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Fool’s gold

by | Jul 15, 2023 | Office Space | 6 comments

Drowned out by all the sturm und drang surrounding the clown show in Vilnius this week, came a headline from der lugenpresse that nonetheless has some very serious and profound implications for the Western world. Essentially, Western SANKSHUNS are forcing other countries to take a long, hard, very sceptical look at how safe their actual assets are, in Western hands and bank vaults.

Foremost among their concerns are gold reserves – and a number of countries are looking to repatriate their gold now:

LONDON, July 10 (Reuters) – An increasing number of countries are repatriating gold reserves as protection against the sort of sanctions imposed by the West on Russia, according to an Invesco survey of central bank and sovereign wealth funds published on Monday.

The financial market rout last year caused widespread losses for sovereign money managers who are “fundamentally” rethinking their strategies on the belief that higher inflation and geopolitical tensions are here to stay.

Over 85% of the 85 sovereign wealth funds and 57 central banks that took part in the annual Invesco Global Sovereign Asset Management Study believe that inflation will now be higher in the coming decade than in the last.

Gold and emerging market bonds are seen as good bets in that environment, but last year’s freezing of almost half of Russia’s $640 billion of gold and forex reserves by the West in response to the invasion of Ukraine also appears to have triggered a shift.

The survey showed a “substantial share” of central banks were concerned by the precedent that had been set. Almost 60% of respondents said it had made gold more attractive, while 68% were keeping reserves at home compared to 50% in 2020.

One central bank, quoted anonymously, said: “We did have it (gold) held in London… but now we’ve transferred it back to own country to hold as a safe haven asset and to keep it safe.”

Rod Ringrow, Invesco’s head of official institutions, who oversaw the report, said that is a broadly-held view.

“‘If it’s my gold then I want it in my country’ (has) been the mantra we have seen in the last year or so,” he said.

As you can see from the middle bars, the degree to which national banks want to hold physical gold in the vaults of other countries, is holding steady – but the degree to which those same national banks want to hold their own gold, is rocketing upward over the next 5 years.

By itself, this headline is neither new nor particularly surprising. But it comes at precisely the same time as the BRICS organisation is looking to launch a new currency for wholesale settlements – backed by gold.

Not everyone is on board with this wizard’s new wheeze. India, for example, has said it has no intention of introducing a new currency, and wants to concentrate instead on using the INR for international settlements, at least for the immediate future. But the new currency has the backing of the two largest gold producers in the world – Russia and China – as well as many of the largest consumers and holders of gold, outside of the West (i.e., the Gulf monarchies).

Good News for Goldbugs

Now, just because some of the world’s largest economies want to use a gold-backed currency for transactions, does not automatically mean much, in and of itself. The mechanics of setting up a new currency are IMMENSELY challenging. You cannot simply snap your fingers and make it happen.

Let us remind ourselves what money actually is. To be “money”, something – whatever that “thing” is, be it gold, feathers, conch shells, paper scrip, or whatever – must meet at least three criteria.

It must be a unit of measure, a store of value, and a medium of exchange. Gold does meet most of those definitions, most of the time – though it is not quite divisible enough to be a true unit of measure, its value fluctuates through time, and its physical nature makes it difficult to transport and exchange readily. But, it is good enough at doing all of these things that it has served as the default standard of currency for much of the world for thousands of years.

Because gold does not rust, it holds its value very well. Because it can (relatively) easily be broken down into smaller units and quantities (though not infinitely so), it is a good unit of measure. And because gold holds its value based on weight, regardless of where you use it, a gold bar can serve as a reasonably good medium of exchange wherever you go – it has intrinsic value of its own, because it is difficult to acquire and hard to get more.

Never mind that gold offers no yield on its own – there is a “cost of carry” associated with holding and storing it, obviously – and that its industrial applications are relatively limited, compared with other metals. The plain FACT is that for centuries, nations have used gold quite happily and readily as their own medium of exchange.

Heck, the US Constitution itself originally mandated that the States themselves (and, by logical, though not explicit, extension, the Federal government) use nothing but gold and silver as legal tender. Rather inevitably, the US abandoned that sensible restraint on monetary policy several times during its existence, and did away with it for good after President Nixon decoupled the dollar from gold entirely.

So, in theory, at least, a new BRICS gold-backed currency is a great idea that brings much of the world back to sane monetary policy, and removes Western control over the world’s money flows.

SWIFT’s Travels

However, in practical terms, implementing a gold-backed currency is going to be a very difficult thing to do.

For one thing, there is nowhere near enough physical gold in the entire WORLD to secure the exchange rate of a country with an economy the size of Russia’s against gold. If you were to take all of Russia’s physical gold reserves and price it in rubles, according to the current price of gold in those same rubles, the amount of physical gold required to back each ruble, one-for-one, with the equivalent amount of the metal, would be ASTRONOMICAL. The only alternative would be to reduce the supply of rubles so sharply as to crater the entire Russian economy.

Never mind trying to do the same thing with the US$25T (in PPP terms) Chinese economy, either. And that is before we get to the fact that China’s economy uses a sharply constrained monetary policy with a heavily enforced currency band for the yuan, that keeps it artificially cheap.

The other big problem with using gold for international settlements, is the actual physical movement of that gold. How, exactly, do you send millions of rubles (or reminbi, or BRICS “bancors”, if you will) overseas, without the threat of Western piracy?

(If you are naive enough to believe an increasingly desperate and straitened West will NOT literally steal gold from nations for its own purposes, you have not been paying attention to Western history, which is rife with actual examples of piracy under government auspices. The Brits called them “privateers”, and elevated several of them to the status of national heroes – most notoriously, one Sir Francis Drake.)

As with most such problems, there are solutions. Back in Ye Goode Olde Dayes, before WWI completely discombobulated world markets in the stuff, banks around the world would simply move physical bars and bricks of gold from one country’s vault to another, based on telegram instructions.

Today, things are rather more sophisticated, in large measure because of the need for secure and stable communications between banks to move money around in digital form. The basic logic is still the same – upon receiving a “wire instruction”, as it were, a bank simply debits one account and credits another. But it needs the telegram instruction, so to speak, to do it.

Our modern equivalent of this telegram is SWIFT, the global interbank messaging system – which is firmly under Western control, and which the GloboHomoPaedoPharisatanists are perfectly happy to wield as a weapon of financial mass destruction, by decoupling banks and national institutions from it at a whim.

Russia has perhaps the world’s foremost alternative to SWIFT, called SPFS (Система Передачи Финансовых Сообшений, literally, “system for transfer of financial messages), with the largest user base among international banks. Yet, its usage pales in comparison to SWIFT in terms of both scale and scope.

The hard fact is, there DOES NOT EXIST a financial messaging system at the moment capable of sending and receiving messages on the scale truly needed for international trade in a gold-backed currency – and that is before we even figure out the design, fungibility, and settlement of such a thing.

Rippling Around

If this new BRICS currency is going to be used for wholesale transactions – that is to say, only for banks and financial institutions to settle accounts at a very large scale, for international trade – then cryptocurrencies provide a potential way forward.

Again, there are alternative solutions that may provide workarounds, and quite good ones at that.

The cryptocurrency Ripple (XRP) offers one such working example. Ripple is not a cryptocurrency like Bitcoin, on a public blockchain, where every transaction has to be cross-checked and verified, and where one can only create new examples of BTC through “mining”. Ripple works in a very different way, using “pre-mined” tokens, on a private blockchain, that serves as a sort of “hawala” service (go look it up) to facilitate large-scale secure money transfers between international financial institutions.

As a private blockchain with pre-verified security credentials, the Ripple approach solves at least part of the classic “Blockchain Trilemma”, in which one has to gain either speed, scalability, or security, at the expense of the other two.

(Bitcoin is NOT a currency, precisely because it cannot get past this trilemma, and therefore people cannot use it for everyday transactions at anything like the speed and scale of fiat currency. Bitcoin is an ASSET, albeit a very important one that provides a roadmap forward for future digital decentralised currencies.)

Furthermore, we are now in an era where we can turn just about any physical asset into a “token” – a fractional digital representation of its value that we can then trade like any other commodity. There is absolutely nothing stopping the BRICS nations from tokenising their gold on an agreed-upon standard blockchain protocol – almost certainly a private one, to deal with security issues – and then use a hawala-type system, similar to Ripple, to move that gold around for settlements.

Russia Leads the Charge

This is where Russia’s experiments in a digital ruble come in. Over the past 18 months, the Russian Central Bank and Ministry of Finance have done an almost complete 180-degree turn (or, if you are Annalena Dumbock, the mind-bogglingly stupid Foreign Minister of the long-suffering Krautland, “360 degrees”) on the subject of digital currencies.

Where previously the CBR refused to countenance the very idea of digital currencies, and even moved to outlaw them (against some pushback from the Ministry of Finance, it must be said), today, recognising the exigencies of the current situation, the Russians are now looking to implement a digital ruble:

Russia’s central bank published draft regulations for use of the digital ruble on Wednesday, as it prepares to launch testing of the new currency with clients.

The draft sets out rules for transactions between the Bank of Russia, as the operator of the digital ruble platform, and the system’s users, according to a statement on the bank’s website.

The document explains the types of digital wallets, the procedure for opening and closing digital ruble accounts, and the list of possible operations with the new currency.

The draft regulation also provides a mechanism for dispute resolution and a procedure for monitoring user compliance with the platform’s rules.

The regulator is accepting comments and suggestions regarding the draft document until July 19, the statement added.

The Russian lower house of parliament, the State Duma, passed a law on Tuesday setting out the legal parameters for the introduction of the digital ruble. The main provisions of the law will take effect on August 1, the regulator said.

The central bank plans to start testing the new currency in transactions with real clients in August, RIA Novosti reported on Tuesday, citing the regulator’s press service. Earlier this year, the central bank said it had expected to begin trials in April.

Think carefully about what this means.

Russia now has the world’s hardest currency – they back the ruble with literally the world’s largest combined stores of oil, gas, wheat, timber, coal, iron, aluminium, titanium, and God only knows how many other physical assets, including gold. They are now in a position to tokenise and digitise those assets into the form of a currency – which means they can build out all of the protocols and systems necessary to run an actual wholesale CBDC designed for international trade settlements.

And, if they can build it, they can expand that system and network out to other countries, in a way that the West CANNOT examine, hack, or stop.

Not Quite the End of the Dollar

None of this means the greenback is doomed. I do not subscribe to doomsday theories about the sudden and total collapse of the dollar as a standard of international trade. That simply is not going to happen anytime soon. There are NO viable alternatives to it for trade. Too much trade settles in dollars today, and the Chinese keep extremely strict currency controls in place over the yuan, so the RMB simply does not have the scale or volume necessary to replace it.

This new BRICS currency will not replace it, either. At best, it will be used primarily for international trade and financial settlements, in a way that the West cannot interfere with or cut off countries from using. It will allow the BRICS and SCO nations to connect up their national payment systems to a decentralised blockchain-based approach that the West cannot break or hack. And that is very much to the good.

But, consider what happens when other countries want to get in on the action. They will look to repatriate their gold from the FUSA and EUSSR. And what happens then?

Keep in mind that we simply do not know, for real, exactly how much gold the FUSA actually has in its vaults. We have a pretty good idea, sure, but a full audit of Fort Knox has not happened since the 1970s, to my knowledge, and the Federal Reserve has NEVER been audited.

What happens when dozens of Dirt World nations start demanding their physical gold back? Does the FUSA even have enough in its vaults to cover those redemptions?

If not, does that mean the FUSA will simply refuse to honour those redemptions, and keep the gold for itself? (Which I fully expect will happen at some point.)

The day THAT happens, it WILL be the end of the dollar, because that will cause such a crisis of confidence in the greenback that it will lead to a collapse in its value, and therefore the destruction of the US economy.

Conclusion – Caught in a Trap

This means the FUSA may find itself increasingly caught between the jaws of a gin-trap that IT CREATED.

None of this had to happen. All the FUSA had to do was to continue being the steward and guarantor of a smoothly functioning global financial system – not threatening countries with war and destruction in the event they wanted to do something different, not monkeying with global financial settlements, and not using MUH SANKSHUNS!!!!11!! to force countries to do the will of the GloboHomoPaedoPharisatanists.

But the FUSA crossed that Rubicon long ago. The world has never been the same since. And now we operate in a world where the dollar’s dominance is gradually diminishing.

This brings to mind the Hemingway quote you see above. The dollar’s decline right now is gradual, which is why incompetent and stupid yentas, supposedly running the world’s most important financial institutions, like Janet Yellen can pretend it isn’t happening. However, eventually – and no one can know exactly when – the USD will reach a tipping point, where people simply do not want to use it anymore.

At that point, network externalities will kick in, as more people gravitate toward something else – whether that is a wholesale BRICS currency with built-in on- and off-ramps into national currencies, or a free-floating digital ruble, or whatever – and away from the dollar.

The USD will not disappear, just as the British pound sterling before it did not. It will simply become yet another currency used for global trade and commerce – but it will never again be the single universal standard.

NONE OF THIS HAD TO HAPPEN. America could have preserved its standing among the nations, simply by being sane and sensible in the exercise of its global economic and fiscal power. But now, the FUSA is going the way of all formerly great empires – to oblivion. And well past time, too, for an empire so corrupt, rotten, and evil as what the once-great nation has become.

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  1. Tom Kratman

    Precious metals, foreign currency, AND armaments. You’re not really safe unless you have control of all three.

    Note that the US is quite admirably ruthless about cutting off governments and successor governments of states that have bought our armaments if they don’t toe our line. We’re also just like the Soviets and Russians in selling “monkey models” of our equipment. They look the safe but lack the key features on the inside.

  2. Ned Crabb

    I would expect the value of a country’s currency be commensurate with the tangible holdings they have, be it gold or any other precious metal as well as extracted natural resources.
    The death of fiat currency should be welcomed by everyone.

    • Didact

      Not necessarily. The ruble is a great case in point. Russia has vast oil and gas reserves, yet the ruble has been sliding downward for weeks now against all major currencies. The reason why is simple. The Russian CBR and Finance Ministry like to maintain a trade surplus, and therefore have no problems with letting the currency slide along with oil prices – even though the prices of other Russian resources are going up.

      Fiat currencies are not a good idea, at all, but they are here to stay – see Gresham’s Law, in which bad money eventually drives out good, for the reason why. The best we can realistically hope for, is something along the lines of a currency basket – a concept which, surprisingly, both Hayek and Keynes, diametric opposites on almost every other issue in economics, both thought was a good idea.

  3. Kapios

    What about reducing overall consumption? Do we really need all those products that we consume? How many resources are wasted on making drugs that slowly or suddenly kill people? How much is wasted to build luxury houses that remain vacant or cars, watches, diamonds that are bought purely for investment?

    Isn’t there a way to downsize the economy without making society stop functioning and accommodate gold?

    • Didact

      Isn’t there a way to downsize the economy without making society stop functioning and accommodate gold?

      Not without colossal and extremely wrenching disruptions to the current structure of the economy, at least in the West. The problem here is the way in which (Western) economies finance that consumption. It is through debt, or credit, which mainstream economic models do an extremely shitty job of accounting for – the classical Keynesian aggregate models do not even bother with it, other than to note that “government spending” will increase output and therefore growth. That model does not explain how the government can and should finance such spending.

      Nor do those models explain how consumers can finance that spending. The truth of it is that when people borrow on credit to finance current consumption, they are simply bringing consumption forward. This creates a severe structural imbalance, because you then have goods and services, with entire supply chains built around them, to finance current consumption at the expense of future savings.

      Other nations with more sensible economic foundations do not have this problem – Russia is a notable example. Returning to a gold standard of some kind would, indeed, cut down on such conspicuous and unnecessary consumption. But the adjustment would be so wrenching, so brutal, and would require such a dramatic reduction in living standards, that it would be politically unacceptable in every way.

      Consider: by the best estimates we have right now, the total amount of gold ever mined and extracted, in all of human history, comes to about 201,300 tonnes. The total market value of that gold, if we use a reference price of around US$1,756.66/oz (2021 prices), is US$12.5T.

      The current global economy is over US$100T in nominal GDP.

      And now you see the problem. Backing every last dollar, as it were, of that economic output with gold, would require, very roughly speaking, reducing output by 88.5%, with a commensurate drop in living standards. Note, also, I am talking in terms of GDP, NOT money supply – the two are NOT the same thing. If you were to back every last dollar in existence with gold, using M3 (the broadest available definition of money), the FUSA alone has something approaching US$22T in that floating around – not far off from its nominal GDP.

      I stress this is a highly inaccurate heuristic. There are simply too many individual cases and variations and issues you would have to look at before figuring out exactly how much living standards would have to decline – some nations would be hurt much worse than others. Russia, for instance, would likely ride out the economic shock much better than most – but China, Japan, and the FUSA, being heavily leveraged and indebted nations, would be hurt very badly.

      Nonetheless, there is nothing wrong with using a gold-backed, tokenised, blockchain-based currency of some kind for international wholesale settlements. It would bring some much-needed sanity and sense to global commerce, and would remove the power of the FUSA and its imperial vassals to block and ban nations they don’t like or agree with.

  4. furor kek tonicus ( "Fake And Gay" is not redundancy, it's emphasis of the syllable )

    you’re getting hung up on current gold prices, as if this were some sort of fixed measure ( ie – that current money is a store of wealth ).
    it is not. when given control of money creation, Bankstas historically destroy the value of that money. this is what the first two central banks of the US did. Bankstas control the Federal Reserve ( and all other central banks ). and the purpose of Federal Reserve is to destroy the value of the USD in a somewhat controlled manner to the benefit of the Bankstas. the Federal Reserve states this as “keeping inflation between 2 and 4%” while preventing deflation. they have definitely done that last. but Vox demonstrated the fraudulent nature of the BIS numbers back in 2008 and that has certainly not improved with the ascension of the coke snorting pedo to the Oval Office.
    but the salient point in all this is that there is no intrinsic requirement for gold to be $2000 / oz. if you were to strip out all of the inflation since 1900, gold would be < $100 / oz.


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