The Gold Standard Wakeup Call

What is the last thing you expect to wake up to first thing in the morning? Well, your editor got quite a fright, because at 7.20am his radio alarm went off to none other than a discussion of the gold standard! On mainstream fm radio! At 7.20am!

You can find the key section of the program here.

After such a startling start, it was going to be one hell of a day. But the radio isn’t the only thing commenting on the merits of a gold standard. World Bank President Robert Zoellick reckons gold should at least play some role in the financial system. And he made those comments just in time for the G20 meeting in South Korea. Apparently things got so heated at the meeting, the South Korean officials had to open the door!

Feelin’ Hot Hot Hot

China, whose debt ratings agency downgraded the US again, suggested the G20 should monitor the Federal Reserve. It looks like the world will no longer accept the US’s argument of “it’s our currency, your problem”. And why should they if the dollar is the world’s reserve currency?

The ratings agency that downgraded US debt also came up with this gem: “Though it is likely for the current loose monetary policy to postpone the occurrence of difficulties, yet in the long run, it will be proven to be a practice resembling drinking poison to quench thirst.”

Europe is in on the Fed bashing too. The German Finance Minister continued his rant in an interview you can find here, with highlights as follows:

Interviewer: Can’t you understand that the American treasury secretary is concerned about [Germany’s trade surplus with the US]?

Minister Schäuble: No, because since we introduced the euro in Europe, the determining factor is no longer US trade with Germany, but US trade with the totality of countries in the euro zone. And in that respect the balance of trade tends to be even. So what’s the problem? After all, we don’t complain about the export successes of individual American states.

The German export successes are not the result of some sort of currency manipulation, but of the increased competitiveness of companies. The American growth model, on the other hand, is in a deep crisis. The United States lived on borrowed money for too long, inflating its financial sector unnecessarily and neglecting its small and mid-sized industrial companies.

It’s inconsistent for the Americans to accuse the Chinese of manipulating exchange rates and then to artificially depress the dollar exchange rate by printing money.

And just for good measure, Minister Schauble called the Fed “clueless”.


Yes, it’s all good entertainment, but what of the consequences? If the world’s leaders go charging off in different directions, it’s bound to lead to conflict. Hopefully the US won’t send its armed forces to slow the flood of Communist Austerian beliefs sweeping across Asia Europe. Oh wait, the US military is already there… Your editor went to school with some US army children in England and Germany. Our short lived basketball experience began with a (not retired) Marine Corps Drill Sergeant as a coach.

But the Austarian sweep is experiencing its own problems. The Irish Prime Minister (Taioseach) is in limbo. The kind where you go as low as you can without falling over. With approval ratings at an impressive 11%, you wonder why he is still there. He can’t have his head in the sand, or he would have lost the game of limbo already.

Violent protests in the UK included a raid of the Conservative Party HQ, which is practically a symbol of austerity. The students who took part raised analogies of Thatcher’s era, which is ironic considering how well the UK did as a result of Maggie’s changes. But the protest wasn’t just a hollow display of discontent. Seven News informs us that many protesters performed a modern type of tribal dance in front of the building. It’s known as a mosh pit and involves jumping up and down hoping to bounce off those around you.

That’s sort of what PIIGS bond investors are doing too. Yields on Irish bonds spiked again, and again. Portugal is following suit according to our technical analyst Murray Dawes. Someone is making a lot of money off all this volatility. And it’s not just the default swap issuers, who have their premiums at record highs.

Bank Bashing Hypocrisy

Closer to home, it seems Australian households are either very smart or very dumb: “According to the latest Reserve Bank Bulletin, households with direct share holdings have 65 per cent of their portfolio in financial stocks, compared to 30 per cent for institutional investors and 20 per cent for foreigners.” So while everyone is complaining about rate rises from the big four, they are positioned to benefit as well. But that didn’t stop customers at the local bakery from complaining. Even Julia Gillard has taken to bank bashing.

Maybe that’s because the banks aren’t actually that profitable. Sure, their dollar profits are big, but earnings per share…

Oh and our comments about banks simply raising their interest rates to compensate for lost revenue from abolishing exit fees – well, we were only half right. Not only will banks charge higher interest rates, but it’s the smaller lenders that currently charge the big exit fees. So abolishing them will damage the competition that politicians are so adamant about. Considering the Courier Mail is aware of this, you can’t call it an unintended consequence. Just a straight up blunder.

Unemployment Improves

Congratulations to the world’s media for displaying a rare show of unbiased reporting. Yes, all across the world newspapers mentioned Australia’s surprise unemployment figures. The point isn’t that unemployment went up, but that media organisations were willing to mention the bad news, which was actually good news, to the same extent as they usually mention good news, which is actually bad news.

Confused? Well, media has reported on falling unemployment in many nations around the world, which was actually due to reduced labour force participation rates. So, they framed bad news as good. But in Australia, with more people returning to the labour force, unemployment went up. That’s good news framed as bad.

And the ironic nature of the beast doesn’t end there. Glenn Stevens, you’d think, might be regretting his latest rate rise. “He has gone too far and increased unemployment” pundits will yell. But in reality, he may have stimulated some couch potatoes off the sofa.

The High Court of Australia has other ideas. Youth allowance recipients can now claim tax deductions for expenses they incur in qualifying for their payments. The ruling could extend to other income support recipients too. Does it seem odd to you that one can claim tax deductions for expenses incurred in getting money from the tax payer?

The ‘Flation Wars reviewed

By the way, we forgot to make the key point we set out to make in Wednesday’s Markets and Money. The discussion was of the ‘flation wars, particularly in the US. Who will win, the inflationists or deflationists? Well, it seems the deflationists, who point to the remaining leverage in the system, have quite an argument.

Keeping in mind that inflation usually gets out of hand only when people realise they should buy hard assets to get rid of their paper money, it seems that inflation can’t get out of hand. What money will people use to buy hard assets? Consumers are already up to their ears in debt. Inflation means nominal rates will go up, so more borrowing can’t get too out of hand.

“Ha”, the deflationists might say triumphantly. But what they might be missing is that government spending counts for a massive amount of the economy, so government spending could be the direct cause of inflation. This could be a unique situation going back through history. In the US, for example, once you adjust GDP figures appropriately, some say government spending comes to about 50% of GDP!

So if the Fed decides it will monetise government spending (it is already doing so), nothing stands in the way of dramatic inflation. It’s just a question of how much monetisation the public will allow politically. The backlash is already pretty popular and has Tea Party momentum. There is even a movement to impeach Ben Bernanke for breaching his oath that “The Federal Reserve will not monetise the debt.” The Dallas Fed has admitted this is already taking place.

Monetary Policy for Hypocrites

Some background info for the uniformed and opinionated: (Timothy Geithner being included in both categories.) China’s peg to the dollar is just its way of performing monetary policy. China does not decree that money will be exchanged at that rate. It merely provides supply and demand for Yuan (mostly supply) as required to keep the currency in the band it determines.

When the Fed buys and sells Treasuries to influence interest rates, it is doing much the same thing, only targeting interest rates instead of exchange rates. One key difference between China’s medium of monetary policy and that of the US is that banks benefit big time from their privileged position in the US. They are included in the insider’s circle.

Now that interest rates in the US can’t go lower, the Fed is turning to a third option – targeting the supply of money. Hence monetisation. The odd part is that the fourth medium of monetary policy is to control reserve fractions of banks. And these have been increased by Basel, which in short means that the supply of money is being decreased. So the US is increasing and decreasing the money supply simultaneously. The winners of the kerfuffle is the banks who end up well capitalised and profit in the process.

The losers are the rest of us. As Dan pondered on Monday, it seems bond investors are being crowded out of the market by the Fed’s purchases. As the new money pushes up bond prices, the yield falls. So investors look to other places. You’d think dividend paying stocks might pop up on the radar. Can’t get the yield you’re looking for in bonds, why not tuck into some cash cows? Well, the argument is much the same and you may have missed your chance. Investors fleeing bonds would already have piled into dividend paying stocks, pushing up those prices, which, once again, reduces their yields.

At least, all of the above was the theory. In his latest video to Slipstream subscribers, Murray explained what is actually going on.

Nick Hubble
Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like.

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7 Comments on "The Gold Standard Wakeup Call"

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There may be only around 150,000 metric tons of gold and silver worldwide, which given the current population amounts to 0.7 troy oz. per person.

Ned S

Yep, and given that I’ve already got very significantly more than my share at maybe 6 oz of Au and 20 oz of Ag, I’m not feeling especially inclined to be greedy? :D

Ned S

A gold standard is crap. We’ve had one and Nixon defaulted on it. Then we had a USD standard and Greenspan and Bernanke defaulted on it. No such stuff is worth more than the ‘honour and integrity’ and fiscal responsibility of the nation issuing such promises irrespective of what their promises pretend to be based on.


Ned S

Oh I get it! The Austrians are talking about a gold standard that nations will actually honour – Ha ha, Ho ho … Same intrinsic value as a toilet paper standard they’ll honour – Quite seriously. Which is way less than none whenever it should suit them.

Ned S

With gold being of less practical use than toilet paper … For mine. Though I know lots see it very differently and certainly wish them well with it.


and didnt roosevelt confiscate it? and how much really is there in Fort Knox, is it like the Saudis probable misreporting (overstating) reserves, or the Chinese misreporting (understating) their fish catches. still, at the near end of the world, gold will shine, I do not doubt that. but none of us would like to live in such a world.

Ned S

I can just imagine a world in which Americans are told that they all have to sell their home to a co-op of 4 Indian housewives in exchange for those same ladies’ wedding day finery so Unca Sam can then confiscate it from them and stick it in Fort Knox to back Americans’ collective debt – NOT!

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