Can Gold Resolve The World's Burgeoning Debt Problem?

It is widely known the crushing debt of Southeast Asia caused its demise last year when their currencies, stock markets and economies were totally devastated - with only the behemoths China and Japan being able to stave off the inevitable. The overwhelming reason for the destruction of the Far-East was their crushing debt load - facilitated by greedy international banks overly eager to foist any amount of debt onto insatiable borrowers, regardless of their credit-worthiness. Consequently, most borrowers in the region literally choked on more debt than they could digest - i.e. these enterprises could not service the debt.

Rumors this morning of China's rapidly worsening economic problems vis-à-vis the continuing debacle in the rest of Asia caused me to think about the principles of the GOLD STANDARD, namely the following:

Somewhere in the US Government archives I discovered the following while rummaging through Uncle Sam's maze of websites. Specifically:

"Monetization of Gold

Any monetary institution has power to monetize. A gold standard, for example, provides for the legal monetization of gold. It specifies that a given weight of gold is vested with the ability to clear a debt of given monetary value. Before gold is declared the standard, it may serve as money by common acceptance of the fact that it is the commodity most suited for monetary usage."

The one sentence of cardinal, nay, of draconian import is, "IT SPECIFIES THAT A GIVEN WEIGHT OF GOLD IS VESTED WITH THE ABILITY TO CLEAR A DEBT OF GIVEN MONETARY VALUE."

Hear this now again: "… THE ABILITY TO CLEAR A DEBT OF GIVEN MONETARY VALUE."

Although All Asia is up to its eyeballs in debt, God only knows what its real level is… Every time you look around the BOJ confesses to another $200 Billion of "uncovered" debt that it had heretofore inadvertently "overlooked." Instead, let us just look at the very well-documented U.S. National Debt, around $5.6 TRILLION DOLLARS (certainly just a spit in the bucket to the amount of Derivatives outstanding in the financial world… but that's another can of worms). For our purpose we need to refer back to Uncle Sam's explanation that "GOLD'S … ABILITY TO CLEAR A DEBT OF GIVEN MONETARY VALUE."

The U.S. Treasury holds about 261 million ounces of gold, which it obtained in the 1930s (my my my, that's indeed a long long time to hold on to a so-called "barbarous relic," eh?). Nonetheless, it is the largest gold deposit in the world, which has - as Uncle Sam has stipulated - "… THE ABILITY TO CLEAR A DEBT OF GIVEN MONETARY VALUE."

Am I missing something? Does it take a rocket scientist or "Einstein" to figure out that much of the world's crushing debt burden (the Big PX, Asia et al) may be resolved by REVALUATING GOLD AND ESTABLISHING A GLOBAL GOLD STANDARD - subsequently using the gold to cancel the debt.

Uncle Sam's 261 million ounces of gold is carried on its books a $42.22 per troy once - further testament to the gross stupidity of our "Illustrious" financial leaders. What sells daily in all world markets for a couple of bucks shy of $300 per troy ounce has a book value registered by Treasury "Accountants" as only $42.22. I just have to ask the obvious. Why does the U.S. Treasury maintain this accounting farce? And why, pray tell, the unlikely figure of $42.22? Methinks on the day the figure was pulled out of the air, it came from the restaurant bill receipt for the lunch the Secretary of the Treasury had just eaten. 42.22 INDEED!

Now back to the Treasury's definition "… THE ABILITY TO CLEAR A DEBT OF GIVEN MONETARY VALUE." The present market value of Uncle Sam's gold stash is approximately $78 Billion. Now if per the established criteria "THAT A GIVEN WEIGHT OF GOLD IS VESTED WITH THE ABILITY TO CLEAR A DEBT OF GIVEN MONETARY VALUE," the Treasury need only re-establish a GLOBAL GOLD STANDARD - and subsequently revalue gold to the equivalent worth of the National Debt ($5.6 TRILLION DOLLARS). The Treasury could then just TRADE the shiny yellow for all of Uncle Sam's IOUs. If my arithmetic is correct the shiny yellow would require a value of $21,500 per troy ounce. NATURALLY, this is way outside the realm of practicality. Moreover, Asia's Debt Burden must also be taken into account and alleviated. A more practical revaluation would be to emulate the 1970s successful experience - that is to revalue gold about 10 times to $3,000 per troy ounce… but this time implemented by the U.S. Treasury - instead of leaving it to speculative market forces which might get out of hand.

Historical Precedent of GOLD'S REVALUATION

Per custom let us review history for possible successful precedents. In the late 1970s the market place re-valued gold from its former GOLD STANDARD peg of $35 per ounce. However, the revaluation was carried to an extreme, principally because the U.S. government did NOT have the intestinal fortitude to take the bull by the horns and establish a much higher revalued gold price, reflecting world conditions at that moment in time.

Lacking the government's stabilizing hand, market speculation drove gold to the untenable height of $850 in early 1980. Not surprisingly, market forces immediately began to correct the IRRATIONAL EXUBERANCE… subsequently gold's value began to dwindle for years afterward. Nevertheless, effectively gold WAS INDEED revalued about 10 times, based on the yearly average gold price during the last 19 years. Remember, market forces made the adjustment - as Uncle Sam had not the savvy nor political conviction to make the decision.

Now let us review the aftermath of GOLD'S REVALUATION in relation to what impact it may have had on world economies and, more importantly, world stock markets. In the year gold scooted to its top (1980), world economies and the stock markets (Japan a notable exception) had heretofore been depressingly stagnant. The DOW had been range bound between 600 to 1000 from 1958 to 1980 - that's 23 long dreary years of economic and financial stagnation. When the pivotal year of 1980 began the DOW was about 800. During the next 19 years (with but short respites) the DOW soared 1,063% (rising nearly 12 times its 1980 base).

Certainly, there are many factors contributing to the DOW's historic bull trend - unprecedented in its entire 200-year history. Nevertheless, I submit that the REVALUATION OF GOLD (by 10 times) played a Sine Qua Non important role in providing the monetary foundation and stability to foster economic and financial growth during the last two decades.

Now, we have come full circle. Burgeoning debt worldwide is stifling growth, AGAIN. Alas, the globe is drowning in its own debt. Southeast Asia is in shambles. China is close to a massive devaluation to save its 1.2 billion population. While Japan has suffered painful RECESSION during the last nine years, its entire banking system now teeters at the brink. Chaos in the currency markets is pervasive. And if that were NOT enough misery to handle, all these cancerous growing problems will be exacerbated as Y2K dangers loom.

Need the world endure another 23-long dreary years of economic and financial stagnation -- or could the revaluation of gold at a considerably higher price again provide the sorely needed monetary foundation and stability to foster economic and financial growth?

Was it really just PUERLY coincidence that GOLD REVALUED 10 TIMES co-existed, while the DOW enjoyed a run from 800 (1980) to 9363 (1998)? Or, was substantially revalued gold both the catalytic agent and propellant fuelling the DOW's rise for nearly two decades?

Ask yourself these questions. If gold indeed is a "barbarous relic," then WHY has the U.S. Treasury not seen fit to divest itself of this "non-producing" asset - which it acquired during the 1930s? Ask WHY the U.S. Treasury tenaciously protects its hoard of 261,000,000 million troy ounces - THE WORLD'S LARGEST GOLD STASH?

Coincidence, I DON'T THINK SO!

 

The Red Baron

21 November 1998