First published: http://snbchf.com/gold-standard/texas-gold-depository/

by Keith Weiner

You’re getting onto a highway. You want to go to your destination but there are roadblocks. The barriers are stacked up in layers. Even if one is removed, you still can’t get anywhere. So is it worth it to start eliminating obstacles, even though it won’t clear the road yet?

On June 12, 2015 Texas said yes.

The road we’re talking about is the path forward to the gold standard. Texas Governor Greg Abbott signed HB 483, authorizing a state depository for gold (and other precious metals) and a payments system. This bill kicks two roadway barriers to the curb: a lack of infrastructure for gold payments, and widespread distrust.

Banking has evolved since the gold standard. We take for granted that we can swipe a card to pay for a ride, a beer, or anything else. Employees can receive their wages by direct deposit and pay their bills online. Businesses can send cash electronically. Some people wrongly think that in the gold standard we will have to go back to carrying coins, paying with little metal discs, and getting change in return. Opponents of gold paint this caricature to make you think that gold will bring us back to wearing sackcloth robes and rope belts with leather purses dangling.

The Texas bill provides the base layer of infrastructure for gold in the 21st century, by creating a depository to safely store people’s gold. And there’s also a means for payments and transfers, “by the presentment of a suitable check, draft, or digital electronic instruction…”

I should note that Texas is not the only player in the gold payments game. BitGold and AnthemVault are also working on payments solutions, including peer to peer, debit cards, and gold web shopping checkouts. Both companies have recently raised significant capital.

Distrust is an intangible but palpable force keeping gold out of the financial system, and hence out of circulation. Gold owners have at least two reasons to be wary about trusting third parties with their metal. One is simply a repeat of the US government confiscation in 1933. I don’t think this is coming, but opinion has hardened.

The Texas bill contains some extraordinary language, “A purported confiscation, requisition, seizure, or other attempt … [much legalese deleted—read the full text of the bill] is void ab initio and of no force or effect.” Texas will not allow the federal government to confiscate its depositors’ gold. Since you have to keep your gold somewhere, and there are risks to every location, this protection makes a strong argument for the Texas depository.

The other worry is the risk of counterparty default. If you own gold via a bank, or financial product such as GLD, then you’re exposed to a counterparty. The Texas gold depository, by contrast, will not deal in credit. Your gold just sits there, with no risk to the depository’s ability to deliver your metal on demand.

The Texas bill is necessary, but not sufficient. It’s a great first step, though there’s more to do. Texas is working on another bill to formally recognize gold and silver as legal tender and to clarify that they are not subject to state taxes. I testified before a Texas Senate committee about SB 1245. That bill did not pass out of committee, but there’s good reason to hope that a legal tender bill will be enacted into law in Texas soon. This is especially so, with the momentum created by HB 483.

Bit by bit, the road to gold is being cleared. Our friends in Texas are helping lead the way.

Here my testimony for the SB 1245 bill:
http://www.youtube.com/watch?v=oiwIQlRaAIw#t=363

The quality of the audio is not good in parts, but that said, this talk followed with Q&A by Dr Keith Weiner is well worth your time.

Keith Weiner – http://snbchf.com/gold-standard/yield-purchasing-power/

The dollar is always losing value. To measure the decline, people turn to the Consumer Price Index (CPI), or various alternative measures such as Shadow Stats or Billion Prices Project. They measure a basket of goods, and we can see how it changes every year.

However, companies are constantly cutting costs. If we see nominal—i.e. dollar—prices rising, it’s despite this relentless increase in efficiency.

This graphic illustrates the disparity (I credit Tom Selgas for a brilliant visualization, which I recreated from memory).

 

 

 

 

 

 

 

CPI measures only the orange zone, the tip of the iceberg. Most people don’t see the gray zone, and that’s a result of the greatest sleight of hand ever.

We need an accurate way to measure monetary debasement. For example, in retirement planning it’s tempting to divide your net worth by the cost of consumer goods. This seems to show your purchasing power. For example, if you have $200,000 and the cost of groceries for a year is $20,000 then you can eat for ten years.

However, this approach is flawed. To see why, let’s briefly consider primitive times when there was no lending or banking. People had to set aside some of their income, to buy a durable good like salt or silver—hoarding. When they could no longer work, they sold a little bit every week to buy food—dishoarding. People accumulated wealth while working, and dissipated it in retirement.

Life got a lot better with the advent of lending, because interest enables people to live on the income generated by their savings. People no longer consumed their principal, worrying about outliving their savings.

Don’t think of capital assets as something to sell in order to eat. An old expression says, if you give a man a fish then he eats for a day, but if you teach a man to fish then he eats for a lifetime. Think of a productive asset like a fishery. It should produce for a lifetime. It should not be consumed as a mere fish.

Capital assets should be valued in terms of how many groceries they can buy, not by liquidation, but by production. Unfortunately, monetary policy is making this increasingly difficult. Interest rates have been falling for over three decades, and now there’s scant yield to be had anywhere. We are regressing to the dark ages of paying for retirement by dishoarding.

CPI understates monetary debasement, because companies are constantly becoming more efficient. Dividing wealth by CPI compounds the error, because asset prices are rising.

We need a different way of looking at monetary debasement. I propose Yield Purchasing Power (YPP). YPP is the yield on assets divided by the Consumer Price Index (or other index). The idea is to look at the productivity of assets to see what you can really afford.

Let me explain YPP with a simple example. If hamburgers sell for $5 and interest is 10%, then $50 of capital lets you eat one burger per year. Suppose the price of the burger doesn’t change, but the interest rate falls to 0.1%. You now need $5,000 in capital to earn that burger. Unfortunately, if you still only have $50, then you only get one burger every 100 years.

CPI doesn’t show this collapse in purchasing power, but YPP does.

Let’s take a look at YPP since 1962. The graph is inverted, to make the trend easier to see.

It’s interesting that the drop in purchasing power (rising in this inverted graph) begins around 1984, when the conventional view said inflation was tamed. CPI may have slowed down, but interest was falling too.

YPP shows us a staggering monetary devaluation—a classic parabola. The problem isn’t skyrocketing prices, but collapsing yields.

You need more and more assets to afford the same lifestyle. If your assets don’t keep up, then you have to liquidate your capital.

Keith Weiner – http://snbchf.com/gold-standard/yield-purchasing-power/