) and the S&P 500 Index (left-hand scale) by inverting the yield. Since the Lehman crisis, the falling bond yield has led the S&P higher, to an extreme divergence in July 2020. Since then, the divergence has reversed spectacularly, indicating that the S&P is now wildly overvalued relative to bond yields and a sharp fall in equities is almost certain. On this basis, a target for the S&P (currently 4,120) of between 500 and 1000 can be justified if this valuation gap is to close and if the long bond yield remains at current levels or higher.

If, as seems very likely, US bond yields rise from here, US equities are due for a significant crash. In that event, with financial asset values falling there can be little doubt that foreign investors will be reducing their exposure dramatically. Some of this reduction is likely to lead to higher short-term balances in banks and T-bills. But it is hard to envisage foreign liquidation of US assets not leading to dollar selling. Some of this liquidity is bound to return to its currencies of origin because, from an accounting point of view, that is always the risk-free option. But some of it is bound to go into physical gold because that is the risk-free international money.

Why interest rates will rise from here and the consequences

The valuation gap between bonds and equities is not unique to the US, being in common with other financial jurisdictions as well. That it exists indicates investors are discounting lower interest rates in time. But what if this is wrong, and interest rates are headed higher still?

In the introduction, I mentioned the alliance between Russia, Saudi Arabia, and Iran, who with the Gulf Cooperation Council dominate global oil and gas supplies. These nations have an interest in ensuring that oil’s value, priced in declining dollars, is maintained in real terms. Furthermore, Russia sees energy prices as an economic weapon useful for putting pressure on European NATO members with a view to splitting them off from American control. And now we face a new flashpoint between Israel and Hamas, which is likely to spread to a conflict involving America and Iran, which could lead to the closure of the Straits of Hormuz, and possibly Suez as well.

For now, markets appear to be complacent in the face of these factors. But as the situation evolves this is unlikely to last, and oil and gas prices could rise significantly as these risks grow.

European energy stocks are insufficient to see Europe through the winter, and the US’s strategic reserves are depleted. There is no better time for this OPEC+ cartel to force prices higher, and by recently cutting the supply of 1.3 million barrels of oil per day that is precisely what the Saudis and Russia are doing. Heating oil and diesel prices are likely to rise strongly as well, if only because Russia has stopped exporting these distillates. The relevance of diesel is that over 95% of all European distribution logistics are delivered by diesel power, increasing the production and delivery costs of all consumer goods.

Consumer prices are what the central banks watch when setting interest rates. And due to energy factors, the outlook is for rising consumer and wholesale prices to accelerate again. Additionally, commercial banks’ balance sheets are highly leveraged, and they have been caught with bond investment values declining while funding costs have risen above their yields. They find that commercial property loans and lending to businesses are threatened by higher interest rates and recessionary conditions. In the current interest rate environment, there are very few buyers for these assets if banks are forced into liquidating collateral against loans.  Consequently, they are reducing bank lending and de-risking their balance sheets where they can.

This is why irrespective of central bank policy, the shortage of credit is driving borrowing rates higher, and the cost of novating maturing debt is rising, if the credit is actually available — which increasingly is rarely the case. It is an old-fashioned credit crunch, not really seen since the 1970s. And it has only just started.

These conditions are very different from the long decline in interest rates from the 1980s, and the subsequent period when they sat at or below the zero bound. The world of fiat currencies has become destabilized, not by the detachment from gold and the market’s adjustment to it as was the case in the 1970s, but by extreme interest rate suppression, inflationary excesses, unproductive debt creation, and massive government debt overhangs. Debt-to-GDP ratios of the G7 group of countries in 2022 averaged 128%. This list was headed by Japan at 260.1%, followed by Italy at 144%, the US at 121.3%, France at 111.8%, Canada at 107.4%, the UK at 101.9%, and Germany at 61.8%. The conditions of currency instability of the 1970s with their higher interest rates have returned, giving rise to an overriding question: how are these budget deficits going to continue to be financed?

US deficits were financed since the early 1980s against a long-term trend of declining bond yields, so every participant in bond auctions began to know that in time bond values would always improve, even if the short-term outlook was uncertain. That is no longer the case.

While it would be a mistake to ignore the skills with which the authorities and the primary dealers manage debt auctions, with a trend of rising rates there will be times when auctions are bound to fail. In the 1970s, this happened several times in the UK, primarily because the UK Treasury effectively managed the debt management office through its control of the Bank of England and Treasury officials didn’t understand markets. Nevertheless, we saw gilt issues with coupons of 15% and over. Imagine what similar funding rates would do to government finances today, with the G7 debt ratio averaging 128% last year.

Relatively quickly, some governments are bound to run into severe funding difficulties, which can only be resolved by overtly inflationary means.

The entire G7 banking system is broken

A further problem arising from the excesses of the past is that the entire banking system from central banks downwards is in dire straits. Central banks that implemented QE did so in conjunction with interest rate suppression. The subsequent rise in interest rates has led to substantial mark-to-market losses, wiping out their equity many times over when realistically accounted for. Central banks claim that this is not relevant because they intend to hold their investments to maturity. However, in any rescue of commercial banks, their technical bankruptcy could become an impediment, undermining faith in their currencies.

As the reserve currency for the entire global fiat currency system, the dollar and all bank credit based upon it is likely to be the epicenter of a global banking crisis. If other currencies weaken or fail, there could be a temporary capital flight towards the dollar before a wider financial contagion takes over. But if the dollar fails first, all the rest fail as well.

The condition of the US banking system is therefore fundamental to the global economy. But there are now signs that not only is US bank credit no longer growing but it is contracting sharply.

The chart above is the sum of all commercial bank deposits plus reverse repurchase agreements at the Fed. While the latter are technically not in public circulation, they have been an alternative form of deposits for large money market funds that otherwise would be reflected in bank deposits. Recently, having soared from nothing to a high of $2,334.3 billion last September, reverse repos subsequently declined by $1,250 billion. Subtracting this change from bank deposits shows the truer contraction of bank credit to be $1,918 billion, which is a 9.4% decline from the high point earlier this year.

This contraction of credit in the banking system is likely due to reverse repo funds switching into Treasury bills, short-term government debt deemed to be the safest form of investment. It is wholly consistent with bank and shadow bank credit being de-risked.

The situation facing the other major fiat currencies differs mainly in the details. It is a sad fact that Basel III regulations have addressed balance sheet liquidity problems but failed to contain excessive expansion of bank credit relative to shareholders’ capital. Consequently, regulators in the Eurozone and Japan have tolerated asset-to-equity ratios of over twenty times for their global systemically important banks, when in the past ratios of twelve to fifteen times were deemed to be dangerously high. The contraction of bank credit is therefore likely to be more catastrophic in these jurisdictions than in the US, where ratios for major commercial banks are commonly less than twelve times.

Estimating balance sheet ratios does not tell the whole story. There are off-balance sheet factors as well, principally liabilities in regulated and over-the-counter derivative markets, which for the G-SIBs are larger than their entire balance sheets combined. According to the Bank for International Settlements, open interest in regulated futures totaled $37 trillion in June 2023, and in December last year, the notional value of OTC derivatives stood at an additional $630 trillion, giving us a total of $667 trillion. Banks, insurance companies, and pension funds are the counterparties in these transactions, and the failure of a significant counterparty acting in these markets could threaten the entire Western financial system.

The big picture is of an asset bubble which has come to an end. And by any standards, this one was the largest in recorded history.

Geopolitics and gold’s renaissance

The fiat currency problem is likely to be made more immediate by a new factor of nearly four billion people rapidly industrializing under the leadership of China and Russia. The evidence strongly suggests that these two hegemons see monetary matters similarly to the author of this article and that they are now ready to protect themselves from an impending collapse of their western enemies’ currencies.

China and Russia have accumulated significant quantities of gold, and by gold mine output is the world’s largest by far. The prospect of the Asian hegemons returning to gold standards is bound to draw attention by contrast to the weaknesses and fallacies behind fiat currencies.

For those of us under the yoke of fiat credit detached from any corporeal values, there is only one escape from a banking system that is now imploding. And that is to possess legal money as much as possible, which by both longstanding law and human habit is gold in bar and coin form. Physical silver is the money for smaller purchases. That is why Goldmoney was founded over twenty years ago, with the objective of providing a safe haven from a monetary system that was eventually bound to collapse. That moment now appears to have arrived.

The likelihood of a dollar collapse is being enhanced by the string of failed US foreign policies. Iraq, Syria, and Afghanistan are on the list, with other ventures, such as the collapse of Libya creating refugee havoc for Europe. It appears that Ukraine is a lost cause as well. And now, the Western alliance is swinging behind Israel in her attempt to root out Hamas from Gaza.

Any objective analysis indicates that US involvement is very likely to bring Hezbollah into the conflict, which involves Syria and Iran. There are US assets in Syria, which would then become a target for Iran, and Iran can easily block the Straits of Hormuz, choking off 20% of the world oil supply, and 18% of LNG. In that event, energy prices would obviously spike far higher, sharply pushing up G7 interest rates. Rational analysis suggests that this possibility would ensure that America and her NATO partners should back off and attempt a diplomatic solution.

The evidence is to the contrary, with America and Britain sending aircraft carriers into the Eastern Mediterranean, and Russian Mig fighters patrolling the Black Sea in striking distance of the Western alliance’s carriers.

What has changed is Muslim unity, fused together even more by Israel’s collateral damage against Palestinian citizens. Both Sunni and Shia Muslims, representing two billion people are now united against the Western alliance and its culture. The US’s policy of divide and rule is no longer appropriate.

US foreign policy is in tatters. If it presses ahead to reassert its dominance over the Middle East by getting involved militarily, the US will lack the support of former regional partners, and inevitably the threat to oil supplies will divide her NATO partners. If she decides not to get involved, that will confirm to the Middle East and the Global South that her days as the global hegemon are over.

Either way the prospects for King Dollar are not good. In a war scenario, there may be a temporary flight to the dollar before the implications for interest rates and financial asset values are better understood. If the US backs off, there may be a temporary relief rally in financial assets, but the message for the dollar is it is over-owned, and with the decline of US power, it should be sold on the foreign exchanges for gold.

This article describes just how precarious the fiat dollar’s position has become.

For now, the dollar appears to be buoyed up by rising bond yields. However, as they rise further portfolio losses for foreign investors are likely to increase, leading to dollar liquidation. It is not generally realised how many dollars and dollar securities are owned by foreigners, the bulk of them being held outside the US banking system. And the quantity of foreign currency owned by Americans to absorb this selling is very small in comparison.

Higher interest rates and bond yields also threaten to destabilise the banking system, a problem equally faced by the Eurozone, the UK, and Japan. But how can the US Government protect itself from this danger?

The only answer is to admit to the end of the fiat era and put the dollar back onto a gold standard. However, the US Government does not have the mandate to take the required actions and officially at least is still in denial over the need to stabilise the currency. The legal position referring to the constitution is briefly touched upon, because laws will have to be considered to secure the dollar’s future.

Unfortunately, the US Treasury’s gold holdings are almost certainly compromised. Furthermore, since the Asian hegemons have accumulated substantial holdings of bullion in addition to their official reserves, there is bound to be a strong reluctance to hand economic power to Russia and China by endorsing a return to gold standards.

My conclusion is that the era of the fiat dollar based global currency system is rapidly ending, and for America and the dollar there can be no Plan B. It will almost certainly lead to  the end of the fiat dollar, and the end of the US hegemony.

Introduction

It is dawning on increasing numbers of analysts that the era of the fiat dollar might be drawing to a close. Very few investment professionals know what to expect. Being thoroughly Keynesian in outlook, most still believe that by the Fed managing interest rates consumer price inflation can be contained and that recessions can also be avoided by expanding fiscal deficits. But the contradictions arising from a deteriorating economic outlook and CPI inflation continually rising completely scuppers these macroeconomic theories. Blaming it on Russia and OPEC+ is tempting, but not a good enough argument.

It is becoming clear that fiat currencies have become increasingly unstable. The only solution for the dollar is to fix the value of credit: but to what? It has been gold or silver throughout the history of national economies. But a denial of returning to exchanging the dollar for a fixed quantity of gold is so systemically embedded in the administration that it is difficult to see this solution even as a last resort.

In this article I look at the background to what is sure to become a dollar crisis. The urgency of this matter has been brought forward by America’s declining global influence compared with that of the Asian hegemons, and the US Government’s profligacy. Almost certainly, exposure to the dollar will be unwound by foreign actors, and that exposure, which must include dollar credit originated outside the US banking system is colossal. The table below illustrates the approximate position.[i]

To summarise the evidence, foreigners own or are exposed to a massive $137 trillion dollars. As a cohort, if they decide to begin reducing their exposure US residents have less than a trillion equivalent in foreign currencies to sell in exchange. In the jargon of the markets, the dollar will become “offered only”.

This is the true danger from rising interest rates. As they rise, the declining value of foreign-owned long-term securities totalling $37 trillion will simply accelerate generating widespread investment and dollar liquidation. This will not be offset by US holders of foreign investments liquidating their positions for a simple reason.

US holders of foreign securities hold almost all of them in ADR form, being listed and priced in dollars. In a rising interest rate environment, they will also be declining in value and so we can expect US investors to sell them as well. The sale of an ADR does not lead to a sale of an underlying foreign currency, whereas a sale of a dollar security by a foreign holder will almost certainly do so – unless the foreign investor cohort overall is content to add to its holdings of short-term dollar securities.

Foreign liquidation of dollar investments is a largely unseen danger to the dollar by US-centric commentators who are stuck with the belief that foreigners need to accumulate them. A further rise in interest rates or bond yields, which appears to be underway, far from protecting the dollar will almost certainly lead to portfolio liquidation, dollar liquidation, and therefore its collapse, there being almost no foreign currency in US residents’ hands to absorb it.

And finally, in the run up to a presidential election year it is becoming clear that the US’s proxy war against Russia is turning into a political and military disaster. Ukraine is running out of men, and Russia is reaping the benefit of western-imposed sanctions. Disagreements between NATO members are beginning to surface.

What will that do to the dollar’s credibility? It all feels like a fin de siècle, the end of the fiat era and the beginning of a new currency regime.

The background to a new dollar crisis

It is never wise to pursue political and economic policies to the end of the road. But that is what the US Government appears to be doing.

In 1971, having embarked on a policy of replacing gold with the dollar as everyone’s currency and valuation standard, there is every reason to fear that for the US Government to return its fiat dollar to sound money is politically impossible. The reasons this might now matter are twofold: the dollar is losing its grip as the world’s reserve currency, and interest rates are rising into a recession which could turn into a slump, destabilising the mountain of debt which is the other side of too much unproductive credit intermediated by over-leveraged banks.

In previous articles, I have shown the importance of anchoring the value of credit to gold to ensure its stability, particularly at a time when credit’s instability becomes beyond the state’s control. Such a time has clearly arrived. I have described the practicalities of how to do it, which is to simply ensure that a currency is freely convertible into gold coin and bullion. A modern version of this has been proved to work time and again in the form of currency boards recommended and implemented for a number of governments by Professor Steve Hanke, tying collapsing currencies to a relatively stable dollar. But the dollar itself is now becoming highly unstable.

For the US Government, the urgency of considering a gold standard for the dollar is now upon it, because the Asian hegemons — Russia and China — are in a position to put their roubles and yuan on rock-solid gold standards. The ease with which Russia can do this was demonstrated in my recent article, here. Furthermore, it is increasingly in Russia’s interest to take this step. But if Russia does so, it is bound to fatally undermine the fiat dollar’s position. And it is not widely realised that China is again encouraging its citizens to buy gold. This is from the Jerusalem Post on 7 June:

“Last week an event occurred which was completely missed by the mainstream media. The People’s Bank of China (PBOC) took the next important step to encourage a wider and less wealthy section of Chinese citizens to purchase gold and silver bullion. The PBOC opened the facility for citizens to convert renminbi cash savings held in the public’s own bank accounts to be converted into physical gold at the click of a button.”

Does that indicate that China feels the time has come to protect even her poorer citizens and the yuan from global currency instability?

Perhaps the hegemons are positioning themselves. While putting the rouble onto a gold standard would be seen as an act of extreme monetary aggression against the fiat dollar, Russia urgently needs to stabilise her currency. In a dollar-centric world suffused with anti-Russian propaganda, any weakness in the dollar is simply multiplied in the rouble exchange rate. This the flaw in Putin’s agreement with Saudi Arabia to drive up energy prices. As I put it in the article referenced above, if they shiver in Germany, they will freeze in Russia: that is without massive energy subsidies for the Russian people.

Feedback from readers exposes an erroneous belief that it is the trade balance which matters. They correctly say that higher energy prices improve Russia’s balance of trade. So why should the rouble’s exchange rate not benefit? The answer is that the purchasing power of a fiat currency depends totally in the belief in its validity as a medium of exchange. And while it is true that Russia’s exports benefit from higher oil and gas prices, in a global inflation crisis such as we now face, the rouble’s credibility is unlikely to improve, particularly when it is off-limits for western speculators and the Russians are demonised in capital markets.

Therefore, we should assume that Russia will be forced to take meaningful steps to stabilise the rouble, which can only be done by returning the rouble to a gold standard. Furthermore, Russia’s economy has the low tax environment that would benefit hugely from interest rates that reflect gold as money as opposed to fiat roubles. From an interest rate on one-year rouble credit currently at 16% we can expect this to decline towards 3% over not very much time with enormous economic benefits. There is evidence that senior Russians, including Putin, understand this point.

If only the US could achieve similar benefits from sound money! Unfortunately, it requires a totally different political, strategic, and economic mindset to those currently operating in Washington and Langley. Instead, the Keynesian playbook is for the state to increase its fiscal and monetary support for the economy to prevent it running into a recession. And policy makers are more informed in their policies by the recent price stability at lower interest rates than the instability of the 1970s when the fiat dollar was bedding in. They believe that the consumer price inflation problem is exogenous and not the consequence of earlier monetary policies. And they aver that a period of current interest rates, or at least levels not much higher, will be sufficient to return CPI inflation towards the 2% mandated target.

America is trapped in a political and economic version of Stockholm syndrome. But there are some influential analysts who are beginning to see this as wishful thinking, and that energy prices in particular are not only going higher but will continue to do so. This creeping suspicion is likely to permeate official thinking over time and in the light of developments.

As part of this enlightenment, JPMorgan’s Global Equity Research unit is now forecasting $150 prices for Brent. The consequences for heating oil and diesel prices are particularly pernicious. These values are already rising, as the snapshot of energy and commodity price moves over the last three months indicates.[ii]

Other prices rising ahead of the US winter include some basic foodstuffs, indicating that any move towards CPI normality is a long way off. And then there is the widespread ignorance that surrounds the consequences of the bank credit cycle which is entering its contractionary phase. The effects are to wrest control over interest rates from central bankers, as desperate borrowers with deteriorating cash flows scramble for scarce credit: they will simply have to pay up to remain in business.

The consequences of the credit cycle

It is too simplistic an argument to blame depressions, slumps, and recessions on the failings of the private sector. The cause is always a contraction of credit. But that is created by a previous overexpansion of bank credit and by its nature is a correction of a previous condition. The greater and the longer the expansion is prolonged, the more destructive the contraction that follows.

Ignoring this reality, Keynes and others invested in a role for governments to intervene in economic affairs. It required the eventual abandonment of sound money. The original idea was for governments to take up the recessionary slack, stimulating the economy by deliberately running a budget deficit, and recovering public finances subsequently through increased tax revenues when the economy recovers. By these means, it was believed that recessions would be minimised, and government finances would be balanced over the economic cycle.

It was an argument which was applied with apparent success in the post-war years until the end of the Bretton Woods Agreement, when the inflation of the dollar’s M3 had doubled from $27bn in July 1950 to $59bn in August 1971, without the inflationary consequences that followed the suspension of Bretton Woods.[iii]

When the Bretton Woods Agreement began to fall apart following the failure of the London gold pool in the late sixties, for America’s high priests of macroeconomics the strictures of a gold standard straitjacket were the problem, not the failures of their economic and monetary theories. Bretton Woods was abandoned, and ever since government-inspired economic theory has doubled down on failure. The FRED chart of the US’s budget position illustrates the consequences of every time things go wrong, blame free markets and just double down on a policy of government stimulation by fiscal deficits.

To put these deficits into context, in fiscal 2021, Federal Government outlays were $6.822 trillion, and revenues were $4.047 trillion. In other words, the deficit on expenditure was 31.4% of revenue. After a brief recovery in fiscal 2022, the current fiscal year which is ending shortly will see a further deterioration in the deficit to $2 trillion. But with the prospect of a now widely expected recession and interest rates higher for longer, fiscal 2024’s deficit will likely be significantly worse.

Clearly, with recession expected and despite record government deficits, the Keynesian stimulation theory has run its course and has failed completely. But that is not all. Lower interest rates are meant to rouse an economy, and in that they have also failed. Macroeconomic theories become so far removed from economic reality that the whole establishment of the economic profession needs to reset its approach to free markets.

The cyclical problem of bank credit

One of the extraordinary failures of modern thinking concerns an almost total blindness to the cyclicality of bank lending. And what is nominal GDP, which is used to measure economic performance? It is no more nor no less than the deployment of credit for qualifying transactions making up GDP. Yet no one appears to understand the consequences of this important fact. GDP rises and falls, not driven by consumers but by changes in the availability of bank credit. Consumer behaviour is not the source of recessions in consumer activity; it is the availability of the credit that drives it.

Those who do not understand the cycle of bank credit and its implications are the large majority of economic actors, both in the financial and non-financial sectors. And the most stubborn cohort of deniers is to be found in governments and their bureaucrats. From the major central banks to banking regulators, a group-thinking blindness to the causes of regular booms and busts is the source of an evolving cyclical credit crisis. Unfortunately, if a government and its agents continue with wrong policies for long enough, instead of being derided public belief in them grows. It is a particular problem in capital markets which have now bought into central bank group thinking policies without reservation.

Bank executives are not immune to this trend. Consequently, instead of sticking to their business objectives properly, they are beholden to central banks and government regulators. Their true business is to be dealers in credit, not to bear responsibility for those who claim to be stakeholders and regulators, but to achieve returns for their shareholders.

Few bankers seem to realise that they are trapped in a cycle of bank credit of their own creation. That is why the cycle has existed for as long as credit statistics have been available. But combine a lack of understanding of the cause of the cycle with the absence of shareholder responsibility, and we can expect the management of large banks to think that with regulatory support they can trade their way out of economic downturns by simply adhering to the regulations. The few banks that have failed this time have been dealt with by the regulators, restoring faith in the regulatory regime for the others.

But when bankers have the wake-up call, that their balance sheets are over-leveraged and producer input prices are rising, unless they urgently reduce their lending exposure they will risk bankruptcy from bad debts and falling collateral values. That is why bank lending is contracting, and why in real terms GDP will decline. And the contraction of GDP feeds into yet more credit contraction, driving up borrowing costs. The pressure on banks to liquidate both on-balance sheet investments and collateral against loans is bound to intensify.

The pressure on the dollar from foreign holders selling down their exposure will naturally follow. As seen in the table in the introduction to this article, the pressure on the dollar from these combined events threaten its continuing existence. Other than accepting the reintroduction of a credible gold standard, what fiscal measures will be required to make a gold standard sustainable?

Cutting out excess spending

The current fiscal year, which ends on 30 September will see a deficit on US Government spending of $2 trillion. $Nearly one trillion of that is debt interest:

The way that debt interest has soared indicates that the US Government is already in a debt trap. Furthermore, in its last estimates of debt interest costs (May 2023), the Congressional Budget Office assumed that the average interest rate on debt held by the public in this fiscal year would be only 2.7%, and in 2024 2.9%. With 3-month T-bills already yielding 4.8% and 10-year Treasury notes over 4.5%, these forecasts are already out of date. And with a recession now more certain than at the time of the CBO’s forecast, on current spending plans plus the fall in tax revenues the budget deficit for 2024 is headed for over $2.5 trillion, even assuming no further rises to borrowing costs. But they are likely to rise to over $1.5 trillion, taking the likely deficit into covid lockdown territory.

In the fiscal year just ending, the average rate of interest paid works out at 2.9%, which compares with a current rate in excess of 4.5%. The consequences of deteriorating tax revenues, increasing welfare costs, rising price inflation, yet higher bond yields, a credit squeeze, and the refinancing of $7.6 trillion of existing debt make the current position unsustainable.

The best solution is to radically cut spending. But given the scale of the problem as part of the solution taxes might have to be increased as well, though the emphasis must be on spending cuts. If there was time to implement these cuts, they could be spread over a few years, but time is of the essence.

Otherwise, the US Government will merely fall deeper and deeper into its debt trap.

This will be the minimum required for the US Government to put its finances in order and to implement and maintain a gold standard for the dollar. Contrary to Keynesian theory, the economic benefits of balancing the budget would be substantial. This was proved in the UK when 364 Keynesian economists signed a letter to London’s The Times criticising the 1981 budget. In that case, at a time of rising unemployment, high inflation and recession, Chancellor Geoffrey Howe raised taxes to close the budget gap. This represented 2% of GDP, which compares with a prospective US deficit of over 9% of GDP. The Keynesian economists opined that tightening monetary policy at a time of recession was wrong. But no sooner was the letter published, than the economy began to improve.

Admittedly, the British deficit as a proportion of the total economy was far less than that faced by the US Government today. But the disproving of Keynesian theories of deficit stimulation, and the benefit to the economy of a balanced budget cannot be denied. Furthermore, if in balancing the budget expenditure is cut allowing taxpayers to keep more of their earnings, the economic benefits are even more obvious. Hence, the recommendation that as much as possible the reduction in government spending is the best way to balance the budget and achieve a better economic outlook.

Not only will balanced budgets have to be run thereafter but spending must be firmly capped in nominal terms. A free market, non-interventionist philosophy must replace state intervention and management of the economy. Central bank credit must be contained, and commercial bank credit allowed to respond to demand for productive credit.

Business must be permitted to dance to the tune of consumers, and not the regulators. Bad businesses hide behind regulation, which through licencing disadvantages competition. Regulators are not motivated by what the consumer wants and is often ignorant of his trade. They produce unnecessary bureaucracy. Where they exist to deter fraudulent and unfair practices, they rarely succeed. Not only should consumers be free to choose the products that they want, but they must be responsible for their actions. The idea that the state can replace the principle of caveat emptor is ridiculous.

The same goes for trade. Traditionally, trade tariffs have been a source of government revenue, but they have evolved into politically driven means of penalising nations which are successful exporters in favour of protecting uncompetitive domestic production. This disadvantages the domestic consumer and manufacturers sourcing raw materials and machinery from abroad.

The setting of interest rates must be to regulate the balance of gold reserves, and not, repeat not to regulate the economy. The source of investment capital in the form of savings should be permitted to return, encouraged by removing all taxation from savings and trading profits. Consumer debt, other than mortgage finance, will wither under these conditions. A savings driven economy, such as Japan’s and China’s, is less prone to consumer price inflation and interest rate volatility. And if savings are not taxed, they become encouraged.

And lastly, government statistics should be banned, because they only serve to encourage state intervention. If there is demand for any particular run of statistics, then private sector actors can provide them.

The US faces problems with a gold standard[iv]

As a matter of fact, gold as money is written into the US constitution as well as in the definition of the dollar. It will surprise readers to know that what commonly circulates as dollars are not dollars at all, being Federal Reserve Notes (FRNs). Under constitutional law, United States money is expressed in dollars, while FRNs are redeemable in dollars which is the lawful money. Therefore, the FRN dollar bills in circulation are not lawful money.

It might seem a pedantic point perhaps, but it should be respected and addressed in any future legislation. And the dollar itself was defined in gold. Article 1 Sec. 10, Clause 1 of the Constitution states:

No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts…

There is much to unpack in this clause, but it is money that concerns us. In 1785, Congress unanimously resolved that the money unit of the United States was to be the dollar and that the dollar would contain 375.64 grains of fine silver. The same resolution determined that there shall be two gold coins, one equal to 10 dollars and one equal to 5 dollars. And subsequently under the Coinage Act of 1792, the coinage of gold Eagles was mandated, “each to the value of $10 containing 247.5 grains of pure gold”.

Dollars and dollar-substitutes such as the FRN were the medium for payment because they specifically represented gold and silver coin in the prescribed weights. In 1834, gold became the de facto standard, confirmed in the Coinage Act of 1900 at 23.22 grains of fine gold, the equivalent of $20.67 to the ounce, a standard that operated for nearly a century until 1933.

It would appear to be a simple matter to return to convertibility in accordance with the law, but instead of the earlier fixed weight, a new relationship would have to be determined for the constitutional dollar and the FRNs if they be permitted to continue to exist: the future of the Federal Reserve system must be called into question, having presided over a failed fiat currency of its own issuance. Either way, the Treasury’s promise to pay the equivalent in its gold reserves to the Fed at $42.22 to the ounce, must be addressed.

Some commentators posit that to define the dollar by weight of gold and to make it fully exchangeable requires a substantial devaluation of the dollar, perhaps to $5,000 or $10,000 per ounce of gold. And that in order to do so, it would be declared over a weekend. Presumably, it is thought that this new rate would ensure that gold would be redeemed for dollars, allowing a new gold exchange rate to operate without undermining the Treasury’s bullion reserves. This appears to be a muddled Keynesian way of thinking, in the belief that devaluation is necessary to ensure a favourable exchange rate with other currencies, whether exchangeable for gold or not, and to ensure there is sufficient economic stimulus to support the mountains of debt in the private sector. But it would also be a default on the US Government’s debt by devaluing it in terms of legal money, which is still gold despite current denials by the US authorities.

Such a substantial devaluation is clearly intended to allow headroom for the US Government to continue with its current fiscal and monetary policies. But without the fundamental reforms outlined in the previous section, it would probably be only a very short time before a devaluing dollar forces yet another reset. In short, it would fool no one for long.

Then there is the problem of verifying US official reserves, which at 8,134 tonnes have been almost unchanged since 1980. Rumours about their condition and the extent to which they actually exist makes them uncredible. To what extent have they been swapped and leased over the decades, if indeed they exist in bars of LBMA deliverable standards?

The experience of Germany seeking repatriation of some of its gold reserves stored as earmarked at the Federal Reserve Bank of New York rings alarm bells over the entire situation. And as long ago as 2002, Frank Veneroso, who was a highly respected analyst at the time concluded that between 10,000—14,000 tonnes of central bank gold reserves had been either swapped or leased and sold into the market.[v] The latter figure was half the declared official reserves of the entire world.

Since then, the leasing game and price suppression of gold has certainly continued. But there is a difference today, with increasing numbers of central banks accumulating bullion reserves, currently recorded at 35,731 tonnes. Much of this increase has to do with China, Russia, and their rapidly expanding spheres of influence, who do not lease or swap their gold reserves. Germany’s experience of the US idea of property ownership of gold, and the Bank of England refusing to deliver Venezuela’s gold when demanded plus the leasing shell game amounts to strong circumstantial evidence that the US Treasury and the New York Fed vaults do not have the gold they say they have.

This in itself suggests that there really is almost nothing backing the fiat dollar when the fall-back position becomes a return to gold as the money-anchor for credit. Furthermore, there is the geopolitics of gold to consider. Not only has Russia been accumulating bullion reserves, but informed sources believe that there is further bullion in state funds, bringing Russia’s holdings to about 12,000 tonnes. And China has had a policy of accumulating gold “off balance sheet” since 1983, accelerating mine output, importing large quantities of bullion, and not permitting any bullion to leave the country. Overnight, China could probably increase her official reserves to a level in excess of 30,000 tonnes.

We can be sure that the US’s intelligence services have an idea of this situation, and the geopolitical disadvantages to the US and its dollar of a return to gold as the monetary standard. In London, where the bullion banks offer unallocated gold accounts, a substantial rise in the gold price such as that recommended by some US analysts would lead to bankruptcies among the LBMA member banks with extremely serious consequences. And on Comex, it would be likely to lead to implementation of force majeure clauses.

The consequences for commodity prices from a de facto devaluation of the dollar would also be to drive them significantly higher. On all practical grounds, a substantial gold revaluation/devaluation of the dollar can be ruled out.

Conclusion

The hurdles in the way of the fiat dollar’s survival are steadily mounting, and the US Government does not know how to secure its future. The state theory of money is turning into a total failure. Interest rates, which more correctly are the time preference required to ensure foreign holders of dollars continue to hold them are rising. This tells us that markets expect the purchasing power of dollar credit to continue to decline, so if the monetary authorities attempt to stop them rising, the currency will fall, and foreigners will sell. Equally, as bond yields rise the value of all financial assets will decline, portfolios will be sold, and presumably the currency raised will be as well.

Either way, the days of the fiat dollar are numbered. The politicians have no mandate to protect it by balancing the budget, returning to a gold standard, and taking the economic measures necessary to make it stick. Furthermore, America’s existing bullion holdings appear to be badly compromised – the cupboard is bare.

Not only is it the end of the fiat federal dollar note, but it is the end of empire, which the administration is reluctant to accept. We must hope that some strategic sense prevails, and the Doctor Strangeloves at Langley do not have their way.

• [i] See my article for Goldmoney quantifying the eurodollar market: https://www.goldmoney.com/research/theres-a-herd-of-elephants-in-the-room
• [ii] See https://finviz.com/futures_performance.ashx?v=14#
• [iii] See St Louis FRED, Currency in Circulation.
• [iv] The legal and historical basis for the dollar, to which the analysis refers is curated from Pieces of Eight by Edwin Vieira Jr., published by The Goldmoney Foundation
• [v] See https://www.gata.org/node/4249

There is little doubt that Putin and his advisers are aware of this problem. Plan A was to introduce a new gold-backed BRICS currency which might be expected to weaken the dollar and euro relative to the rouble. Plan B was more drastic: to back the rouble itself with gold. This is the financial equivalent of dropping a hydrogen bomb on the dollar and the global fiat currency system upon which it is based.

As well as demonstrating why there is no option for Russia but to back her currency with gold, this article shows why it is perfectly possible for Russia to do so during wartime and explains how it can be done. It is, as a matter of fact, very easy for Russia to reintroduce a gold standard for the rouble, but the consequences for the global fiat currency system are nothing short of lethal.

Introduction

For the last decade I have argued that there is a strong financial element in the wars between the Asian hegemons and America. President Trump’s trade policy towards China and his banning of Chinese technology, notably of Huawei, the world leader in G5 mobile technology was not just to suppress competition to America’s technology leadership but also to discourage global capital flows into China, which otherwise might have gone to America. And Ukraine gave President Biden the excuse to cut Russia out of global currency markets.

All had gone quiet, superficially at least, until Russia declared its special operation against Ukraine, setting in motion a sequence of events which rebounded badly on the West. Initially, the rouble soared in value when Putin responded to western energy sanctions by setting his own payment terms. But since then, the rouble has declined and it has become clear that as a fiat currency the rouble will continue to weaken against the dollar. The weakening rouble is the principal chink in Putin’s armour.

In response to sanctions, Putin appointed one of his advisers, Sergei Glazyev, to design a trade settlement currency, initially for the Eurasian Economic Union. It is believed that the scope was widened into a planned BRICS gold denominated currency, confirmed by the Russians ahead of the BRICS summit last month. But for China and India that was a step too far too quickly. China’s yuan is a component in the IMF’s SDR, a hard-won privilege which might have been threatened if it backed gold as a trade settlement medium. India has a history of anti-gold Keynesian monetary policies and is keen to develop trade links with the US and its allies, as demonstrated by its hosting of the G20 meeting last weekend and its prospective free trade agreement with the UK. China may have also been concerned that the consequences might be destabilising for the global currency system.

The hesitancy of the two most populous nations on earth over the gold issue is now creating significant problems for them, as the chart below of their respective currencies shows.

I have inverted the y-axis on both charts to make the point that the current rally in the dollar’s trade weighted index may not mean very much for the euro, which is its largest component, but it is undermining the major Asian currencies badly. When, rather than if the rupee breaks below its current support level, a move to test the INR100 level looks all but certain. And despite zero consumer price inflation in China, the yuan has already broken support and looks like falling even further. No wonder China’s citizens are pushing gold prices up to significant premiums: it is their escape from a falling currency. The Indians have yet to get used to higher gold prices in rupees, but that is likely to be only a matter of time.

A particular currency target is Russia’s rouble, illustrated in our next chart.

In an attempt to stop the slide, Russia’s central bank raised its interest rate by 3.5% to 12% in August, which initially rallied the rouble, but it is now sinking back towards its recent low against the dollar. But while Putin and his economic advisor Maxim Oreshkin appear to have a reasonable grasp of monetary affairs, the same cannot be said of the leadership of Russia’s central bank. At the time of the interest rate hike, Oreshkin wrote that “a recent acceleration of inflation and the sinking currency were the result of loose monetary policy, and that the central bank “has all the necessary tools to normalise the situation”.[i]

The issue is that the central bank has followed expansive fiat monetary policies by allowing M0 money supply to expand by 26% in the year to August. Directly addressing this expansion of central bank credit would have done more to stabilise the rouble than crippling interest rate increases. While much of the destabilisation of the rouble can be attributed to the continuing expense of the war, there can be little doubt that it is also partly due to the dollar’s recent strength. As is the case between the dollar and most other fiat currencies, there is a relative trust factor working against the rouble. Irrespective of interest rate differentials, it is the fact that fiat currency values are tied to nothing more than the faith in them. And Russia now faces the problem that in a fiat currency regime run in western capital markets it can never match the faith and credit in the US dollar. In current currency conditions, the dollar can always undermine the rouble because the US controls the fiat currency agenda.

The weakness of the rouble is perhaps the only real pressure point that America and NATO can apply. The war in Ukraine is turning out to be yet another NATO debacle, which only appears not to be the failure it is due to the western alliance’s control of its media-reporting. In a world driven by propaganda, we cannot know the truth. But any military commander who thinks, as did Napoleon and Hitler, that a land-borne army can defeat the Russians in Eastern Europe is deluding himself. While grinding down the Ukrainian army, the Russians are digging in for the long haul, expecting growing dissent in the NATO membership to undermine its unity. It is a plan which appears to be working.

The energy war could backfire badly against the rouble

Dissent in NATO can be expected to increase this winter, as energy shortages begin to bite. The most recent salvo in the energy war is timed ahead of the northern hemisphere winter. Russia and Saudi Arabia have jointly been squeezing oil supplies, pushing crude prices above the G7’s price caps. One area where energy supplies will hurt the Europeans more immediately is heating oil, which is also regarded as the proxy for diesel prices having increased in dollars by nearly 50% in the last quarter alone.

The importance of diesel is that logistics in Europe (and America) are almost entirely dependent upon it. On top of earlier OPEC+ cuts of 2 million barrels per day, the more recent 1.3 million barrels per day cuts in oil output by Russia and Saudi Arabia are bringing pressure to bear on the supply of distillates (of which diesel is one) and Russia also plans to cut its diesel exports by a quarter, partly due to refinery maintenance (allegedly) and partly to divert supplies to its domestic economy. While the EU’s gas reserves are relatively full at 90% of capacity, it is not nearly enough to see the EU through the winter. From December onwards, there will be a scramble for more supplies. And the end of the agreement on Black Sea grain exports will put further pressure on food prices as well.

Therefore, the western alliance will face further inflationary pressures, likely to give higher interest rates and bond yields a new impetus. Already, there is a credit crisis developing in key western economies, with banks trying to reduce their risk exposure to financial and non-financial markets in the face of a recession. And as the credit crunch intensifies, the likelihood of a new round of bank failures increases.

The problem for Russia is that in pursuing energy policies with the intention of undermining the dollar and euro, the consequences for the rouble are likely to be far worse. The next chart, of oil priced in gold and roubles, illustrates the point.

The first point to note is that in 1998, the rouble was redenominated at a ratio of 1000:1. Back-dated by this factor, in June 1992 there were US$7.25 to the new rouble, and a barrel of oil was valued at 2.03 gold-grammes. Today there are nearly 100 roubles to the dollar, and a barrel of oil is over RUB 7,500. As a fiat currency, the rouble has behaved like a third-world currency relative to the dollar, let alone gold. And the domestic price of oil in Russia has soared along with the rouble’s collapse. Furthermore, the exceptional volatility in the rouble price of oil is extremely disruptive for the domestic economy, with heating becoming unaffordable for Russia’s citizens in desperately cold winters.

To quantify this distress, between September last and end-July, priced in roubles the oil price increased from RUB4,707 per barrel to RUB7,500:  that is an increase of 59%. In dollars, the price rose from $78.72 to 81.72, up less than 4%. Clearly, the energy battle cannot be won by Putin, because if they shiver in Germany they will freeze in Russia.

The chart above puts Putin’s energy war in its proper context. Withholding energy from western markets will undoubtedly destabilise their currencies. But the blowback on the rouble will be even worse. But Russia’s analysts, including Maxim Oreshkin and Sergei Glazyev (who has already recommended a gold standard for the rouble) must surely know this. And the chart also tells us that priced in gold oil is considerably more stable. In June 1992 a barrel of oil was 2.03 grammes, today it is 1.41 grammes, a fall of 30%. Bearing in mind that gold is real money, and currencies are highly unstable credit, Russia is getting 30% less for her oil today than she did in 1992.

Again, in common with the Saudis, the Russians are aware that American monetary policy has had the consequence of undermining the true value of their oil, something they have been powerless to correct without binding the price of oil to gold. There can be little doubt that Russia’s motivation to take control of energy values was behind its proposal for a new BRICS gold backed currency and that it was part of a two-step plan.

The first step was to send a signal to markets that the era of the fiat dollar was over, justifying the second step which was for Russia and China, followed by other nations in the BRICS camp to evolve their own currencies onto gold standards as a protective response to a declining dollar. But China was not going to take the offensive against the dollar, and the Keynesian Indians were not convinced.

Russia will take the BRICS presidency next year, so we can assume that the new BRICS currency has not gone away. Meanwhile, if Russia is to use the oil weapon against the West, then it must put the rouble onto a gold standard again as a matter of urgency (it was on a gold standard until Khrushchev devalued the rouble in 1961). If Russia prevaricates on this issue, then Putin’s legacy to be a latter-day Peter the Great will be destroyed by his own currency.

The practicalities of a Russian gold standard

In the middle of a war, usually a government suspends its gold standard. This would suggest that Russia can only consider a gold standard after its special operation in Ukraine is over. But the modern equivalent of a gold standard, the currency board, has been successfully established in modern times in nations with far worse budget deficits than Russia. Russia was in the fortunate position of a budget deficit of only 2.3% of GDP last year, despite military spending. This year, military spending has soared, and at a guess the deficit will be about 5% of GDP this year, but government debt to GDP will still be about 20%.

Anything other than ball-park numbers for the Russian economy are difficult to come by, and the volatility of the rouble is a further analytical hazard. But some of these numbers are not substantially different from where Britain was economically in 1816, when a return to the gold standard was planned — the exception being her estimated debt to GDP number, which at nearly 200% was ten times that of Russia today. Therefore, there is no reason why Russia cannot put the rouble onto a gold standard immediately.

In doing so, the objective is simple: to ensure that the purchasing power of circulating credit retains its value in terms of goods and services with as little fluctuation as possible. It would allow savers to accumulate credit balances in their bank accounts, and for businessmen to calculate the profitability of their investments with greater certainty. With income tax currently at a flat 13% rate and corporation tax at 20%, in these conditions economic progress will advance surprisingly rapidly. And there is every reason to expect Russia would quickly become an economic counterweight to the sheer power of China, rather than living off the depletion of her natural resources. It is necessary not just for Russia to distance herself from the fate of the western fiat currency system, but also for President Putin’s legacy.

The method of ensuring monetary stability is equally simple: to bind credit denominated in roubles to gold, which both in law and naturally is the money of the people. It is the highest form of credit, there being no counterparty risk. It’s purchasing power in the general sense has held steady through millennia. Importantly, it removes the currency from political control and dollar influences. It allows for the creation and destruction of credit determined solely by the needs of the Russian people, both as businessmen and consumers.

In constructing a new gold standard for Russia, we can learn from the lessons of the past, particularly the establishment of Britain’s gold sovereign coin fixed at 113 grains (7.99 grammes) to a one pound Bank of England banknote, freely exchangeable at the holder’s option. There were mistakes made in the implementation of Britain’s gold standard in the nearly one hundred years of its existence, but in the light of experience we should know how to avoid them today.

The principal errors incorporated in the 1844 Bank Charter Act were to not realise that redemptions of bank notes for sovereign coin were inconsequential. The occasional runs on the Bank of England’s gold reserves always originated in cheques drawn on the Bank for bullion. Amazingly, this source of encashment was not foreseen by the framers of the Act, leading to crises in 1847, 1857, and 1866. The Act was suspended on these three occasions, the crises were averted, and the Act subsequently reinstated every time.

The observant reader will have noted that these runs on the Bank’s bullion reserves fit in with an approximate ten-year cycle of bank credit expansion and crisis, a cycle still evident to this day. The 1847 suspension came about after the Bank had made immense advances to commercial banks to rescue them from insolvency. But the Bank’s advances were insufficient to stop the crisis. With Parliament staring into an economic abyss, it authorised the bank to issue notes at discretion, and the panic immediately subsided.

Ten years later in November 1857, the Bank’s monetary assets were comprised of gold and silver, which together with its own notes bought in had declined to only £387,144 compared with liabilities to commercial banks of £5,458,000. It was on the point of having to cease trading within the terms of the act. Consequently, the government authorised the Bank to expand its liabilities at its discretion, but at a discount rate of not less than 10%. The following day, the panic passed.

In 1866, the prominent discount house, Overend Gurney failed. Again, the government authorised the suspension of the Act, allowing the Bank of England to expand its liabilities to deal with the crisis, but again at a punitive discount rate of not less than 10%. As before, the run on the Bank of England’s gold reserves ceased.

In all three cases, the suspension of the 1844 Act saved the nation from untold economic damage. In this respect, the Act was a failure. Insisting on the restrictions of the Act come hell or high water and simply letting banks and businesses fail is never an option. Therefore, a successful gold standard must allow for the management and containment of banking crises, the inevitable consequence of periodic over-expansions of credit. There has to be the flexibility to support otherwise solvent commercial banks in times of crisis. In all three cases above, it was the function of the banking department to avert the crisis by extending additional credit. It should not have been the function of the issue department to get involved, and if the separation between the two had been different in its detail, the Act need not necessarily have had to be suspended.

I should mention a further error in the framing of the 1844 Act. At that time, it had been assumed that a drain on the nation’s bullion would only occur if the balance of trade with other nations was unfavourable, because settlements would be conducted in gold. While this was obviously true, there was a far greater influence on bullion flows: differences in discount rates (or interest rates in modern terminology) between centres with currencies on gold standards.

If the interest rate in Centre A exceeds that in Centre B by more than the cost of transporting bullion between them, then bullion will flow from Centre B to Centre A. This is why the setting of interest rates must be solely to regulate bullion flows. To explain further why this is the case, it should be understood that the future value of gold includes the interest accumulated with it, being payable in gold. Therefore, if the sum of principal plus interest is less in one place than another, gold will naturally gravitate from the former towards the latter.

Armed with this knowledge, Russia can easily establish the rouble on a gold standard and maintain it. In light of the foregoing, the following are the basic principles required to achieve this goal.

1. The objective is to ensure that rouble banknotes and balances held in the Issue Department (see below) are freely encashable into gold coin and bullion.
2. The issue and redemption activities of rouble banknotes must be transferred from the Central Bank of Russia to a new entity charged solely with managing the note issue, which we will refer to as the Issue Department. The central bank’s gold reserves must also be transferred to the Issue Department. Furthermore, the Issue Department must have the sole power to set interest rates with the mandate of maintaining sufficient bullion balances at all times. By these means, interest rates will no longer be a matter for monetary policy, being handed down to the markets.
3. The Banking Department will continue with its other functions on behalf of the Russian state, except for the setting of interest rates. It will act as it sees fit in the management of commercial bank failures, extending credit or withdrawing it when necessary to maintain stability in the overall credit system.
4. The separation between the Banking and Issue Departments must be defined and confirmed in law. As separate entities, each shall have its own balance sheets, so that the credit activities of one are separate from the other.
5. Along with the power to set interest rates, the Issue Department will be empowered to maintain reserve balances (the counterpart of bullion submitted to it) paying interest at a small discount to the official rate. Assets on the Issue Department’s balance sheet balancing these reserves will be held as interest paying deposits at the Banking Department, allowing the Issue Department to generate sufficient profit between its liabilities and assets to cover its costs and the costs of minting coin.
6. Any restrictions and taxes on gold coin and bullion must be removed by law. All foreign currency restrictions and controls must be removed as well to permit the free flow of bullion.

Currently, Russia’s official gold reserves are declared to be 2,301 tonnes. It is thought that between two state funds, the Gokhran (State Fund for Precious Metals) and Russia’s National Wealth Fund, Russia has a further 7,000—9,000 tonnes. Their holdings need not be folded into the Issue Department (though it may be advantageous to the funds to do so), but public declaration of their quantity would be helpful to establish the gold standard’s initial credibility.

The rouble must be defined by weight in gold grammes and be fully exchangeable in gold coin. New coin must be minted accordingly, perhaps with a face value of 50,000 roubles and exchangeable in those units (currently the equivalent of about $500, and similar to the value of a British sovereign). The time taken to design and mint the new coin will delay its introduction, but there is no reason why a bullion exchange facility cannot start immediately.

This is how it will work.

The bullion exchange facility operates not through the Banking Department, but through the Issue Department. In order for a commercial bank to have a credit balance with the Issue Department, bullion must be deposited in the first place. And it is here that the lessons learned from the 1844 Bank Charter Act comes into play.

Banks eligible to open an account at the Issue Department can buy gold in domestic and foreign markets, where the lease rate for 12 months is currently less than 2%. We can take that as an indicated rate of interest that global markets pay to borrow gold. Therefore, in one year a holder of 100 ounces of gold has 102 ounces equivalent (assuming the interest accumulates in line with the gold price and is paid in gold — which is not the case). Meanwhile, the Bank of Russia’s key rate is 12%. The uplift in return for a buyer of gold in international markets depositing gold with the Issue Department is 10% accumulating in gold.

It now becomes obvious that Russian and other banks accessing the Issue Department will provide the gold deposits to ensure that the Issue Department will rapidly accumulate all the bullion it needs to operate a secure gold standard. And it is equally clear that with the ability to regulate the interest rate, the issue Department can manage its gold reserves.

In its initial stages, credibility is obviously key. This can be rapidly achieved by the Russian banks supporting the plan, which they are bound to. Any bank on Russia’s SPFS payments messaging system can open an account with the Issue Department. This should be extended to any licenced bank in the Shanghai Cooperation Organisation and BRICS with secure messaging system access to the Issue Department. As well as acting as principals, these banks can operate on behalf of their customers. Russian oligarchs and draft-dodgers who have sold their roubles would almost certainly rush to buy them back, and even deposit gold with the Issue Department through the agency of their banks.

On current interest rate spreads, bullion inflows should be substantial: arbitrage with western bullion markets will ensure it. Given current sanctions against Russia, London and other markets under the control of the western alliance will not be directly available to sanctioned banks, a factor which is likely to provide a significant boost to gold trade in Asian and Middle Eastern markets. Sanctions will not stop gold shipments. Nonetheless, Russia’s success is bound to lead to imitators, almost certainly the Saudis, and if not immediately the Chinese are bound to follow.

A rouble priced in gold will also make energy payments in declining fiat currencies even less desirable to Russia, which will have to be sold — for what? The divide between the fiat world and gold standard currencies is going to become a very wide gulf indeed. A new impetus for the delayed BRICS trade settlement currency is bound to ensue, particularly with Russia taking the BRICS chair in January. India’s hope that payment terms for oil will be set by nations on fiat currency standards should be dismissed.

For the other BRICS currencies, a currency board relationship with a gold backed currency becomes a live option. The more natural alternative to the rouble (which Russia may not desire anyway) is to tie in with China’s renminbi — if or when it adopts a gold standard. China may not be far behind Russia in implementing its own gold standard anyway, because the consequences for the dollar and euro could be sufficiently undermining for China to seek to protect her own currency.

The impact on the dollar of the move to gold standards

Chalk and cheese, oil and water, diamonds and dust: whatever metaphor you care to choose, it must be clear that a mixture of gold standards and fiat currencies will not last long. Priced in fiat currencies, gold’s value might be expected to rise significantly, as central banks in what is now termed The Global South (the Asian hegemons and those aligned with them) move towards replacing fiat currencies in their reserves with gold.

According to Ambrose Evens-Pritchard (Wednesday’s Daily Telegraph), “The Global South holds three-quarters of the world’s $12 trillion of foreign exchange reserves (59 per cent held in dollars)”. And in addition to a $2-plus budget deficit, in the next year the US Government has to refinance about 30% of its existing debt.

Therefore, the impact of a move to gold on funding the western alliance’s deficits will be substantial, because not only will The Global South stop buying their bonds, but they will seek to liquidate their existing holdings. In the absence of severe spending cuts and increased taxes, increasing monetisation of government debt will become inevitable. Kiss goodbye to lower inflation, lower interest rates, and lower bond yields: embrace crashing bond prices and collapsing asset values. What over-leveraged bank can survive the squeeze on their balance sheets? Which of the western alliance’s central banks, already deeply into negative equity will be able to monetise their government’s debt with further QE against a background of soaring bond yields?

Inflation of energy prices, already low measured in gold grammes, is bound to increase measured in collapsing fiat. Truly, if Russia does introduce a gold standard for the rouble, it will be the financial and economic equivalent of a nuclear attack on the entire fiat currency system. There can be little doubt that these consequences for the global financial system are what have made Russia hesitate so far. China is sure to have arrived at a similar conclusion, one reason why she was too cautious to support Russia’s proposal for a gold backed trade settlement medium. But Russia is reaching a point where she has no other way to stabilise her currency.

Russia and NATO (by which we really mean America) have got themselves into positions from which they cannot back down. Unless Russia stabilises her currency, her likely victory in Ukraine will be pyrrhic. Putin’s policy of driving up energy prices will have worse consequences for the Russian people this winter than for Europeans and Americans, because of a collapsing rouble. And a collapsing rouble will also drive up food prices, a combination which will almost certainly destroy Putin’s government.

Whichever way you look at it, it is the currency factor which matters above all else and the Russians have no option but to stabilise the rouble by defining it in gold grammes and making it immediately exchangeable on the lines described in this article.

It will be a tragic end to the dollar-based fiat currency regime.

How do you protect your paper wealth from this outcome? Some swear by bitcoin and others by gold.

This article looks at what is likely to emerge as a replacement currency system, and concludes that from practical and legal aspects, bitcoin and the entire cryptocurrency industry will fail with fiat, while mankind will return to gold, as it has always done in the past when state control over currency fails

Introduction

It is gradually dawning on market participants that the era of fiat currencies is drawing to a close. Monetarists, who first warned us of the inflationary consequences of the expansion of money and credit were also the first to warn us that the slowdown in monetary expansion would lead to recession, and since then we have seen broad money statistics flatline, with bank lending beginning to contract. This is interpreted by macroeconomists as the end of inflation, and the return to lower interest rates to stave off recession.

Unfortunately, this black-and-white interpretation of either inflation or recession but never both has been challenged by bond yields around the world which are rising to new highs. And the charts tell us that they are likely to go considerably higher. Consequently, conviction that inflation of producer and consumer prices will prove to be a temporary phenomenon is infected with doubt.

For those of us steeped in free market economics and with experience of the monetary and economic scene in the 1970s, the possibility of both inflation and recession occurring at the same time is less of a surprise. They called it stagflation, though the Keynesians never managed to reconcile the existence of the two conditions being present at the same time. The error, surely, is in Keynes’s denial of Say’s law, which postulates that we produce to consume. The Keynesian error was to ignore the plain fact that rising unemployment is the consequence of falling production first, so there can never be a general glut of goods in a slump which is the basis of Keynesian assumptions.

Consequently, we should concede that a return to stagflation, or worse, is eminently possible. And that rising bond yields from here are also possible, indeed even likely as the charts so clearly indicate. In the coming weeks and months as bond yields continue to rise dragging interest rates up behind them, the debate as to how to hedge this unexpected condition is bound to intensify. In one corner, we have gold, and in the other cryptocurrencies, headed by bitcoin. Both have their vocal enthusiasts.

But enthusiasm is not a sensible basis for an investment or trading strategy. It misleads investors and those seeking to protect their wealth from the debasement of currencies, which is what continuing and rising inflation of prices represents.

Sentiment driven investment tends to overlook important facts. In this article, I compare the relevant facts from very basic legal and monetary standpoints, first for cryptocurrencies represented by bitcoin and then for gold.

Bitcoin as practical money

Bitcoin and crypto currency fans argue that they are the future money. Bitcoin in particular is seen as incorruptible, secured, and self-audited on a blockchain. It is strictly limited to its hard cap of 21 million coins. It is this limitation which has led to estimates of its future value in fiat currency, depending on how much more fiat currency debasement a forecaster expects. And it can be convincingly argued that the fiat currency debasement rate is likely to accelerate further as stagflation returns, leading to ever greater government deficits and escalating increases in government debt. This might be expected to lead to a resurgence in interest in bitcoin, taking it to new highs.

Enthusiasts argue that bitcoin will increasingly replace fiat as the general public begins to realise that fiat currencies are losing purchasing power, which is why the general level of prices is rising. But we must make a distinction between using a currency, crypto or otherwise for day-to-day transactions and as a store of value. In the former case, the possession of currency resulting from the sale of something is temporary, so its changing value in terms of goods over time is of little interest to the seller of goods who receives it in payment. But it does matter to the saver with a longer time horizon.

Saving, or more correctly hoarding in the case of bitcoin, is the issue which we must address. To a saver an increasing purchasing power for currency units in which his savings are denominated is desirable. Therefore, it is likely that savers will hoard their bitcoin instead of letting them circulate because the hard stop on their quantity would be expected to continually increase its value. So powerful is this deflationary tendency likely to be that other than for bare essentials, all commerce, currently depending on credit, would grind to a halt. Taken to its logical conclusion, the world would simply regress to a feudal state with mass poverty.

The solution can only be for holders of bitcoin to lend their bitcoin to borrowers so that commercial activities could take place. This is credit and is the basis of all banking and all economic progress. The need for credit will not go away with the end of fiat currencies, nor will its counterpart, debt. Indeed, the possession of debt obligations is wealth and makes up the majority of it. I shall go into this topic later in this article. But for now, let us consider the difference between bitcoin and bitcoin credit.

In order to produce anything, capital is required. It is a simple fact that production precedes consumption. It can take years for factories to be built, and people with the relevant skills trained and employed. Most if not all of this funding requires credit. It entails a business plan to take all cost factors including the cost of funding into account in order to estimate a project’s viability.

When assembling a business plan, not only does an entrepreneur have to estimate all the input costs and the product’s final sales value, but he has to estimate the cost of repaying borrowed capital. But presumably, a hard stop of 21 million bitcoins will lead to higher bitcoin costs of future capital repayments. Uncertainty as to what bitcoin’s future value would be will likely scupper most projects, even before the difficulty of predicting future demand for goods priced in rising and volatile bitcoin. Bitcoin’s limitations would almost certainly lead to an intensely deflationary outlook, because it is simply not suited as a basis for valuing credit.

In this respect, bitcoin is fundamentally different from gold, the extraction of which in the long term has grown roughly in step with the world’s population. Furthermore, there are substantial reserves of above ground gold in the form of jewellery, which can be reallocated to monetary functions if markets demand its change of use. The flaw in the bitcoin as money argument is gold’s strength: its unsuitability to act as backing for credit, and its total inflexibility of supply.

I am not aware that anyone in the bitcoin camp has properly addressed these issues or is even aware of them. It appears that hodlers do not understand how dependent humanity is on credit. Instead, they tend to dismiss credit as being the problem. Nor is there any understanding of the relationship between money and credit in a functioning, stable economy. The very conditions which are supposed to give bitcoin its value as incorruptible currency are enough to render it entirely unsuited to act in that capacity.

The dismissal of credit is even before we are asked to swallow the fact that it is wholly inappropriate for the vast majority of users who are not tech savvy enough to even understand it. A currency must be simple enough to be understood by its users. The promotion of bitcoin and other cryptocurrencies is the dream of an elite of technological literates and speculators hitching a ride on its concepts.

Then there is the legal position. In the absence of specific legislation passed to give bitcoin or any other cryptocurrency the legal status enjoyed by gold it does not have the legal status required. Hodlers do not appreciate that legally only certain things can act as money.

In order to understand the distinction between what can pass as money and what cannot, we must define the difference between the right of possession and the right of property. If I lend a book to a friend, I allow him to have a right of possession for a period of time, but it still remains my property. The property in the book has not been transferred to him. If I went to his house to collect the book, and he was not at home, I would be free to recover the book if I saw it (though out of politeness I should let him know that I’ve recovered my property). This in Roman law was referred to as a commodatum, which is defined as “a gratuitous loan of movable property to be used and returned by the borrower”.

Money and credit are treated differently, along with consumable items, such as food and drink. When these are loaned, the property in them transfers absolutely, in return for which an obligation by the receiver is created to restore the equivalent of similar quality and quantity. To continue on from the example of the commodatum, if instead of a book I had loaned my friend $100, and going to his home to recover his obligation to me I found he was away but saw his wallet left behind, and I took $100 from it, I would be guilty of theft.

In Roman law, the loan of money, credit, and items to be consumed is a mutuum, which is defined as “a loan of a fungible thing to be restored by a similar thing of the same kind, quality and quantity”.

While in the English language the use of the terms lend and loan are ambiguous, the difference between commodatum and mutuum is still clearly recognised by us all to this day, as the examples of the different treatment of a loaned book and $100 illustrate. The same conditions apply with respect to criminal theft. If a thief steals your car and sells it on to an unsuspecting buyer, it remains your property and you are fully entitled to recover it without compensating the hapless buyer. But if a thief steals your wallet, or empties your bank account, you only have recourse against the thief and your property in the money or credit is lost.

In this legal context, the question arising is in the treatment of fully identifiable bitcoins, whose possession is recorded on a blockchain. Clearly, if someone sells you a bitcoin in return for currency you receive it as entering into your possession. But if the bitcoin had previously been stolen, say from a crypto wallet, it was nobody’s to sell and it almost certainly remains the possession of the person it was stolen from. The point is that while each bitcoin, or fraction of a bitcoin has the same value as another, the blockchain means that each bitcoin or part of it has a specific identity. Therefore, it is not fungible like banknotes or credit, nor is it consumed and so it almost certainly cannot be a mutuum. The precedents in law therefore point to the property in it having not been transferred if in the past it was the proceeds of crime, so it must be regarded as a commodatum.

This is a significant problem for bitcoin, which has become the money laundering medium of choice for criminals and tax evaders. While in Roman times, criminality was more basic, today governments have extended it to include mere suspicion as grounds for property confiscation. Software allows investigators to link bitcoin wallets with real world identities, which are easily available to the authorities from crypto exchanges. Companies such as Chainalysis have been working with the FBI successfully to identify wallets linked with criminal activity. The trail from these wallets clearly leads to those who subsequently bought bitcoin and are under the impression they are now their property.

Therefore, you cannot be sure that the bitcoin you have bought through an exchange will not be seized by the authorities on the grounds that a previous owner acquired it through the proceeds of crime. You cannot be certain you have clear title. On legal grounds alone, without the certainty of ownership bitcoin cannot act as a general medium of exchange.

Why credit matters

In discussing the practicality of bitcoin as money, its unsuitability as a medium from which credit takes its value has been mentioned, and that enthusiasts appear to have overlooked this vital function. Indeed, the creation of bank credit is seen by many in both gold and bitcoin camps as evil and therefore they say that one of the key benefits of bitcoin is it does away with the creators of credit. Those following this line of reasoning fail to understand that all money and obligations to pay are in fact credit, representing the temporary storage of unspent production. Because all of our consumption has its origin in production, the medium of exchange is a matter of intermediation.

There are two distinct forms of this credit, one in which there is no counterparty, and it is only in the form of gold, silver, or copper coined for convenience. It cannot be anything else if we rule out barter. The proper term for coin is money, to distinguish it from promises to pay in money at a future date, which is credit.

As a right to future payment, credit is always matched by an obligation on the part of the debtor. Ultimately, that right and corresponding obligation are to be settled in money — though in practice, today they are novated by way of settlement into other credit. It is not the transfer of money, but nevertheless credit is a form of property. That credit is property and has value in terms of goods and services arises from its transferability. This is apparent in valuations of financial assets, which together with the possession of the property in physical objects make up a person’s wealth.

In any economy which has progressed beyond a feudal state, it is credit which makes up the vast bulk, if not all of the circulating medium. And the more perfected the economic system becomes the less money circulates. It is simply more convenient to use credit, whether it be bank notes, bank deposits, or individual credit agreements, such as exist between families and friends.

Legally, money has a general and permanent value, while credit has a particular and precarious value. The problem we have today is that these distinctions between money and credit are poorly understood. Those who profess to support “sound money” rarely appreciate this vital distinction, routinely stating that sound money is a policy and not a definition. Accordingly, they incorrectly assume that bank notes issued by a central bank is money when it is in fact credit with counterparty risk, whose value in terms of goods and services can become subverted.

This leads us into the topic of how credit is valued. All credit, including bank notes issued by government authority, must take its value from something. But without being a credible substitute for what the Romans originally defined as money the value of credit obligations becomes inherently unstable. Furthermore, abandonment of credit’s attachment to money encourages a government to spend beyond its tax revenues by debasing the currency, and that is what is happening today at an increasing rate. It is not credit, which is the evil, but its detachment from money.

The legal position and history of gold as money

As a medium of exchange, the function of money is to adjust the ratios of goods and services one to another. Thus, the price expressed is always for the goods, money being entirely neutral. It is therefore an error to think of money as having a price. This should be borne in mind in the relationship between legal money whether it be gold or silver, which is habitually given a price nowadays in fiat currencies, and the fiat currencies themselves which, given the status of legal tender, are erroneously assumed to have the status of money. The relationship between money and credit has become stood on its head. The magnitude of this error becomes clear with understanding what legally is money, and what is credit. Again, this understanding starts with Roman law.

Roman law became the basis for legal systems throughout Europe, and by extension those of European settled regions, from North America, Latin America through Spanish and Portuguese influence, the Dutch in the Far East, and the entire British Empire. In common with the Athenians, Rome held that laws were the means whereby individuals would protect themselves from each other and the state. But it was particularly Rome which codified law into a practical and accessible body of reference generally.

The first records of Roman statutes and the case law which followed were the Twelve Tables of 449BC. These became the basis upon which individual jurors subsequently expounded, developed, and evolved their rulings over the next thousand years. The whole legal system was then consolidated into the Emperor Justinian’s Corpus Juris Civilis, otherwise known as the Pandects. When the empire relocated to Constantinople, the Corpus was translated into Greek and eventually reissued in the Basilica, at the time of the Basilian dynasty in the tenth century. It was that version which became the foundation for European law in the Middle Ages, except for England. As an eminent nineteenth century lawyer specialising in banking put it, the reason common law differed in England was that:

“The Romans abandoned Britain at the end of the fifth century and the common law of England on the subject of credit was exactly as it stood in Gaius which was the textbook of Roman law throughout the empire at the time when the Romans gave up Britain.  But on the 1st of November 1875, the common law of England relating to credit was superseded by equity which is simply the law of the Pandects of Justinian.”[i]

In all, two thousand years of legal development had elapsed between the Twelve Tables and the reaffirmation of Justinian’s Pandects in Dionysius Gottfried’s version in Geneva of the Corpus Juris Civilis, translated back into Latin in 1583AD from the Greek Basilica.

It is the Digest section of the Corpus which is relevant to our subject. The Digest is an encyclopaedia of over nine thousand references of eminent jurors collected over time. Prominent in these references are those of Ulpian, who died in 228AD and was the juror who did much to cement the legal position and distinction between money and credit. The Digest defined property, contracts, and crimes. Our interest in money and credit is covered by rulings on property and contracts.

The regular deposit contract is defined by Ulpian in a section entitled Deposita vel contra (on depositing and withdrawing). He defined a regular deposit as follows:

“A deposit is something given another for safekeeping. It is so called because a good is posited (or placed). The preposition de intensifies the meaning, which reflects that all obligations corresponding to the custody of the good belongs to that person.”[ii]

Another jurist commonly cited in the Digest, Paul of Alfenus Varus, differentiated between the regular deposit contract defined by Ulpian above and an irregular deposit or mutuum. In this latter case, Paul held that:

“If a person deposits a certain amount of loose money, which he counts and does not hand over sealed or enclosed in something, then the only duty of the person receiving it is to return the same amount.”[iii]

So, a mutuum is taken into the possession of the person receiving it. In return for a right of action in favour of the depositor to be exercised by him at any time, the receiver has a matching duty to return the same amount until which it becomes the receiver’s property to do with as he wishes. This is the legal foundation of modern banking.

Clearly, the precedent in the Digest is that money is always metallic. While anything can be deposited into another’s custody, it is the treatment of fungible goods, particularly money, which is the subject of these legal rulings. It is only through an irregular deposit (or mutuum) that the depositor becomes a creditor. By laying down the difference between a regular and irregular deposit, the distinction is made between what has always been regarded as money from ancient times and a promise to repay the same amount, which we know today as credit and a matching obligation to pay.

There is still one issue to clarify, and that is to do with credit rather than money. As noted above, Justinian’s Pandects were compiled a century after the Romans had abandoned Britain. From what was subsequently unified as England and Wales out of diverse kingdoms, common law differed in that debts were not freely transferable. The transferee of a debt could only sue as attorney for the transferor. This placed debt as property in a different position from other forms of transferable property. Justinian took away this anomaly as a relic of old Roman law (the laws of Gaius, referred to above), allowing the transferee to sue the debtor in his own name. Without this amendment, the status of a particular and precarious debt as an asset would be in doubt.

This anomaly in English law was only regularised when the Court of Chancery merged with common law by Act of Parliament in November 1875. Since then, the status of money and credit in English law has conformed in every respect with Justinian’s Pandects.

While the legal position of money is clear, the economic position is technically different. Jean-Baptiste Say pointed out that money facilitates the division of labour. Technically, money is unspent labour, and is therefore a credit yet to be used. Various other classical economists made the same point. Adam Smith wrote that a guinea might be considered as a bill for a certain quantity of necessaries and conveniences upon all the tradesmen in the neighbourhood. Henry Thornton said that money of every kind [including credit] is an order for goods. Bastiat and Mill opined similarly.[iv] The similarity of function between money and credit has undoubtedly led to confusion over the true meaning of terms.

But it is the legal difference which is of overriding importance because it was founded on the principal that there is a clear distinction between metallic money and a duty to pay. Money is permanent while credit is not. Money has no counterparty risk, whereas credit does.

The modern belief that money can be done away with and substituted with banknotes is therefore incorrect. And it is common ignorance of the established relationship between money and credit both in law and in practice which has led to the error of thinking that bitcoin can be the new money for modern times. Accordingly, we must put any such thoughts out of our minds.

The future of cryptocurrencies

It has been easy to point to the benefits of the cryptocurrency revolution. The blockchain concept promises a transformation in the recording of property ownership. And the popularity of bitcoin has alerted a wider public to the debasement of fiat currencies by governments — that surely is a public good. But it appears to have done nothing to enhance anyone’s understanding of money and credit.

The crypto revolution has created a potential evil in the form of central bank digital currencies, originally conceived by central bankers, seemingly ignorant of their own craft as a response to the threat from private sector money to their fiat monopolies. Their ignorance is of the legal position described above: after all, to detach a national fiat currency from legal money requires a denial of the true, legal position on the part of the perpetrator.

Central banks further demonstrated their denial of the laws of money by appointing a committee of the Bank for International Settlements, which coordinates central bank policies, to examine the benefits of a CBDC to a central bank and its government. Pursuing statist interests, the BIS committee’s conclusion is that CBDCs could give governments totalitarian control over economic activity. Nowhere has the legal position established millennia ago been respected, or even mentioned in their deliberations.

The reason the legal position of gold as money has persisted as authoritarian governments have come and gone is that the Romans defined an entirely natural relationship between money, what it is, and credit. Originally, money was and still is determined by people who are its users. And they create credit based upon money’s value. The practice evolved from the creation of credit based on goods that could be bartered. Credit must have been the way the Phoenicians financed their trade long before their city-states took to the convenience of coining metals, thought to be at about the same time as Rome’s Twelve Tables.

While the Romans paid close attention to the practicalities of trade and the natural evolution of payment in gold, silver, copper, or bronze coin and embodied it in their law, the state theory of money has always failed. The introduction of CBDCs is just another state theory of money. And while it promises to further the objectives of authoritarianism, it is bound to fail as well.

The sheer impracticalities involved have already caused the Bank of England in its White Paper to reject the BIS’s central proposition, that a sterling CBDC will bypass the commercial banking system and be totally under a central bank’s control. The reasons for the Bank’s approach are entirely sensible: the bureaucracy involved in setting up a CBDC, with everyone and every business required to open an account at the Bank of England would take years in the planning, testing, and implementation. And in the US, where the large majority of lawmakers depend on contributions from the banks to fund their election expenses, we can be certain that if any CBDC proposition was to be put forward by the Federal administration, it would be heavily watered down so as to not undermine existing banking interests.

The fate of the entire CBDC saga is likely to turn out to be a red herring. And in this article, I hope I have demonstrated convincingly the impossibility that bitcoin or any other cryptocurrency can fulfill the role of a currency. There only remains the question over their future if this role is denied to them.

It is now 52 years since the dollar and all other currencies with it became entirely fiat. While it is beyond the scope of this article to describe the factors involved, there is growing evidence that the current dollar-based fiat currency episode, like all others before it, is coming to an end. That being so, we can expect a new monetary system to replace it. But with bitcoin not suited to the task, we can be sure that the reason for bitcoin’s existence will turn out to have been purely speculative.

Therefore, when fiat dies, we can expect the whole cryptocurrency and the CBDC phenomenon to die with it. Mark it down as a modern Mississippi venture, or South Sea Bubble, both of which owed their existence to speculative excesses financed by credit — just like bitcoin.

• [i] See HD Macleod’s The Elements of Banking, Longmans Green & Co, 1877
• [ii] See de Soto’s Money, Bank Credit, and Economic Cycles, Chapter 1.
• [iii] ibid
• [iv] Listed in HD Macleod’s The Elements of Banking.

But all will be revealed in three weeks’ time. Meanwhile, this article looks at how gold standards could return in the wake of a new gold-backed trade settlement currency, if that is what emerges, using the currency board model as a template. 

This is followed by an explanation of why gold reserves must cover the bank note issue. I assess the cover afforded to both the rouble and the renminbi, incorporating assumed levels of non-reserve gold bullion held by both Russia and China. The conclusion is that both nations have ample cover to implement proper gold standards. And that gives the opportunity for other allied nations to implement currency boards with the renminbi.

The availability of above ground gold stocks to support a global retreat from fiat currencies back to the stability of legal money — gold — is then addressed. The conclusion is that with bullion having migrated in vast quantities from the west to the east in recent decades, there is a deficit for the fiat-committed western alliance and nations in its sphere of influence to back their own currencies. 

A gold standard is similar to tried and tested currency boards…

All the vibes coming out of the Russian and Chinese axis strongly point to a new gold-linked trade settlement currency being proposed at the BRICS summit in Johannesburg later this month. Until the details are revealed, we won’t know what this proposal actually is, whether it will fly, whether it will be simply imposed on BRICS members, or if they will have a say about its introduction and if so its form. All we can deduce is that Russia is leading this project and as an educated guess it will incorporate work by Sergei Glazyev.

What we do know is that the majority of the world measured by population and GDP (on a PPP basis) is becoming confident enough to throw off the yoke of American imperialism, and with it will go the hegemonic power of the fiat dollar. And remaining tied to the dollar, it would appear that the days of western fiat currencies are similarly numbered. 

In the western alliance, economists and investors alike will have to re-educate themselves about how the relationship between gold and credit works, and what is required to ensure that the link between them endures. Our politicians will have to wean themselves off from their habitual promises to give everyone everything. They will have to stop believing that they know how to deliver outcomes better than free markets. Social legislation must be rescinded, regulations annulled, and responsibility for the actions of individuals handed back to them.

The position of Russia, China, the members associates and dialog partners of the Shanghai Cooperation Organisation, and BRICS+ is far stronger. None of them are burdened with the social and socialist responsibilities of the so-called advanced nations. They are in a position to operate currency boards to secure the value of their credit systems. But instead of a currency board attached to the dollar, it must be attached directly or indirectly to gold. A gold standard can be regarded as a type of currency board — indeed, it was its forerunner. 

According to the IMF, 

“A currency board combines three elements: an exchange rate that is fixed to an anchor currency, automatic convertibility (that is the right to exchange domestic currency at this fixed rate whenever desired), and a long-term commitment to the system, which is often set out directly in the central bank law. The main reason for countries to contemplate a currency board is to pursue a visible anti-inflationary policy.”[i]

It was the way in which colonial Britain ensured that a colony’s currency was firmly tied to sterling. I remember from my youth in Kenya that the Kenya shilling was exactly the same as a British shilling at twenty to the pound. That rate held until independence in 1963. Today, there are 181 KES to the pound, and the pound has also lost 99% of its purchasing power since 1971 measured in gold. 

The IMF article goes on to say,

“A currency board system can be credible only if the central bank holds sufficient official foreign exchange reserves to at least cover the entire narrow money supply. In this way financial markets and the public at large can be assured that every domestic currency bill is backed by an equivalent amount of foreign exchange in the official coffers. Demand for a “currency board currency” will therefore be higher than for currencies without a guarantee because holders know that rain or shine the liquid money can be easily converted into a major foreign currency in the event of a testing of the system. Currency boards’ architects contend that automatic stabilisers will prevent any major outflows of foreign currency. The mechanism works with changes in money supply within the currency board country — a contraction in the case of a flight into the anchor currency — which will lead to interest rate changes that in turn will induce investors to move funds [back into the currency board currency].”[ii]

The operation of a monetary authority becomes strictly limited to controlling the currency issue, swapping the domestic currency for the anchor currency on demand. It must be prohibited from funding government spending, the government operating its banking facilities with commercial banks instead. Banking supervision must be devolved to a separate agency to ensure that the issuance of domestic currency does not get bound up in responsibilities as lender of last resort.

The classic gold standard operates differently in some respects. In common with a currency board system, the currency issuing facility is separated from banking responsibilities, but gold backing need not be 100%. Sir Isaac Newton came up with a minimum 40% formula. And under the 1844 Bank Charter Act, the Bank of England’s issuing department had to back every additional bank note in circulation with gold, exchangeable for bank notes in sovereign coins.

The charts below show how a stable measure of narrow money, such as bank notes in issue, relates to price stability, while broader measures of credit are free to respond to commercial demand without leading to runaway inflation.

These charts covered the six decades following the introduction of Britain’s 1844 Bank Charter Act, which had the effect of severely limiting the note issue, while permitting commercial bank credit to expand as commerce demanded. While the latter expanded nearly eight times, prices (the lower chart) were remarkably stable, particularly as the savings ratio rose from the 1880s onwards. Clearly, for a gold standard to work, it is the note issue to which credit values are anchored.

Critics of currency boards and gold standards say that they are too inflexible, which is, of course, the point. But without the encumbrance of welfare commitments, it is relatively simple for a government to ensure it never runs a budget deficit. For many emerging economies today, the weakness of their currencies has been due to mismanagement, lack of international credibility, and misguided monetary policies. 

There has also been an evolutionary issue for many African nations. They had made enormous economic and social progress under colonial rule. Understandably, they then sought self-determination which undid many of the advances made in the decades before. Furthermore, many African politicians flirted with communism, only being kept in America’s sphere of influence by foreign aid — which too often fed political corruption. Having suffered from combinations of corruption and mismanagement, they are now offered a better alternative of investment in their infrastructure by China, frequently on the basis of local partnerships.

This is the basis of BRICS+: a new industrial revolution for emerging nations willing to join in. Cementing these prospects will not be Keynesian stimulation. It will be sound money, which means credible gold standards. And a gold-backed trade settlement currency will be the first step.

A gold-backed trade settlement currency offers energy and commodity exporters a better alternative payment medium to dollars. This is one motivation for Russia to devise and back it, supported no doubt by the Saudis and Iranians. It is not popular with India, which has pursued similar monetary policies to Britain. Indeed, relationships between the Reserve Bank of India and the Bank of England have been close historically. But India is likely to be told the payment terms for her energy imports — perhaps sweetened with a discount offered — which means she will have to go along with it.

The second step will involve major currencies within the BRICS block migrating onto gold standards, most likely starting with Russia and then China. The initial move to a gold-backed trade currency is likely to undermine the dollar’s purchasing power, leading to higher oil and gas prices, particularly as depleted reserves need replenishing ahead of the Northern Hemisphere’s winter months. Oil has already risen 18% since end-June, and further price rises will take pressure off Russia’s deteriorating finances. And as the dollar sinks further, a gold standard can be introduced as protection for the rouble, leading to lower, stable interest rates for the domestic economy.

We know this is an objective for the rouble from comments by Sergei Glazyev, President Putin’s senior economic adviser, echoed by Putin himself. Furthermore, a sliding dollar is likely to take down other currencies with it so both the rouble and renminbi are likely to seek protection through gold.

Russia’s gold

Officially, Russia has monetary gold reserves of 2,302 tonnes. But in addition, there are unknown quantities of gold held in the State Fund of Russia and the State Fund for Precious Metals. Anecdotally, these two funds are said to contain an extra 10,000 tonnes between them, bringing Russian state holdings to over 12,000 tonnes. Whatever the true figure is, it is possible that Russia has more gold to monetise than the US Government’s 8,133 tonnes, which is unaudited and rumoured to be wildly overstated.

In an article for the Moscow newspaper Vedomosti last December Sergei Glazyev wrote that,

“Large gold reserves allow Russia to pursue foreign financial policies and minimise dependence on external lenders. The amount of gold reserves affects the country’s reputation, credit rating, and investment attractiveness. Large reserves allow you to plan the state budget for a long time buying off many economic and political risks.”

Glazyev is known to hold similar views to Putin, which presumably is why he was seconded to head up the Eurasian Economic Union committee, which is considering a replacement for the US dollar for trade and commodity pricing. And the practicalities of that situation strongly point to gold being the backing for trade settlements. Glazyev is also the mover and shaker behind the beefed-up Moscow gold exchange. And Russian gold mine output at 325 tonnes is planned to be enhanced and was second only to China’s 375 tonnes last year. 

If we assume that altogether the Russian state can monetise just 10,000 tonnes of its gold, then its gold reserves cover M0 (which we take as proxy for the note issue) four times over, and mine output currently adds a further 11% cover annually. Russia has much to gain from putting the rouble onto a gold standard, which can be easily maintained. The monetary authorities would only have to refocus policy to exercise greater control over M0, which in the year to May was destructively inflated by 24%. 

China’s gold

China took its first deliberate step towards eventual domination of the physical gold market as long ago as June 1983, when regulations on the control of gold and silver were passed by the State Council and gold was in the early stages of a protracted bear market. The following Articles selected from the English translation set out the objectives very clearly:

Article 1. These Regulations are formulated to strengthen control over gold and silver, to guarantee the State’s gold and silver requirements for its economic development and to outlaw gold and silver smuggling and speculation and profiteering activities.

 Article 3. The State shall pursue a policy of unified control, monopoly purchase and distribution of gold and silver. The total income and expenditure of gold and silver of State organs, the armed forces, organizations, schools, State enterprises, institutions, and collective urban and rural economic organizations (hereinafter referred to as domestic units) shall be incorporated into the State plan for the receipt and expenditure of gold and silver.

Article 4. The People’s Bank of China shall be the State organ responsible for the control of gold and silver in the People’s Republic of China.

Importantly, under Article 3 the PBoC is able to allocate gold purchases to other state entities, such as the Peoples’ Liberation Army and the Communist Party Youth Wing, only retaining a small balance for reserve asset purposes. Otherwise, accumulating large quantities of bullion would have been made difficult without this secrecy. Additionally, China has deliberately developed her own gold mine output so that she became the largest producer in the world, mining 6,869 tonnes since 2002. State-owned refineries process this gold along with doré imported from elsewhere.

The regulations quoted above formalise the State’s monopoly over all gold and silver, which is exercised through the Peoples Bank. They allow for the free importation of gold and silver but keep exports under very tight control. On the basis of these regulations and as subsequently amended the PBoC established the Shanghai Gold Exchange in 2002, which remains under its total control and permits the general public to acquire gold. The intent behind the regulations is not to establish or permit the free trade of gold and silver, but to control these commodities in the interest of the state, even when in the possession of members of the public.

This being the case, the growth of Chinese gold imports recorded as deliveries to the public since 2002 is only the most recent evidence of a deliberate act of policy embarked upon forty years ago. China had been accumulating gold for nineteen years before she allowed her own nationals to buy any when private ownership was finally permitted. Furthermore, bullion had been freely available, because in seventeen of those years, gold was in a severe bear market fuelled by a combination of supply from central bank disposals, leasing, scrap, rapidly increasing mine production and investor selling, all of which I estimate totalled about 76,000 tonnes in all. The massive expansion of derivative gold products freed up the supply of physical bullion as well. I assess that as much as 25,000 tonnes of that 76,000 total were quietly accumulated by the PBoC before the public were permitted by the PBoC to buy and own gold in 2002.

Put in another context, the cost of China’s 25,000 tonnes of gold equates to roughly 10% of her exports over the period. And the eighties and early nineties in particular also saw huge capital inflows when multinational corporations were building factories in China, all of which accumulated as foreign exchange in the PBoC’s hands. However, the figure for China’s gold accumulation is at best informed speculation, but given the determination expressed in the 1983 regulations and subsequent events it is clear she had deliberately accumulated a significant undeclared stockpile by 2002, allocated into various state entities. 

So far, China’s long-term plans for the acquisition of gold appear to have achieved some important objectives. Deliveries to the public through the SGE since only 2008 have totalled over 22,000 tonnes, gross of returned scrap, probably exceeding 23,000 tonnes since 2002. 

Assuming that China’s monetary authorities have 25,000 tonnes of gold available which they can monetise, its M0 money supply would be covered about 1.5 times at current gold prices.

Why now is the time for rouble and renminbi gold standards

Evidenced from a number of disparate threads, there can be little doubt that China and Russia are moving towards protecting their currencies and their entire joint project for global industrialisation of emerging economies from an increasingly likely collapse of the post-Bretton Woods fiat currency system. In this context, it started with China’s secret accumulation of gold bullion dating back to 1983, which continued after the establishment of the Shanghai Gold Exchange in 2002. If the PBoC had accumulated 20,000—25,000 tonnes by then, the total could easily exceed 30,000 tonnes today.

Russia came late to this policy, only accelerating its plans to acquire monetary gold following the western alliance’s sanctions. Nevertheless, both nations appear to be in a position to cover their narrow money supply measures comfortably. And from empirical evidence, with suitable reforms it is the narrow measure of money in the form of bank notes issued by the monetary authority which matters in this respect. And as if to confirm an even wider adoption of gold standards, it is usually Asian central banks reporting the accumulation of higher gold reserves.

The other side of gold standards for China and Russia is an accelerated destruction of the US dollar’s purchasing power. This is a course upon which the US dollar is set anyway with its debt trap increasingly visible. But it is China and Russia’s different economic objectives which lead many observers to believe that gold standards are unlikely, with China seeking to protect the value of her export markets by not undermining the major fiat currencies.

Doubtless, this latter point was raised by Janet Yellen at her recent meetings in Beijing, followed by Henry Kissinger. Yellen’s meetings occurred in the days after Russia confirmed that a new gold-backed trade settlement currency is on the BRICS summit agenda later this month. We can reasonably assume that the danger of this move to the dollar’s standing set alarm bells ringing at the US Treasury. Presumably, Yellen was unable to move the Chinese, which was why Henry Kissinger was sent in a last-ditch attempt.

But China’s focus is increasingly on protecting her investments in Asia, Africa, and Latin America. She is aware of the damage that rising dollar interest rates inflicts on these emerging nations. So are the emerging nations, a fact which undoubtedly encourages them to seek protection by joining BRICS. 

Only this week, we find that cash-strapped Argentina has secured from China the equivalent of $1.5 billion in yuan to pay to the IMF as part of a $2.5 billion obligation. China probably believes that America plans to use rising interest rates to drive a wedge between her and emerging nations minded to join BRICS. Argentina needed rescuing from this fate. The Argentinian loan was probably too big for the New Development Bank (the BRICS equivalent of the IMF) but the NDB stands ready to finance the smaller African nations in debt to the IMF.

America has used the trade threat continually since President Trump first introduced discriminatory trade tariffs against China. In the wake of sanctions against Russia, analysts in Beijing are probably concluding that America would lose more than she would gain by implementing trade threats. And as a possible geopolitical dividend, a disunited EU might not follow suit, splitting the western alliance. Therefore, not only will China have changed her trade policy objectives, but for her, hastening the dollar’s demise by reintroducing gold into the monetary system is now the preferred goal.

Global gold distribution

China’s gold policies since 1983 have introduced distortions into the global distribution of gold bullion holdings. By locking up significant quantities of bullion, liquidity available for nations outside the China-Russian axis has become severely limited. To illustrate the point, the table below attempts to identify broad categories of ownership based on an extrapolation of an assessment of above ground stocks carried out by James Turk of Goldmoney with economist Juan Casteñada in 2012, using US Geographical Survey numbers for subsequent years. That work convincingly pointed out that there was no support for the estimates adopted by the World Gold Council, which compared with Goldmoney’s estimate overstated above-ground stocks by about 17,000 tonnes. Accordingly, I believe that in 2022 the total figure is now 191,584 tonnes, not the 208,874 tonnes assumed by the WGC. This difference is material.

The following notes to the table are by way of explanation:

• Goldmoney’s estimate of above ground stocks, compared with that of the WGC illustrates the impact on the bottom line, which in this table would otherwise show a balance unaccounted for at 68,535 tonnes. This balance includes undeclared state holdings of gold by Russia and China, which as we have seen could exceed 40,000 tonnes, leaving little room for private investors holding bars and coin.
• Jewellery is mostly owned by Chinese, Indian, and other Asian nationals, who traditionally use it as a savings medium as much as ornamentation. This explains the size of this category.
• The Central Bank official reserves are collated by the World Gold Council, as are estimates for gold-backed ETFs. We can assume these figures as reported are accurate, but include double counting.
• Double ownership of gold through leases and swaps was the subject of detailed research by analyst Frank Veneroso presented to a conference in Lima in 2002.[iii] He concluded that between 10,000—15,000 tonnes of central bank gold was leased or swapped. I have assumed the lower figure, despite the material increase in central bank gold reserves since 2002. This is supported by further analysis which follows.

The last bullet point needs further explanation. Under the IMF’s gold accounting rules, 

“Monetary gold is gold held by a monetary authority principally as an element of its foreign exchange reserves (also sometimes called international reserves). To qualify as monetary gold, the gold must meet the International Monetary Fund’s (IMF’s) definition of monetary gold and the monetary authority must designate the gold as part of its foreign reserve portfolio. Monetary gold includes allocated gold bullion and unallocated gold accounts with non-residents that give title to claim the delivery of gold.”[iv]

An unallocated account arises when a central bank delivers gold under a lease or swap arrangement to a bullion bank, or an institution such as the Bank for International Settlements in return for a deposit credit. The bullion bank takes the bullion onto its own balance sheet, so the central bank loses possession. That the IMF permits a central bank to record this credit as monetary gold despite having given away possession means that there are at least two owners for a given quantity of bullion. And that assumes only one rehypothecation, when there can be no theoretical limit to the use of bullion for a chain of transactions in this fashion.

It seems reasonable to assume that unallocated monetary gold is concentrated on the central banks not aligned with the Asian hegemons and firmly in the western alliance camp. The notional total of the latter groups’ holdings is about 26,000 tonnes, depending on which nations are included in the definition, in which case only 16,000 tonnes can be assumed to exist in physical form. Confirmation of this situation came, perhaps, from the difficulty with which Germany sought to repatriate some of her bullion which was meant to be held as earmarked gold (in custody) at the New York Fed.

The major players arranging this merry-go-round are the NY Fed and the Bank of England, which between them currently report physical gold vaulted for foreign central banks totalling 10,874 tonnes. From websites for the major non-Asian holders (Germany, France, Italy, and Switzerland) we know that 5,066 tonnes of this total are for these major holders, except for France, which stores almost all its gold in Paris. Between them, they store 5,271 tonnes of their gold in their own jurisdictions. That leaves 5,808 tonnes held at the NY Fed and the BoE held for the other central banks notionally allied to the West, which is the vast majority of their recorded holdings.

After allowing for the 5,271 tonnes above stored elsewhere, there is still an approximate 10,000-tonne gap between the 26,000 tonnes derived above and the 10,874 tonnes recorded in New York and London. This suggests that there are significant levels of unallocated gold involved, calculated as follows: 

While the calculations in the table above are far from complete, there appears to be a significant gap between total claimed bullion holdings and what is stored in the two main centres. 

In the first table, we noted that 46,898 tonnes of global above-ground gold were unaccounted for. That includes the undeclared bullion holdings of China and Russia, which from the analysis in this article could total over 40,000 tonnes. Private investment holdings in bar and coin will also be in this unexplained balance. The only way in which these two large quantities can be accommodated in the 46,898 balance is due to the double counting and multiple rehypothecations of central bank gold.

 Otherwise, the numbers don’t add up.

This leaves very little liquidity for nations trying to escape the impending collapse of the post-Bretton Woods fiat currency regime by seeking to implement their own gold standards. It also calls into question the survivability of the entire bullion banking system, being caught horribly short of deliverable bullion if the market attempts to unwind its positions.

Conclusions

Not only are there clear advantages to the Russian and Chinese axis from supporting a new trade settlement and commodity purchasing gold-backed currency, but the rapidity of its introduction could take the world by surprise. There is now little doubt that the fiat currency regime based on the dollar has run its course, leaving multiple debt traps to be sprung in the western alliance and an outlook of stagflation or worse. 

In other articles for Goldmoney, I have covered the various aspects of an existential crises facing the world’s fiat currency regime. These range from government debt traps, and the bank credit cycle turning down, to the ability of the major central banks to rescue failing commercial banks, given they themselves are in negative equity. The gross values of many derivatives should also be recorded on bank balance sheets, to properly reflect counterparty risks.

To these problems can be added a collapse of the entire bullion trading system, revolving around swaps and leases and frequent rehypothecations of bullion. When the music stops, the extent of the problem which has grown since the early 1980s will become known. The end of the fiat currency system, no doubt accelerated by a move to incorporate gold back into the Russian and Chinese financial systems is likely to be the trigger.

At the very least, if China and Russia’s grand project is to proceed, the renminbi and rouble must be protected from a fiat currency crisis. This is the moment for which the Chinese have been preparing since 1983, and the Russians more recently sparked by western sanctions. They at least have sufficient bullion available to cover their narrow money supply with ample margins and are the two largest nations by goldmine output. A move towards gold backing of other currencies is likely to prove more difficult, because of the shortage of monetary gold due to the double counting of reserves through leasing and swaps. The only solution for many of the BRICS attendees in Johannesburg later this month will be to piggy-back on China’s yuan though a currency board relationship. The rest of the world faces the grim prospect of being ensnared in a widespread fiat currency collapse with no visible escape.

Sound off about this post on our Economic Collapse Substack.

• [i] Are currency boards a cure for all monetary problems? IMF Quarterly December 1998, Volume 35, Number 4.
• [ii] ibid
• [iii] See https://www.gata.org/node/4249
• [iv] See IMF Note 6 — Monetary gold
• Reprinted with permission from Goldmoney.

There is strong evidence that planning for this new trade settlement currency has been in the works for some time and has been properly considered. That being so, we are witnessing the initial step away from fiat to gold backed currencies. Without the burden of expensive welfare commitments, all the attendees in Johannesburg can back or tie their currency values to gold with less difficulty than our welfare-dependent nations. And it is now in their commercial interests to do so.

We have been brainwashed with Keynesian misconceptions and the state theory of money for so long that our statist establishments and market participants fail to see the logic of sound money, and the threat it presents to our own currencies and economies. But there is a precedent for this foolishness from John Law, the proto-Keynesian who bankrupted France in 1720. I explain the similarities. That experience, and why it led to the destruction of Law’s livre currency illustrates our own dilemma and its likely outcome.

It’s not just a comparison between fiat currency and gold. America’s financial position is dire, more so than is generally realised. The euro is additionally threatened with extinction because of flaws in the euro system, and the UK is already in a deeper credit crisis than most commentators understand.

Introduction

On 7 July, news leaked out and was then confirmed by Russian state media that the BRICS meeting in Johannesburg would have a proposal on the agenda for a new gold-backed currency to be used exclusively for trade settlement and commodity pricing. It appears that this is still beyond the comprehension of the mainstream media who have failed to even report on it. But like the fall of the Berlin Wall in the twentieth, it will probably turn out to be the most important monetary and geopolitical development this century.

The very few of us who have followed this story from the outset know that the Russian confirmation is the culmination of a trail of clues dating back to the time of the western alliance’s sanctions on Russian trade. With very few exceptions, among those who don’t understand the whys and wherefores that lead us to this event are the press, economists of all schools, and the western financial community.

Driving this is a war between the hegemons, with America on one side and Russia in partnership with China on the other. Until Russia was sanctioned, the Asian hegemons appeared to have a policy of sitting on their hands and letting the Americans tie themselves in knots. This has been evident in military strategy — Syria, Afghanistan, and other pyrrhic victories or failures. But it has also been true in the hidden financial war. And it is the financial war which could determine the military outcome, because if the dollar is destroyed, so will be America’s military capability and NATO will fall apart. 

That much should be obvious to independent observers. Therefore, an important question to be answered is under what circumstances would the Asian hegemons drop their generally passive strategy and take the initiative? As well as Russia’s Special Military Operation last year, there is evidence that the time has now arrived. Russia’s trade surplus has now fallen sharply, and the SMO in Ukraine is a drain on otherwise healthy government finances. Because of these factors, President Putin needs to act soon to bring his SMO to a conclusion, or alternatively act to drive global commodity prices higher, which is the same thing as undermining the purchasing power of the dollar.

China sees this and faces an additional problem from the escalation of US hostilities over Taiwan. If Ukraine continues to worsen with neither party being able to backdown, China could be dragged into the conflict, given the common enemy. Furthermore, with much of Africa and Latin America migrating away from America’s sphere of influence and towards Asia, rising dollar interest rates are creating a crisis for those of them owing dollars. China almost certainly believes that in bankrupting these emerging economies by raising interest rates, America is attempting to stop them from joining BRICS, and seeks to take over many of their assets and infrastructure which China has helped create.

This threat is now greater to China’s long-term economic strategy than threats to her export trade with America and Europe. This is why China is now prepared to back the Russian plan for a new gold-backed trade currency, which is bound to rapidly undermine the fiat dollar, as all central banks in the Asian hegemons’ sphere of influence sell off their dollar reserves to acquire physical gold. For a long time, I have described activating gold as being the financial equivalent of a nuclear war — this is about to be tested.

A lesson for us from Cantillon

One of the earliest writers on economics was an Irishman, Richard Cantillon, who went into partnership with his cousin, also named Richard in Paris in 1714, finally assuming control of the bank. It was during this period that John Law befriended the Duc d’Orléans, the Prince Regent for the infant King Louis XV who succeeded Louis XIV in 1715. John Law was a proto-Keynesian, with similar policies for the state expansion of credit as the means by which a government could stimulate an economy, thereby increasing tax revenue. With the royal finances facing bankruptcy due to Louis XIV’s profligacy, the Regent grasped at Law’s scheme like a drowning man thrown a lifebelt.

There were four essential elements to Law’s scheme, which resonate with the monetary regime today:

• The establishment of a bank with the principal function of issuing banknotes to replace gold and silver coins as the medium of exchange. This would evolve his commercial bank into a prototype central bank, appointed by the government to have a monopoly on the note issue. Gold and silver coins were to be driven out of circulation entirely.
• The establishment of a trading entity (later known as the Mississippi venture) as part of a debt management scheme for the benefit of royal finances.  The bank and the venture were to be the only tradable financial assets. This equates with all bond and stock market asset values being inflated currently, for the general enhancement and perpetuity of tax revenues.
• To use his position as controller general of finances to boost the values of both his Royal Bank and the Mississippi venture by expanding the quantity of banknotes and bank credit.
• To merge the new central bank with France’s import and export monopoly embodied in the Mississippi venture to secure income from trade tariffs and duties, significantly enhanced by the wealth created through the expansion of credit.

The similarity of Law’s financial policies with those of today are remarkable. The state’s monetary monopoly over its economy managed by a central bank replicates Law’s design for his fiat currency. The manipulation of today’s fiat currencies has ensured a wealth transfer from savers to the state for the benefit of government finances. The Fed and other central banks believe that a heathy stock market (a bubble?) is essential to maintaining consumer confidence in spending, and therefore sustaining tax revenues. The expansion of central bank balance sheets creates a wealth illusion in bond and stock markets, leading to irrational valuations.

While profiting hugely as a banker by lending credit to wealthy speculators, Cantillon was sceptical of Law’s scheme from the outset. And he was not above the sharp practice of taking in stock as collateral against loans and immediately selling it without informing the borrower. This was to result in legal actions in London’s Court of Chancellery after the bubble burst, all of which found in his favour on technicalities.

In 1720, Cantillon decided the collapse of Law’s scheme was coming. He sold all the remaining shares under his control amounting to 1,742 shares, 573 of which were collateral taken in that year at prices between 8,200 livres prior to 12 March to as low as 4,550 livres in September for a total value of 8,229,786 livres.[i]

Besides clearing out all remaining shares under his control, his choice of action was to short Law’s livres on the foreign exchanges in London and Amsterdam in preference to Mississippi stock in the market. As events proved, Cantillion was right, because between the peak of the bubble in February 1720 and the final quarter of that year, Law’s merged Mississippi venture lost two-thirds of its value, while the livres became worthless in London and Amsterdam.

From his Essai sur la Nature du Commerce en General published posthumously in 1755, it was clear that Cantillion understood the inconsistencies in Law’s actions. In late-February 1720, Law promised to not expand the money supply, but from early March he was forced to do so to support share prices by buying them in the market. In May over the Whitsuntide holiday, with the agreement of the Prince Regent it was decreed that there would be a phased reduction in shares and banknotes to stabilise the shares and the currency, but that failed in both respects. These actions rhyme strongly with the inconsistency of central bank policies today — fighting inflation while still relying on currency debasement to fund fiscal deficits. Furthermore, central banks are raising interest rates in an attempt to control price inflation, without realising that it is the valuation users place on a fiat currency which ultimately sets its value, not monetary policy.

Today, bank credit has stopped growing and is already contracting in a number of major currencies, being driven by a combination of high commercial bank balance sheet leverage and growing concerns over bad and doubtful debts which taken together threaten to bankrupt entire banking systems. Furthermore, like Law’s Banque Royale which did not survive the 1720 crisis, today’s central banks are already technically bankrupt on a mark-to-market valuation basis due to their acquisition of government bonds at inflated prices through quantitative easing.

The one shoe to drop is the switch from raising interest rates intended to stop the general level of consumer prices rising above official 2% targets, to rescuing the entire system through a renewed credit expansion. But as the John Law experience in February 1720 showed, while a switch from supporting currency values to credit expansion to rescue a failing system is inevitable, equally it does not succeed.

The dollar and related currencies are being challenged

So far, few have minded that the dollar is a naked fiat currency. But the proposed BRICS trade settlement currency clothed in gold is bound to expose that nakedness for all markets to see. Not only will we then witness the ending of the fiat dollar regime, but we will see a forerunner of its replacement. In common with the punters at the top of the Mississippi bubble in February 1720, today there are very few commentators who, like Cantillon, detect these dangers ahead.

For fiat currencies it is a problem with two aspects. A properly designed new BRICS trade settlement currency will lead to problems for fiat currencies on a comparative basis. And led by the dollar, the fiat currencies’ credibility is being undermined from within as well. As this becomes increasingly apparent, like John Law’s livre the dollar can be expected to sink towards oblivion valued in real money, which is the gold being adopted as an anchor for the new BRICS currency. 

The first problem the US authorities will face is the falling off of foreign demand for dollars and dollar debt, likely to be followed by outright sales. Of the major foreign holders of US Treasury debt amounting to $7,581bn in April, the largest liquidation in recent years was by China, as the chart below shows. 

But at a pinch, by recycling dollars through financial centres to compensate, such as Cayman Islands, Luxembourg, London and Dublin, non-buying from China and the BRICS tribe can probably be offset. China and others could even be dealt with by the US Treasury refusing to accept transfers of bond ownership, but at a risk that it would seriously backfire.

The wider problem is liquidation of the dollar itself. In April, foreigners owned short-term securities, including bank deposits, CDs, and T-bills totalling $7,198bn, and long-term securities totalling $24,865bn for a combined total of $32,063bn.[ii] This is considerably more than the US’s entire GDP and does not include Eurodollars, which is dollar denominated credit created between foreign banks abroad not reflected in correspondent banking balances. Worse still, US resident citizens, businesses, and investors hold short-term assets and deposits in foreign currencies to the equivalent of $689bn (US Treasury TIC figures for March), being the only foreign currency available to absorb net dollar liquidation by foreign holders of dollars. And virtually all long-term investments are in ADR form, which means that liquidating these investments does not raise foreign exchange transactions (and therefore demand for dollars) unless they are bought by foreigners.

The crisis phase of Triffin’s dilemma[iii] is rapidly approaching, and there is very limited non-dollar liquidity on the foreign exchanges to avert it. Already, the dollar has breached an important chart support line on its trade-weighted index, as the next chart shows.

As a measure of foreign confidence in the dollar, the TWI has suddenly deteriorated in the wake of the Russian confirmation that a new gold-backed trade currency is on the BRICS summit agenda. And if it is not just deteriorating dollar sentiment, it will be rising interest rates and a securities bear market which will accelerate a dollar liquidation. 

It is universally assumed in global financial markets that consumer price inflation will subside and that central banks will be able to reduce interest rates. But only this week, Russia refused to renew permission for grain shipments from Odessa, giving further impetus to global food price inflation. Falling inflation is the condition for the maintenance of financial asset values, and therefore for foreigners to retain dollar portfolio assets: but rising grain prices and the current renewed strength in oil prices indicate that the inflation dragon is still breathing its fire.

A further error in the hope that interest rates will soon decline is to not realise the consequences of commercial banks restricting credit expansion. In doing so they are sure to drive up the interest cost of credit — it used to be called a credit crunch. This contraction of bank credit, which is only just beginning to be apparent in US banking statistics, will not only threaten bankruptcy for many businesses thereby driving the economy into a slump, but it will increase the government’s funding requirements due to tax shortfalls and increasing welfare liabilities. 

Meanwhile, to the confusion of neo-Keynesian expectations consumer price inflation will continue to be a problem, even accelerating again after the current pause. The error here stems partly from discarding Say’s law, and not realising that a general glut of products arising from falling consumption cannot happen. A further error is to not understand that the fiat dollar will continue to lose value measured in goods, just as John Law’s livre did after May 1720 despite belated attempts to contract the bank note issue. Like spots are to measles, inflation of prices is the visible symptom of all dying fiat currencies.

The essential point is that markets are taking over control of interest rates from the central banks. This is an additional problem for the US authorities. Along with other group-thinking central bankers in the Bank for International Settlements network, they will learn the hard way that interest rates are not the price of money, but the compensation foreigners require to maintain their holdings. And even that assumes that with the correct interest compensation foreigners will continue to be passive holders, rather than deploying credit for better purposes as they seem bound to do.

Now that a sound money alternative to maintaining reserve balances in dollars is emerging, if the dollar is not to suffer a major crisis at the minimum the Fed will have to go along with the markets and raise rates. Another way of looking at this dilemma is that if the authorities attempt to support the dollar by activating swap lines, it will contract the quantity of dollar credit in circulation, worsening the credit crunch. But as John Law discovered in the months following May 1720, contracting credit in a fiat currency does not necessarily save it. The implications for the US Government’s deficit and its funding costs are also dire.

US budget deficits and inflation

The chart above is of US Government debt outstanding daily for the last year, according to the US Treasury.[iv] Besides the period when negotiations to raise the debt ceiling put the outstanding debt level on hold, there are two notable features. The first is that in only a year, government debt has increased by $2,027bn (6.6%), and secondly the rate of increase is accelerating alarmingly. A large part of the problem is that the cost of funding US Government debt is soaring, as the next chart shows.

Congressional Budget Office forecasts are for budget deficits exceeding $1.5 trillion this and next fiscal year. But the interest rate assumption is an average of 2.7% for both years and beyond, which is clearly behind events and overly optimistic.

Put together the two charts above and you have the classic debt trap, whereby US finances are deteriorating beyond control. Furthermore, the US faces the prospect of a severe contraction of business activity due to the slowdown in bank lending and its effects on interest rates. Tax revenues will undershoot current Congressional Budget Office estimates and mandated welfare commitments will increase on the expenditure side. Consequently, government borrowing will accelerate even further and interest payments on it will as well.

Funding this accelerating deficit must be causing the US Treasury an enormous headache. Just as President Biden went to Saudi Arabia to persuade MBS to accelerate oil output unsuccessfully, Janet Yellen visited China’s Vice Premier He Lifeng as this financial crisis is developing. Of course, none of this was mentioned in the press communiqués, but you can bet your bottom dollar that Yellen wanted China to start buying Treasuries again, or at the very least to stop selling them. But the implications for the dollar are still dire, and it becomes something of an open question as to when foreign holders of the dollar will realise how serious America’s finances have become.

Even without a banking crisis, the Fed will be faced with a stark choice: does it try to save the dollar, or does it try to salvage government finances. Welcome to the John Law dilemma.

All fiat currencies are threatened

Gold backing for the new trade currency is bound to create problems for BRICS national currencies, which may or may not be fully appreciated by individual BRICS nations. The solution for them is to secure their own currency values, either by setting their own gold standards or linking them to the new trade currency in some sort of currency board arrangement. While many of these nations have a history of currency mismanagement, theirs is essentially a confidence problem which can be resolved by turning their backs on the dollar-based fiat currency system.

All these governments have finances that can be balanced with a little fiscal discipline, because they don’t have the welfare burdens that the advanced economies have to contend with. The benefits to their economies of sound money and the low level of interest rates that comes with it are obvious, and social and economic progress can be expected to be as miraculous as those enjoyed in Britain under her nineteenth century gold standard.

But the introduction of a new trade currency backed by gold will undermine the major fiat currencies which have survived on Keynesian myths, which like those of the proto-Keynesian John Law are about to be terminally challenged. And the euro will have an additional problem arising from the ECB’s committee-designed structure.

Like other central banks the ECB not only reduced interest rates, in its case to unnaturally negative levels, but it paid top euro for government bonds as part of its “asset purchase programmes” — currency-debasing QE to the rest of us. Consequently, since the mark-to-market losses have wiped out its equity many times over, and also the equity of nearly all the national central banks which are the ECB’s shareholders, the whole euro system is technically bust — a situation which will worsen if Eurozone bond yields continue to rise. Furthermore, there are substantial imbalances in the TARGET2 settlement system between the euro system’s members which remain unresolved.

When a central bank has one shareholder such as its government, recapitalising it is relatively simple and can be done in a heartbeat. On its balance sheet the central bank creates a loan in favour of the shareholder, and instead of balancing the asset represented by the loan with a deposit liability, it enters the balancing item as equity. In many jurisdictions, this can be done and subsequently confirmed by the legislature. But the structure of the euro system requires multiple governments to agree to recapitalise their own central banks as well as the ECB. The recapitalisation of the entire system will be far from a fait accompli and almost certainly will become an embarrassingly public issue.

The ECB takes the view that it will hold the bonds on its balance sheet to maturity, so there is no need to mark to market and recapitalise the system. But that assumes monetary plain sailing for a considerable time and that interest rates will decline from current levels and stay down. Otherwise, the euro system will be called upon to rescue overleveraged commercial banks with mounting portfolio losses and bad debts. 

But we can now see that if the new BRICS gold backed trade currency replaces the dollar and euro for potentially more than half the world’s trade measured by GDP on a PPP basis, it will lead to catastrophic falls in exchange rates for both the dollar and the euro valued in gold. Assuming that priced in gold commodities continue to be stable (which over time tends to be the case), then the implications for Eurozone states are that after the current dip inflation of prices will remain high and potentially rise even further due to the euro’s loss of purchasing power. Similarly, bond yields will rise above current levels, commercial banks will be destabilised, and the euro system’s hidden losses multiply.

This is why the future of the euro system and the fiat euro itself is at stake. Not only will the euro be on the wrong side of the return-to-gold-backing story, but its structure is an additional, fatal weakness. 

Sterling has similar problems to the dollar. London being the centre of financial activities outside the US has led to substantial quantities of sterling accumulating in foreign hands. For now, the increase in interest rates and bond yields has led to the currency recovering against a weakening dollar by 24% since last September. But the increase in rates is causing serious difficulties for residential property, which combined with price inflation is squeezing consumers badly. The UK economy faces the early stages of a nasty credit squeeze, which is clearly evident in the chart below from the Bank of England’s website — the last data point being April.

Interest rates cannot fall while lending is contracting because bank credit becomes increasingly scarce at a time of rising demand for liquidity. This is the consequence of rising input prices and slowing sales volumes. So far, consumers have absorbed much of the increase in prices by extending credit card debt, which increased by 9.5% in the year to April. But with mortgage and other costs now hitting consumers hard, sales volumes of goods and services are set to contract even further, in turn accelerating the reduction in business lending as banks turn increasingly cautious. For nearly all businesses, cash flow is slowing to a halt. And my company doctor friends and insolvency practitioners have never been so busy reconstructing companies with a view to avoiding bank debt write-offs. 

Just as banks fuelled the boom, they are now fuelling the bust. This is a point which is poorly understood by market participants, who have come to believe that it is the Bank of England which sets interest rates. It is a common error behind the state theory of money, which is now being challenged by events in Asia and much of the developing world.

The consequences for gold

Apart from monetary stability, the raison d’être for BRICS adopting a gold-backed trade currency lies in its relationship with commodities. This is illustrated in the chart below, which is of oil priced in dollars and gold.

Oil priced in gold has been considerably more stable than priced in dollars, a fact also reflected in any non-seasonal commodity you care to name. For energy and commodity producers, the volatility of the dollar as a pricing medium plays havoc with the values upon which extraction costs are predicated. Additionally, pricing in dollars has depressed the pricing of oil in gold, which is currently half what it was in 1950. This will have been noticed by Russia, Iran, and Saudi Arabia.

Price stability also benefits manufacturers, who in their business calculations can be more certain over long-term cost assumptions. They also benefit from low level interest rate stability that comes with a gold standard, particularly when compared with the current increasing interest rate volatility under the fiat currency regime. Russia is a case in point: the central bank’s interest rate is 7.5%, and the 10-year government bond yields 11.5%, despite June’s consumer price inflation at 2.76%. If the rouble went on a gold standard, and as confidence in the arrangement becomes established the overnight rate is likely over time to drop below 3% and bond yields should decline to not much more.

This argument is sure to have also persuaded the Chinese and other manufacturing nations in the BRICS community that tying production costs to gold is beneficial, exploding the myths about fiat currency flexibility, which have only led to the weaponization of the fiat dollar by the US government.

The benefits of gold-backed currencies are clear. The problems arising from adopting gold standards principally affect the standing of fiat currencies reluctant to embrace gold. China’s exporters are bound to experience the purchasing power of dollars and euros declining, perhaps collapsing completely. This leads to higher prices for Chinese goods in all major fiat currencies. But by sanctioning a new BRICS gold backed currency, the Chinese are now going along with the less visible benefits of valuing export goods in gold, and along with Russia she now has good reasons to put the renminbi onto a gold standard as well.

In short, we are witnessing the end of the fiat currency era, which in pure form has existed since Bretton Woods was abandoned 52 years ago. Americans, Europeans, and the British will experience gold prices rising against their fiat currencies, possibly at an accelerating rate when foreigners start dumping their currencies in favour of gold. But it won’t be gold rising so much, as their fiat currencies failing, just like John Law’s livre.

• [i] See Richard Cantillon, Entrepreneur and Economist by Antoine Murphy (Clarendon Press, 1986)
• [ii] Derived from US treasury TIC figures for April.
• [iii] Triffin’s dilemma was so named after Robert Triffin, who pointed out that a reserve currency required the nation providing it to run deficits to ensure an adequate supply of currency to provide foreign exchange reserves, but that ultimately these deficits would create a crisis for the nation. We could be approaching such a crisis.
• [iv] https://fiscaldata.treasury.gov/datasets/debt-to-the-penny/debt-to-the-pen

Article cross-posted from Lew Rockwell.

This is a mistake. China and Russia know that if they are to succeed in removing the dollar from their sphere of influence, they have to come up with a better alternative. They also know they have to consolidate their trade partners into a formidable bloc, so plans are afoot to consolidate BRICS, the Shanghai Cooperation Organisation, and the Eurasian Economic Union along with those nations who wish to join in. It will be a super-group embracing most of Asia (including the Middle East), Africa, and Latin America.

The groundwork for the new currency has been laid by Sergei Glazyev and is considerably more advanced than generally realised.

This article explains why Russia and China are now prepared to fully back Glazyev’s expanded project. For Russia, it is also now imperative to destabilise the dollar as a deliberate escalation of the financial war against America and NATO. China’s priority is no longer to protect her export trade, but to ensure that her African and Latin American suppliers are not destabilised by higher dollar interest rates.

Introduction

“The BRICS’s introduction of a gold-backed currency, which is supported by 41 countries with large and influential economies, will weaken the dollar and the euro and will benefit countries such as Iran, while Iranians in possession of gold will experience a wealth increase,” Mousavi added [the head of the South Asia Department at Iran’s Foreign Ministry]. The Russian government confirmed a day earlier that Brazil, Russia, India, China, and South Africa would introduce a new trading currency backed by gold. — Iran’s MEHR News Agency[i]

The quote above encapsulates why a new gold-backed currency is desired: it will undermine fiat currencies which have been no friends to oil producers and benefit individuals who own gold making it popular on the streets. RT, the Russian government-financed English broadcasting service had confirmed on last Friday the intention to introduce a new gold-backed currency for BRICS members. The announcement was completely missed by mainstream media, partly because RT and other Russian news sources are censored in many countries in Europe including the UK, and any news out of Russia is disbelieved anyway. 

Reactions from those who saw it, even among gold bugs, vary from the opinion that neither China nor Russia could make a gold backed currency stick, to it taking years in the planning and implementation so is irrelevant to today’s markets. But there are good reasons to believe that this complacency will turn out to be wrong, and that events are likely to evolve considerably more rapidly than expected. 

The problem for capital markets is that they are dominated by Keynesians, automatically programmed to believe gold is bad and fiat is good. As a stockbroker in London, when President Nixon suspended the Bretton Woods Agreement, I recall there was a similar level of confusion over those implications. And now, 52 years after putting the world on a fiat dollar standard, the majority of the world has had enough of dollar hegemony, has found safety in numbers, and is going back onto a gold standard. Like all life, the pure fiat era is ephemeral after all, defined by its birth and death. Macroeconomics will have to be rewritten.

The move away from fiat has been evolving for a considerable time, with de-dollarisation the ultimate objective of the Asian hegemons. Those tracking developments in gold bullion markets in recent decades have noted the drift of bullion from west to east, and the rise in gold mine output in China and more recently in Russia. Central banks, predominantly in Asia, have been accumulating bullion reserves and adding to declared and undeclared state funds in record quantities. Ultimately, this activity can only be to use gold to secure currency values as the dollar dies or is done away with. 

A sudden turn of events occurred when the western alliance imposed sanctions against Russia following her attack on Ukraine. They set off a train of actions that has unified Asia and many of its supplier nations into a rebellion against American hegemony, stoked up by Putin and led by Saudi Arabia and the Gulf Cooperation Council. And since the western alliance turned its back on fossil fuels, the low-cost producers throughout Asia have banded together representing nearly half global oil output, and a third of natural gas. As a cartel, OPEC is now just an appendix to the Asian mega-energy producers. 

The new cartel is dominated by President Putin, whose degree from Leningrad University was in energy economics and well qualified to be energy ringmaster. Not only has he demonstrated an understanding of the importance of controlling global energy supplies, but he also has a clear understanding of the importance of monetary gold. 

Since the western alliance’s sanctions, the signals coming out of Moscow have been clear: Sergei Glazyev, who is Putin’s point-man for macroeconomic policy has been waving the gold flag since then in plain sight. As a board member of the Eurasian Economic Union Commission (EAEU) since 2019, he was tasked by Putin to design a trade settlement currency for the EAEU. The initial statement through a news agency in Bishkek in early March 2022 reported that it was to be based on the currencies of the member states and a basket of undefined commodities. According to Glazyev, his brief was to create a Eurasian monetary and financial system to the exclusion of foreign currencies, particularly the dollar and euro. 

The intention was also to remove exchange controls for cross- border settlements within the Eurasian membership, replacing the dollar as the commonly used settlement medium between them. A week later, in an article for Goldmoney[ii] I concluded that as stated the new currency would not work, and the only logical solution was to do away with the currency basket proposal and use gold backing solely to represent commodities. That way, it would be easy for other nations in the Shanghai Cooperation Organisation (SCO) to join in, which was the ultimate objective from the outset.

In July 2022, Glazyev was behind a move to beef up the Moscow gold exchange, the official line being that having been sanctioned from the London market Russian miners needed a more effective local market. But working in conjunction with the Shanghai Gold Exchange this was an important signal about the way Galzyev’s monetary thinking was developing. Confirmation came on 27 December last year, when he wrote an article for Vedomosti, a Moscow business paper, describing why the rouble needed to return to a gold standard. That article was co-written by his deputy on the EAEU committee designing the new trade currency and was a thinly veiled indication of the committee’s view. 

Therefore, you did not have to be particularly astute to discern the trail of clues presented to us. We could assume with justification that gold was intended to be the sheet-anchor for this new currency probably from the outset, but some political hoops had to be jumped through to convince the EAEU member states that it was the solution. 

The impracticality of basing a new trade currency on anything else other than gold had been established. It now turns out that this project is almost certainly a Trojan horse for something far larger. It was obvious that other members of the Shanghai Cooperation Organisation should be able to join in, and now it turns out that the invitation is being extended to members of the BRICS club as well. But that’s not all. The entire membership of the SCO, its dialog partners, and associate members will be attending the BRICS conference in Johannesburg on 22—24 August. I am assuming that the original list of 36 nations, which according to most recent reports has expanded to 41, includes the members of the EAEU who were not on the original list — at the time of writing this is yet to be confirmed.

That being the case, the BRICS currency project is not a cold start and not something to be planned for a distant future. The groundwork has already been prepared by Glazyev and the structure can be rapidly assembled once the necessary resolution is adopted. It is even possible that the necessary institution(s) exist waiting to be deployed.

It is also beginning to look like there will be another proposal on the Johannesburg agenda, to merge the SCO, the EAEU and BRICS into a supersized trading block. In terms of both combined population and GDP on a purchasing power parity basis, it is already in excess of half the world, dwarfing the western alliance which kowtows to America.

The US Treasury would almost certainly have known about the BRIC proposals when the agenda was first circulated, which probably explains why at short notice Janet Yellen, US Treasury Secretary flew to Beijing. From her department’s point of view, if the new currency proposal was to be adopted its financing of the budget deficit would be adversely affected, not to mention the threat to the dollar’s hegemony. The principal card up her sleeve was to threaten greater sanctions against China’s exports, not just to America, but to her allies as well, but we don’t know if it was actually discussed in these terms.

The Chinese view

For too long and too often China has been threatened over access to markets by the Americans. We can be sure that ahead of the BRICS currency proposal the Chinese have gamed this possible threat being acted upon and come up with their own conclusions about its economic consequences. Russia’s experience, which harmed the sanctioning countries considerably more than the sanctioned, will have been fed into these calculations. One suspects that other than signalling to the Chinese and Russians that there is an increasing level of alarm in Washington, Yellen’s mission will have achieved little. And an important factor for the Chinese attitude is their experience of the US’s attempts to destabilise Hong Kong, which led to it being taken directly under Beijing’s control. It is therefore important to understand China’s analysis of America’s objectives and methods in order to define her own position.

In April 2015, Qiao Liang, the People’s Liberation Army Major-General in charge of intelligence strategy gave a speech at a book study forum of the Chinese Communist Party’s Central Committee.[iii] Qiao commenced by stating the obvious, that the U.S. enforces the dollar as the global currency to preserve its hegemony over the world. And he concluded that the U.S. would try everything, including war, to maintain the dollar’s dominance in global trading. But what he then went on to say is extremely relevant to the current situation. He described US’s actions with respect to foreign national debts. 

Qiao made the case that both the Latin American crisis in 1978—1982, and the Asian crisis in 1996—1998 were engineered by America. By reducing dollar interest rates to below their natural level they would weaken the dollar and encourage an investment boom in the targeted jurisdictions, funded by dollar credit. They then increased interest rates and strengthened the dollar to create a financial crisis. These events did, indeed, happen, but perhaps driven by the cycle of bank credit, as much as by foreign policy.

The relevance of Qiao’s analysis is that today, the same conditions appear to be targeted not against China, which does not borrow dollars, but at the dollar indebted nations around the world with which China trades — the BRICS nations. Informed by Qiao’s analysis, it must appear to China that America’s persistent strategy is to continue to raise interest rates even after the inflation dragon is slain, and by bankrupting them the US will attempt to bring the nations seeking to join BRICS back under her control.

That being the case, China will have weighed up the consequences for her export trade against the likely sanctions America and her allies could threaten and decided that the real threat is against the emerging economies in Africa, Latin America, and elsewhere which have received substantial Chinese investment. In financial terms, it is therefore imperative that this threat be addressed in a pre-emptive attack on the dollar, which can only be achieved by exposing the dollar’s weakness as a fiat currency. At least since the Lehman crisis, China and more recently Russia have had the power to do this.

Furthermore, the New Development Bank, which is headquartered in Shanghai, will be able to provide credit either in yuan or the new BRICS currency at lower interest rates to offset the undoubted strains imposed on BRICS members as a result of rising US interest rates. Therefore, China is fully prepared to counter what General Qiao Liang described as the American strategy of “harvesting” assets in foreign countries.

It is important to understand what China believes and motivates her, not whether Qiao is right or wrong. But given that his view is inculcated in the Chinese government, China is ready with Russia to mount an attack on America’s fiat currency by returning to a gold standard for trade, and ultimately for their own currencies.

The Russian view

It should be clear that the current plans for a trade currency originated in Russia, and not China. Indeed, until now China will have been reluctant to destabilise the currencies of the western alliance, because of her export interests. But not only has the relationship with America deteriorated over Taiwan, not only is it clear (in China’s view) that America plans to bankrupt the BRICS members and all those seeking to migrate away from the dollar’s hegemony by raising interest rates, but it is now also clear that neither Russia nor America can back down over Ukraine. Consequently, unless China and Russia together take the initiative, shortly Russia will be directly at war with America and her NATO allies and China will almost certainly be dragged into the conflict over Taiwan. World War 3 must be forestalled.

It is clear that NATO, under the thumb of America, is determined to defeat Russia, remove Putin, and gain control of its massive natural resources. The proxy war being fought in the Ukraine appears to be failing with Zelensky’s summer offensive having ground to a halt. And following the Wagner debacle, Russia is now in a strong position to counterattack. This has led to President Biden being prepared to send the Ukrainians cluster bombs, increasing the urgency for a Russian counter-offensive.

Furthermore, with Ukraine’s summer offensive failing, NATO’s theatre of operational strategy is moving to Poland and the Baltics (Biden was in Vilnius this week for a NATO summit), with Poland particularly becoming a client state of America through NATO. The build-up of military personnel and missiles in Poland will become increasingly obvious in the coming weeks and is already anticipated by Moscow. We await Putin’s reaction, but he is unlikely to just sit on his hands and let NATO build its forces in Poland and the Baltics.

Compromise is out of the question, because it is plain to Putin that America cannot back down. Imagine the consequences for Biden, who started his presidency with the withdrawal from Afghanistan if he ends it with a withdrawal from Eastern Europe. Furthermore, the neo-cons are firmly in charge of policy, determined to defeat Putin, add Russian territory to their sphere of influence, and leave China isolated. 

Putin’s terms for peace would be unacceptable to America because he insists on protecting Russia’s borders, which means that all missiles and American bases be removed from Eastern and Central Europe. For Moscow, this raises the question as to whether Russia should simply secure its current position or take Ukraine, which can then be set up as a buffer state. A Russian attack is bound to drive up energy, cereal, and fertiliser prices, worsening price inflation in western alliance countries and causing division with America and Britain, but to the benefit of Russia’s finances which are coming under pressure. Additionally, a successful attack on their currencies’ credibility would undermine the alliance’s military capability, so the dollar should be attacked financially as well.

No one can be sure whether destroying the dollar would avert a nuclear war, but there is little doubt that so long as America can finance its aggression that events are drifting in that direction. From Putin’s viewpoint, undermining the dollar must now be a priority, perhaps combining it with taking Kiev now that Zelensky’s summer thrust has failed.

An advantage of a financial war is that it need not be declared, therefore there is no official victor, and no need for a post-war reconciliation.

Designing a gold-backed trade currency

A new trade currency has the advantage that it will not ever be used as a means of funding government deficits. And given that its role is limited to cross-border trade settlement and and dealing in physical commodities it has to be institutionally acceptable and does not have to appeal to public confidence. Much of the credit will be self-extinguishing. It is additional to national currencies, leaving individual nations to manage their own currency policies, which is why such a currency can enjoy widespread support. It is not to be used as a medium for capital investment.

As the groundwork appears to have been already established by Sergei Glazyev, it could be ready to use as soon as it is approved in August. Besides a strict and simple set of rules, all it needs are two things: the establishment of an issuing entity, and physical gold. The first can be done in a flash, if it is not already established, and the gold will be allocated from the reserves of participating central banks. This is almost certainly why central banks of many of the putative membership of BRICS have been adding bullion to their reserves. They must be extremely thankful for actors in the western financial establishment who trade paper gold in ignorance of this outcome.

The bulleted list that follows is a brief outline of how a new trade settlement currency based on gold can be quickly established to replace the fiat dollar in all transactions between member nations, updated from an earlier Goldmoney article on this topic.[iv] It will be interesting to see how its elements compare with Glazyev’s proposition.

It is designed to be politically acceptable to all involved, as well as a long-term practical solution to facilitate the Russian Chinese axis’s ambitions for an Asian industrial revolution, encompassing Africa and Latin America, free from interference by America and her allies. The essential elements are as follows:

• The announcement of the creation of a new issuing central bank (NICB, not to be confused with the existing New Central Bank in Shanghai, whole purpose is to fund investment in the BRICS members) and a new gold-based currency on the lines below is the first step. 
• The NICB is established with the sole function of issuing a new digital currency backed by physical gold. It will be designed to be a fully trusted gold substitute, independent of existing fiat currency values.
• The new currency will only be redeemable for gold between the NICB and participating central banks. They will be free also to add to their NICB currency reserves by submitting additional gold to the NICB at any time.
• The NICB’s eligible participants will be the central banks of participating nations, broadly limited to member nations, associates, and dialog partners of the EAEU, SCO, and BRICS, and additionally nations applying for membership of any of these organisations on an approved list. 
• The NICB’s currency is issued to approved national central banks against their provision of a minimum 40% gold backing for it. For example, currency representing one million gold grammes secures an allocation of 2,500,000 currency units denominated in gold grammes. The gold does not have to be delivered to a central storage point but can be earmarked[v] from within a central bank’s gold reserves, on condition that it is securely stored in vaults on a list approved by the NICB. This list is likely to exclude gold stored at central banks of the western alliance and must not be leased or swapped. 
• A participating central bank records the new currency units allocated to it as an asset on its balance sheet, balanced by an increase in its liabilities as equity. A participating central bank’s balance sheet is thereby strengthened.
• A participating central bank can offer credit and take in deposits tied to the new currency’s value, to and from the commercial banks in in its national network. Note that the new currency is available exclusively to participating central banks, upon which they can base their own credit dealings with commercial banks.
• Commercial banks trading in member nations and elsewhere will be free to create and deal in credit denominated in the NICB’s new currency. They will have no credit relationship with the NICB, but their regulating central bank will. 
• Commercial banks whose central bank does not have access to the NICB currency can clear through wholesale credit markets and will be always free to acquire physical gold in the markets, should they wish to back credit created in the new currency with gold itself. 
• All taxes and restrictions on gold ownership must be fully rescinded by participating nations, recognising its historic and legal status as money.
• An efficient central clearing system for commercial banks dealing in credit based on the new currency will be established.
• Asian commodity exchanges in the expanded BRICS will price all products in the new NICB currency as well as in dollars. Intra-BRIC imports and exports will similarly be priced. This will ensure that physical markets and their derivatives are insulated from a fiat currency collapse, a likely consequence of gold’s return to its true monetary status.

The purpose of the new currency is to provide the basis for trade finance and other cross border financial settlements on a sound money basis. The expansion of credit based upon it will grow strictly in line with economic activity and therefore will not be inflationary, undermining its purchasing power. Last week, in an article for Goldmoney I explained why when tied convincingly to gold, commercial bank credit grows on a non-inflationary basis when distortions from the lending cycle are removed. This is the key to understanding why a new trade currency constructed on these lines will endure.[vi]

It is also likely to lead to participating nations placing a greater emphasis on their own currencies’ stability while providing a safe haven from the consequences for the dollar following its introduction. Once the new currency is established, it will be in Russia’s interests to put the rouble back on its own gold standard, and China may follow with the renminbi.

All empirical evidence informs us that when gold becomes the means by which credit is valued, credit’s own value becomes tied to that of gold and is not dependent on stability in the quantity of credit. Operating as a gold substitute imparts pricing certainty to trade and investment and leads to stable, low interest rates giving the necessary conditions for maximising economic development in emerging economies.

Constructed on the lines above, it should be simple and quick to establish. It must be free from attack by members of the western alliance trying to preserve their own fiat currency systems. And the 40% gold backing rhymes with the basic requirement for a metallic monetary standard set by Sir Isaac Newton, when he was Master of the Royal Mint. 

For participating central banks, the replacement of gold in their reserves for allocations of the new currency would represent a significant increase in their balance sheet equity. As confidence in the scheme builds, it could be argued that only minimal gold reserves need to be retained by participating central banks, with the balance swapped for the new currency. For example, the Reserve Bank of India officially possesses 787.4 tonnes of gold. Converted into the new gold currency, its value in reserves is uplifted to 1,968.5 tonnes equivalent, added to its equity capital. 

The impact on gold

Throughout history, money has been gold, and the rest credit. When you detach credit from gold, there are consequences. Pricing goods and services in credit diverges from pricing them in gold. It is really that simple.

It is widely assumed that fluctuations in prices have nothing to do with the medium of exchange, and for individual transactions it is certainly true that both buyer and seller will share this view. But over time, with official policies aiming for a 2% fall in purchasing power for the dollar and other major currencies it is not true that price fluctuations are entirely due to changes in the demand/supply balance for commodities and other manufacturing inputs. In fact, since the end of Bretton Woods, measured in real money which is gold, the loss of purchasing power has been considerably in excess of the 2% annual target. The chart below puts it directly in a gold versus fiat context.

Since the suspension of Bretton Woods, the dollar has lost 98% of its value relative to gold. The other major fiat currencies have been similarly impoverishing for their users and savers, and only now is the final act in their destruction looming due to the introduction of a new BRICS gold-backed currency. 

Through the medium of gold, participating central banks will exchange their reserve dollars for the new NICB currency. Immediately, this rejection of the dollar by a large number of central banks will devalue it further, followed by foreign non-government entities seeking to reduce their exposure. Initially, this will be seen as a run on the dollar into gold, similar to that which followed the suspension of Bretton Woods on 15 August 1971. The market was similarly nonplussed then as it appears to be today, with the London morning fix on Monday 17 August at $43, slightly down on the previous week. It wasn’t until 19 November that the morning fix exceeded $43 again for the first time. It took two whole months for the implications to sink in. But when they did, the price rose to $197.50 on 27 December 1974.

The lesson for us in this Keynesian world is that two months of static prices following the suspension of Bretton Woods is proof that gold was poorly understood in financial markets, and still is today. Derivative markets, particularly the London forward market and Comex futures for the last forty years have lost sight of gold being money and assumed it is a trading counter which plays on irrational fears of instability of the modern currency system. But with the return of gold as the anchor for credit values for the Asian hegemons and their sphere of influence, those fears will suddenly become rational.

The wider consequences of a BRICS currency gold standard

We can assume that the consequences of Asian trade settlements backed with gold will have been carefully considered by the Asian superpowers, particularly by the Russians who have faced weaponised dollars.

Besides bringing stability to export values there are other advantages to reintroducing gold into currency systems. Interest rate stability at lower rates is an obvious benefit. Currently, the Bank of Russia’s key interest rate is 7.5% and price inflation has collapsed to 2.3% (April). The yield on Russia’s 10-year OFZ bond is still 11.3%. If the rouble becomes a credible gold substitute, price inflation, interest rates, and bond yields can be expected to decline and maintain levels that reflect gold’s long-term stability, particularly in more normal times when the Russian government runs decent budget surpluses. And assuming that credit expansion by Russia’s commercial banks is not cyclically excessive, there is no reason to expect otherwise than that financial stability for the currency and the Russian economy would continue in the long-term. Coupled with low taxes (Russia’s income tax is a flat 13%) this stability can be expected foster genuine economic progress and the accumulation of personal wealth for the Russian people. It would be a far better outcome than the current situation and it would secure Putin’s legacy.

However, a move towards gold backing for their currencies by the Asian hegemons can be expected to undermine the purchasing power of western fiat currencies. International capital will abandon ephemeral fiat currencies for real values in commodities, with nations rebuilding stockpiles of energy, metals, and other raw materials instead of accumulating fiat paper. Precious metals, specifically gold, will be sought and its price can be expected to reflect the demise of fiat currencies.

The consequences for wholesale and consumer prices in the western nations would rapidly become obvious, with central banks forced to revise their expectations for price inflation sharply higher. Bond yields can be expected to rise further, undermining all financial and property values. As this negative outlook clarifies, measured against gold fiat currencies will likely enter a substantial relative decline.

The consequences of the emergence of gold backing for currencies in Asia on the currencies and economies of the western alliance are bound to differ in their detail for the currencies in the western alliance.

The reliance on inward foreign investment has protected the dollar from continual trade deficits and played a key role in funding US Government debt since the end of Bretton Woods. It has allowed the US Government to run budget deficits more or less continually. The ending of the fifty-two years of a fiat regime changes all that. The US Government will face significant funding hurdles against foreign liquidation of Treasuries. Bond yields and funding costs for the government are bound to rise significantly.

The consequences for the EU and the eurozone would be both politically and economically divisive. If it were not for political constraints, Germany would naturally drift towards cooperation with the sound money regimes emerging to her east, particularly as the finances of the Mediterranean club deteriorate. With rising bond yields, the entire euro system comprised of the ECB and its national central banks would need to be recapitalised, being already deeply in negative equity. The eurozone’s global systemically important banks (G-SIBs) are extremely highly leveraged and unlikely to survive the combination of falling asset values and bad debts that would be the certain consequences of the euro’s declining purchasing power. Having been assembled at the behest of a political committee and now managed by a political cabal, the euro is at risk of losing all market credibility.

The consequences for the UK pound will also be significant. In a similar debt trap to that of the US Government, the British have the further disadvantage of an economy suffering under increasing taxes. Furthermore, with London being the international financial centre, the UK will be at the epicentre of a fiat currency crisis. For the size of her economy, the UK has little in the way of gold reserves, hampering any future escape from the fiat currency trap.

The major governments aligned both economically and intellectually with the fiat dollar will be left at a comparative disadvantage by a BRICS gold-backed currency, possibly followed by Russia and China adopting gold standards. Interest rates, which are escaping from central bank control, will rise due to two factors: there is the credit crunch from the turn of the bank credit cycle, and the deteriorating outlook for fiat currency purchasing powers. It is the worst of both worlds. Furthermore, economists in governments and central banks would be reluctant to abandon their embedded economic and monetary policies. And will be slow to react.

The only salvation will be for western governments to jettison Keynesian macroeconomics entirely and revert to classical economic theories. The false assumptions that have built up over the fiat currency era will have to be overturned. Crises of this sort nearly always emanate in the foreign exchanges because it is foreign holders of currencies who are the first to recognise a currency’s weakness. Usually, it involves a specific currency. But this time, it will affect all the major currencies in the western alliance.

• [i] Official Iranian news release. See https://en.mehrnews.com/news/203015/BRICS-currency-to-benefit-Iran-undermine-US-dollar-euro
• [ii] See https://www.goldmoney.com/research/designing-a-new-currency-is-impractical
• [iii] See http://chinascope.org/archives/6458
• [iv] See https://www.goldmoney.com/research/cbd-cs-the-good-the-bad-the-ugly under the sub-heading, The Good.
• [v] Earmarking is the technical term whereby one central bank acts as custodian for another central bank’s bullion.
• [vi] See https://www.goldmoney.com/research/the-real-determinants-of-currency-value

Article cross-posted from Goldmoney.

Plans for a new trade currency backed by gold appear to be on the agenda for the BRICS meeting in Johannesburg in August. In this article, the geopolitical aspects of its introduction are considered, and the indications that how it will involve gold are discussed. The mechanics of this project are then suggested.

But first, we look at the situation in Ukraine, attempting to put the recent Wagner rebellion into context. Furthermore, Russia’s deteriorating trade surplus, weakness of the rouble and rising bond yields suggest that it is time for President Putin to put an end to Ukraine’s misery. He is likely to do this by attacking Kiev, which is only 60 miles from Belarus, while the bulk of Ukraine’s army is distracted by operations over 400 miles to the south and east.

Introduction

Given the hysteria in the Western press over the Wagner group’s alleged coup attempt, it is time for an update on the battle between the hegemons. But I shall commence with an attempt to put the leader of the Wagner mercenary group’s supposed coup attempt to bed.

It emerges that Western intelligence knew something was up, as much as ten days before the dispute between Wagner and the Russian defence ministry became evident. This was The Daily Telegraph yesterday:

“Before Wagner troops began their advance on Rostov and then on to Moscow last weekend, British officials had ‘an extremely detailed and accurate picture of the mutiny plans’, it was revealed yesterday. The details were shared by US intelligence ahead of the mutiny and contained information of where and how Wagner mercenaries planned to move.”

This immediately puts up a red flag. Did Britain’s MI6 or the CIA have a part in it? If not, how is it that they knew so much about it? Is it likely that the Wagner leadership or elements in it had been bribed by western intelligence into staging an attempted coup of the Russian government? But we must leave this speculation hanging, in the certainty that black ops are being widely deployed by western intelligence in Ukraine, Russia, and Belarus and that anything is possible.

Western commentary, always informed by government briefing and censorship, seems to take Putin for a fool. We are routinely told in op-eds that his regime hangs by a thread, the Russian economy is in a state of collapse, and similar episodes to the Wagner farce have always been the straw about to break Putin’s back. It has been going on like this since the launch of his special military operation in February 2022. If he smoked, like Castro doubtless the CIA would offer him a box of exploding cigars.

But clearly, Putin is no fool. He will realise the limitations of mercenary troops. He has used Wagner specifically to spread fear in Eastern Ukraine. Like the French Foreign Legion of Beau Geste yore, Wagner’s recruiting ground appears to have been among jailbirds, criminals on the run, social misfits, and is a haven for psychopaths.

It seems that Prigozhin’s complaint (who leads the Wagner force) was not with Putin but his senior military advisers. There is a long history of commanders in the field being frustrated with ministerial ineptitude. To Prigozhin, it is likely that Wagner’s role in Eastern Ukraine had evolved from clear military objectives to a feeling of being hung out to dry, while Russian divisions led by inept generals dithered. Putin would have understood why Prigozhin threw his toys out of the pram and sought to calm him down. Furthermore, Putin’s special military operation is probably entering a new phase where mercenary forces might complicate battlefield planning, as I shall explore further in this article.

Undoubtedly, Wagner’s role will continue to be countering American and British undercover activities in foreign theatres such as Kurdistan, Chad, and Sudan. And the majority of his forces in the Ukraine theatre will probably be absorbed into the Russian army as Putin’s special military operation enters a new phase. And if Prigozhin managed to get a backhander out of the Americans to “stage a coup d’état” as conspiracy theorists suggest, I suspect that this comic opera will end up with both Prigozhin and Putin enjoying the joke at the western alliance’s expense.

Russia’s situation

We were originally told that sanctions would rapidly bring Russia to her knees and force the Russian people to overthrow Putin. Neither have materialised, and the evidence is that the Russian economy is stronger today than it was a year ago and Putin’s public backing remains high. Since early-2022, Russia’s economy had officially been in a mild recession, but in April economic activity was recorded as rising sharply due to buoyant industrial production and retail sales.

Sanctions never work, and a sanctioned nation rapidly adapts. Furthermore, while sanctions have focused on hitting Russian oligarchs, a low flat 13% income tax and corporation tax of 20% on company profits means that Russian SMEs, artisans, and shopkeepers are doing well. It also explains Putin’s continually high approval ratings, but Russia’s economy has far greater potential under sound money and lower interest rates. Furthermore, with consumer price inflation running at about 2.5%, domestic economic conditions are remarkably stable.

Russia’s balance of payments has been declining sharply. According to the central bank, the current account surplus between January and May was $22.8bn equivalent, compared with $123.8bn for the same period last year. This decline was due to lower oil and commodity prices, as well as marginally lower export and higher import volumes. The rouble has declined, and interest rates have recently risen as the charts below illustrate.

To have such volatility in the exchange rate and interest rates is the greatest weakness in Russia’s economic condition. The way to fix it is for the rouble to adopt a proper gold standard. And between the Bank of Russia’s official gold reserves, Russia’s National Wealth Fund, and the Gokhran precious metals fund there are ample bullion resources to establish it. The merits of such a move for the domestic economy would be interest rate stability at far lower rates. Bank credit could then respond to economic demand for credit, which would undoubtedly expand, without undermining the rouble’s domestic purchasing power.

Putin and his economic adviser, Sergey Glazyev, have shown that they understand these benefits, and that a gold standard for the rouble is likely to be Russia’s end game in the financial war against the western alliance. Furthermore, unless energy and commodity prices begin to increase, the fiat rouble and Russian interest rates could come under renewed pressure. The other way to look at rising energy and commodity prices is to attribute them to a decline in the dollar’s purchasing power for them, artificially suppressing their values.

This brings us to the reasons for Russia to step up the attack on Ukraine, which can be expected to give a new impetus to higher energy and commodity prices. 

Besides the need to drive commodity prices higher for the benefit of the rouble and the balance of payments, the timing appears propitious. The redeployment of battle-hardened Wagner troops in Belorussia across the border from Kiev could form part of Putin’s plan for a new attack, now that Ukraine’s summer campaign to recover territory in the East and South is absorbing most of Ukraine’s military forces. 

Before we were distracted by the Wagner episode, there were putative signs that the US deep state was changing its view from the conflict being easily winnable with covert support and Putin vulnerable to being toppled. And therefore, the true objective, the dismemberment of Russia, is no more than a dream and the proxy war is becoming a long drawn out operation. There is now little doubt that as a front man Zelensky is unable to deliver the goods, and his supporters in the western alliance are faced with being committed to the long haul.

The stakes for America are extremely high. Increasingly, neutral countries around the world are shifting their foreign policies on the evidence that America and her dollar are losing their hegemonic power. If America and NATO fail in Ukraine, it won’t just be thirty nations lining up to join BRICS: it will be the moment America’s political grip on the world is certainly lost. And then President Biden can kiss goodbye to his re-election chances next year.

Equally, Putin will strive to make sure his counteroffensive succeeds, and that must be the short-term priority. The financial benefits for Russia, principally the consequences for energy and oil prices will flow from it.

Russia is unlikely to immediately adopt a gold standard for the rouble when Ukraine falls because of the geopolitical consequences, not least for its partnership with China. It would undoubtedly hasten the fiat dollar’s destruction as a reserve currency, making financing of the US trade and budget deficits virtually impossible at current interest rates. While these outcomes would undoubtedly be helpful to Putin, it would amount to a major escalation of the financial war between Russia and the western alliance with unpredictable consequences. And it would be a change from Putin’s proven strategy of letting the western alliance make all the strategic errors without his intervention.

Furthermore, Russia is in partnership with China in a joint grand strategic plan for Asia and allied nations. And there is no doubt that the economic consequences of a collapsed dollar would rebound badly on China’s manufacturing base. 

Far better to commence the move towards gold backing by other means, and this train of events has already been put in place under the command of Sergey Glazyev, a close confident of Putin, a moving light in the expansion of the Moscow Gold Exchange, and Minister in charge of Integration and Macroeconomics for the Eurasian Economic Commission. Glazyev was given the brief to come up with a new trade settlement currency for the Eurasian Economic Union (EAEU), which appears to be a Trojan horse for a wider BRICS and Shanghai Cooperation Organisation deployment. 

If that plan is successful, then both the rouble and China’s renminbi could also adopt gold standards in due course, having the underlying financial conditions to sustain them.

The BRICS summit in Jo’burg

There is evidence that plans for a new trade settlement currency will be announced at the upcoming BRICS meeting in Johannesburg on 22—24 August[i]. If so, it will be a major development for global markets and a threat to the dollar’s future. And a new supranational trade currency for BRICS, the Shanghai Cooperation Organisation, and the Eurasian Economic Union has the merit of not having to address the vested trade and domestic currency interests of each member state. It would be designed to ensure its reserve status does not give overriding power to one nation, unlike the dollar.

It is probable that an announcement concerning the new currency will come out of the summit, but it is likely to be preliminary in nature, and gold might not even be mentioned at this stage. And it would make more sense for Glazev’s brief designing such a currency to be officially expanded from that of the EAEU committee, involving China more directly. That being the case, the only practical means of tying the new trade currency to multiple commodities and national interests is to use gold.

It increasingly suits Russia to see this move announced, and the timing could well coincide with or shortly follow Putin’s next push in Ukraine. But we should not expect this new currency to arrive shortly, only that it is being planned.

Another aspect of the Johannesburg summit is the increasing queue for BRICS membership. It will need the agreement of existing BRICS members. But given that the existing five members have diverse political interests, if is not easily forthcoming either China and Russia will have to strong-arm them into acceptance, or form a different membership category, such as associates. Either way, formal applications have been submitted from Algeria, Argentina, Bahrain, Bangladesh, Egypt, Indonesia, Iran, Saudi Arabia, and the United Arab Emirates. In addition, Afghanistan, Belarus, Comoros, Cuba, Congo, France, Gabon, Guinea-Bissau, Honduras, Kazakhstan, Nicaragua, Nigeria, Pakistan, Senegal, Sudan, Syria, Thailand, Tunisia, Turkey, Uruguay, Venezuela, and Zimbabwe have expressed an interest. Including the existing five members, that is 36 nations in total

The most interesting expression of interest comes from France, with President Macron reported to have applied to attend the Johannesburg summit. Only yesterday, it was reported that he was denied the opportunity to attend. But it is visible evidence of an EU member not toeing the American line. And recently, TotalEnergies the French conglomerate sold LNG to China for yuan, not dollars, signalling France’s independence from petrodollars. 

Discounting France from actually applying for membership because Macron has his hands firmly tied by the EU, if membership was granted to all other applicants and those interested in joining an expanded BRICS, it would encompass 64% of the world population, and 33% of world GDP in 2017 (the latest year for which all individual national GDPs is available). For reference, the US’s population is 4.25% of global population and 24% of 2017 global GDP.

It seems to have escaped wider notice, but the only full members of the Shanghai Cooperation Organisation not members of BRICS, applying for membership, or expressing an interest are the four central Asian states — Kazakhstan, Kyrgyz, Tajikistan, and Uzbekistan, already in the EAEU. Furthermore, nine of the SCO’s Observer States and Dialog Partners are among the BRICS applicants. This is almost certainly centrally organised, with the possible objective for BRICS to be merged with the SCO, or to become indistinguishable from it.

For China and Russia, the advantages of integrating the SCO with BRICS are obvious. They are assembling an organisation based on free trade which dwarfs the US and EU and extends beyond Asia. Macron appears to be aware of the implications, and so are Germany’s industrial leaders, opening the way for an EU schism and an extension of Asian hegemony. It builds a trade bloc which makes the western alliance’s sanctions meaningless and will have complete independence from the dollar and its allied fiat currencies. Alternatives to the SWIFT international payments system now exist and can be easily extended.

It will allow for military and intelligence cooperation against terrorism (for which read Five Eyes’ black ops). In this, the experience of the Middle East has been instructive. Since Saudi Arabia sided with China and gave the US its marching orders, peace has been restored to the region.

The thinking behind a new trade currency

While any announcement about a new trade settlement medium at the BRICS summit in Johannesburg is likely to be preliminary, we can be sure that the legwork has already been done by Sergei Glazyev. Furthermore, various statements by nations prepared to accept settlement in national currencies other than the dollar must be seeing this as a temporary solution, pending more satisfactory payment arrangements. The Saudis accepting Kenyan shillings, or Russia accepting Iranian reals makes no sense on any other basis. Because the current position is temporary, it is time limited. 

In an article entitled “Golden rouble 3.0: How Russia can change foreign trade infrastructure”[ii] written for Vedomosti, a Moscow-based Russian business newspaper published on 27 December2022, Glazyev laid out his latest thoughts. Furthermore, it was co-authored by Dmitry Mityaev, who is Assistant Member of the Board for Integration and Macroeconomics of the Eurasian Economic Commission — so this article was not just Glazyev’s musings, and we can assume that it carried official weight in Russia, at least. The article focused on the potential for a gold-backed rouble rather than the new trade settlement medium, but the same logic applies.

From this article, the EAEU currency commission now appears to have dropped the original indicated proposal for a new currency based on a weighted index of participating currencies and commodities entirely, using gold and credit based upon it instead as the principal means of settling trade imbalances. Presumably, the requirement to make payments in the new trade currency could be circumvented if one or more national currencies such as the rouble or renminbi went onto credible gold standards. The implication is that the rouble will readopt a gold standard sometime after a gold-backed trade currency is announced, reviving the gold backing (though not the relationship) that the Soviets operated between 1944 and 1961.

To reinforce the importance of a return to a gold standard, both Russia and the Saudis heading up OPEC+ will be aware of the consequences of the fiat petrodollar regime for their primary export product — crude oil.

In August 1971, when the Bretton Woods agreement was abandoned, crude oil was priced at $3.56 a barrel and the market price for gold was $42.85. Converting this into ounces of gold per barrel gives us a value of 0.0831 ounces. Today, the gold price of oil is 0.036 ounces per barrel, down 57%. In other words, using gold Glazyev can demonstrate that the true cost to OPEC+ of dollarisation has been to more than halve the value of their export revenues since the Bretton Woods agreement was suspended. By accepting a new trade settlement medium tied to gold, this US enforced erosion of oil values will cease. And to compensate for the loss of oil’s value from the ending of Bretton Woods, the gold price in dollars would have to be more than double that of today at over $4,400. 

The evidence mounts therefore, that gold provides a framework within which Glazyev intends to operate. That he must be thinking this way has become fundamental to his approach, confirmed by his many references to gold in his article for Vedomosti, to the rouble’s history tied to gold, and to the US’s debasement of petrodollars. In the UK at least, Russia’s media appears to be censored, so Glazyev’s Vedomosti article (referenced in endnote ii) may not be available to many readers in the west. Therefore, for ease of reference the salient points in the English translation of his detailed article are summarised as follows [with additional commentary in square brackets]:

• In the nine months to September 2022, Russia’s trade surplus with members of the EAEU, plus China, India, Iran, Turkey, The United Arab Emirates etc. was $198.4bn equivalent, against $123.1bn for the same period last year. In other words, the western alliance’s sanctions failed to suppress Russia’s oil revenues, merely redirecting their sources. [Since then, this surplus has declined materially due lower oil and other commodity prices. Time for another special military operation?]
• The trade surplus with SCO members has allowed Russian companies to pay off external debts, replacing them with borrowing in roubles. [Glazyev doesn’t make this point, but a return to the gold standard would reduce borrowing costs in roubles substantially]
• Russia became the third largest country using renminbi for international settlements, accounting for up to 26% of foreign exchange transactions in the Russian Federation. The share of settlements in soft currencies is growing for SCO members, dialog partners and associates, replacing dollars, and is expected to increase further. [This is almost certainly a temporary fix, ahead of a new trade settlement currency being established]
• Since these currencies are subject to exchange rate risks and possible sanctions, the best way to offset them is to take payment in non-sanctioned gold from China, the UAE, Turkey, possibly Iran, and other countries instead of their local currencies. [A BRICS/SCO trade settlement currency tied to gold would eliminate this problem]
• Gold purchased by the Russian Central Bank can be stored in central banks of friendly countries for liquidity purposes and the rest repatriated to Russia.
• Gold can be a unique tool to combat western sanctions if used to price all major international goods (oil, gas, food, fertilisers, metals, and solid minerals). This would be “an adequate response to the west’s price ceilings”. And “India and China can take the place of global commodity traders instead of Glencore or Trafigura”.
• Gold (along with silver) for millennia was the core of the global financial system, an honest measure of the value of paper money and assets… It was cancelled half a century ago, tying oil to the dollar. But the era of the petrodollar is ending. Russia, together with its eastern and southern partners has a unique chance to jump ship from a dollar-centred debt economy.
• By signing the Bretton Woods agreement but not ratifying it, for the USSR “Golden Rouble 2.0” played an important role in post-war Soviet industrialisation. Now the conditions for “Golden Rouble 3.0” have objectively developed.
• Sanctions against Russia have boomeranged against the west. It now faces geopolitical instability and rising prices for energy and other resources [i.e., yet more price inflation].
• In 2023, [there will be a shift from] risky investments in complex financial instruments to invest in traditional assets, primarily gold. Gold’s increasing prices towards Saxo Bank’s forecast of $3,000 per ounce will lead to a substantial increase in the values and quantities of gold reserves. Large gold reserves will allow Russia “to pursue a sovereign financial policy and minimise dependency on external lenders”. [Note that in addition to official reserves it is believed that Russia has at least a further 10,000 tonnes — more than the officially declared total for the US Treasury.]
• Central banks are adding to their gold reserves. China has an export ban on all mined gold. According to the Shanghai Gold Exchange, customers have withdrawn 23,000 tonnes of gold. India is considered the world champion in gold accumulation…. Gold has been flowing from West to East… Is the West’s central bank gold safely earmarked, or is it all “de-done” through swaps and leasing? The West will never say, and Fort Knox’s audit will not either.
• Over the last 20 years, gold mining in Russia has almost doubled. Gold production may well grow from 1% of GDP to two or three per cent… Already, Russia’s annual gold production is set to rise from 300 tonnes to 500 tonnes… giving Russia a strong rouble, strong budget, and a strong economy. [Note that in this statement Glazyev reveals that he expects most of the increase of mine output is to be in its value measured in dollars.]

Glazyev is all but saying for definite that Russia plans to enact Golden Rouble 3.0. And we should be in no doubt that Russia is backing away from the west’s fiat monetary system and sees far higher gold prices expressed in falling dollars. The only question is the speed with which it is moving in this direction. 

What Glazyev did not mention in his Vedomosti article, other than his reference to western central banks not necessarily having possession of their gold reserves, would be the consequences for the dollar and other western fiat currencies of gold becoming the trade settlement medium throughout Asia, or of the rouble returning to a gold standard. Inevitably, holders of dollars and financial assets, totalling some $30 trillion, would make comparative value judgements not just for the dollar but also for their exposure to other fiat currencies. Not only would this cause private sector actors engaged in cross-border trade to re-evaluate their exposure to fiat currencies as well, but the whole system of fiat currency reserves held by central banks could become threatened.

The strong indications are that Putin supports Glazyev’s thesis. But he has a wider remit, including military strategy over Ukraine. NATO is now committed to the Ukrainian proxy war for as long as it takes. It will require a swift victory by Putin to end this misery, and increasingly the rest of the world knows it. But almost certainly, the forthcoming military escalation by Putin will destabilise financial markets in the western alliance. 

A renewed panic in energy and commodity markets seems certain, which will lead to fears in the western alliance’s financial markets of higher price inflation for longer, driving bond yields up and equities lower. Neo-Keynesian investors might initially expect the uncertainty arising from renewed military action to drive global liquidity into the dollar, which is their traditional safe haven, rather than gold. But US-centric markets fail to appreciate that at $30 trillion the currency and financial assets are already over-owned by foreigners, while physical gold is not. And they fail to appreciate that Putin can exploit this weakness.

It would be a good time for Putin to encourage financial conditions to deliver a major blow to the dollar’s hegemony. Under cover of the battlefield, Russia could let markets drive up prices of nearly all her exported commodities. It would then be seen by neutral nations as a market response to the western alliances’ political imperatives. But soaring energy and commodity prices will reflect a sharp decline in the purchasing power of the dollar and its fiat currency cohort of euros, yen, and sterling.

Yet again, by pursuing its military and political objectives in Ukraine, the western alliance would be seen by the wider world to be entirely responsible for collateral financial damage. And that surely, must suit Putin.

Constructing a trade medium of exchange

We now turn to the mechanics of constructing a new trans-national gold-backed currency. One condition which will need to be in place is for a value for gold measured in goods to back inter-Asian trade. Despite the accumulation of gold by the central banks of the Shanghai Cooperation Organisation membership, some of them may not have sufficient official gold reserves to cover their balance of payments deficits except for limited times, requiring a higher gold value in order to do so. And other members, such as Russia, could see continual accumulation of physical gold because of her balance of payments surplus. Ideally therefore, instead of trade settlements being entirely in physical gold, they should be facilitated by a banking system whose credit values are securely based on gold to ensure flexibility.

The task therefore is to design an entirely new non-national currency backed by gold, specifically created for cross-border trade and commodity transactions. Presumably, this is what Glazyev is trying to achieve instead of the more cumbersome EAEU project originally announced. It is a relatively simple task and does not require blockchains and the paraphernalia of a CBDC. The mantra should be to keep it simple, and therefore have no mystery.

The bulleted list that follows is a brief outline of how a new trade settlement currency based on gold can be established to replace the fiat dollar in all transactions between SCO/BRICS member nations. By being completely independent of national currencies, it should be politically acceptable to all involved, as well as a long-term practical solution to facilitate the Russian-Chinese axis’s ambitions for an Asian industrial revolution, free from interference by America and her allies. 

The essential elements are as follows:

• The announcement of the creation of a new central bank (NCB) and a new gold-based currency on the lines below will be made in advance of implementation to allow bullion markets to adjust to the new regime before it comes into existence. 
• A new central bank is then established, whose function is to issue a new book-entry currency backed by physical gold, issued and available only to participating central banks. It will be designed to be a fully trusted gold substitute, independent from fiat currency values.
• The new currency will only be redeemable for physical gold by participating central banks. They will also be free to add to their NCB currency reserves by submitting additional gold to the NCB at any time.
• The NCB’s eligible participants will only be the central banks of participating nations, limited to member nations of the SCO, EAEU, and BRICS. The NCB’s currency is issued to the national central banks against their assigning a minimum 40% gold backing for it. For example, currency representing one million gold grammes secures an allocation of 2,500,000 currency units denominated in gold grammes. The gold does not have to be delivered to a central storage point but can be earmarked[iii] from within a participating central bank’s gold reserves, on condition that they are securely stored in vaults on a list approved by the NCB.
• Commercial banks trading in member nations and elsewhere will be free to create and deal in credit denominated in the NCB’s new currency. Issuers and users of this credit are always free to acquire physical gold in the markets, should they wish to back credit created in the new currency with gold itself. 
• All taxes and restrictions on gold ownership must be fully removed by participating nations. Gold’s legal status as money must be reaffirmed, if necessary.
• An efficient central clearing system for commercial banks dealing in credit based on the new currency will need to be established.
• Accompanied by the major energy producers setting price benchmarks, commodity exchanges in member nations will be required to price all products in the new NCB currency, replacing pricing in US dollars completely for trade between participating member nations. They can still quote prices in dollars for others should they so wish.

The purpose of the new currency is to provide the basis for trade finance and other cross border financial settlements on a sound money basis. It is also likely to lead to participating nations placing a greater emphasis on their own currencies’ stability while providing a safe haven from a fiat currency systemic collapse.

All empirical evidence informs us that when gold becomes the means by which credit is valued, credit’s own value is not dependent on stability in the quantity of credit, taking its value from gold. This stability imparts pricing certainty to trade and investment, necessary conditions for maximising economic progress particularly in the context of wider industrial development throughout Asia.

Constructed on the lines above, remarkably little physical gold would be required to underwrite cross-border payment values for trade in Asia and beyond. This trade settlement currency should be simple and quick to establish. It must be free from interference from members of the western alliance trying to preserve their own fiat currency systems. And the 40% gold backing rhymes with the basic requirement for a metallic monetary standard set by Sir Isaac Newton, when he was Master of the Royal Mint.

For participating central banks, the replacement of gold in their reserves for allocations of the new currency would represent a significant increase in their reserves. As confidence in the scheme builds, it could be argued that only minimal gold reserves need to be retained by participating central banks, with the balance swapped for the new currency. For example, the Reserve Bank of India officially possesses 795 tonnes of gold. Converted into the new gold currency, its value in reserves is uplifted to 1,988 tonnes equivalent. 

• [i] https://www.cnbctv18.com/market/currency/brics-to-discuss-common-currency-plan-south-african-foreign-minister-china-india-russia-16621991.htm
• [ii] See https://www.vedomosti.ru/opinion/columns/2022/12/27/957178-zolotoi-rubl?utm_campaign=vedomosti_public&utm_content=957178-zolotoi-rubl&utm_medium=social&utm_source=telegram_ved (Western censorship permitting)
• [iii] Earmarking is the technical term whereby one central bank acts as custodian for another central bank’s bullion.

Article cross-posted from Goldmoney.