Home > Archives for Philip Barton > Page 31

The American Corner: The Credit Gradient

by

(Extracted from the August edition of our monthly journal: The Gold Standard)

The United States, and every country, is subject to a monetary authority and legal tender laws. Here in the U.S. we have the Federal Reserve, a central bank that plans money and credit. The Fed thought they had perfected their planning (but of course it cannot be perfected). They thought they had ended the boom and bust cycle, and brought us into a brave new era, their so-called great moderation that ended in 2008. All they really did was manage the banking system to the brink of insolvency.

Let’s try a thought experiment. Suppose the monetary central planner attempts to fix the problem of insolvency by massive injections of liquidity. The central bank buys bonds. It dictates rates near zero on the short end of the yield curve, and promises not to raise rates for years to come. What perverse outcome would we expect?

Arbitrageurs see a green light, telling them that they can safely borrow short to buy long bonds. As the price of a bond goes up, the rate of interest goes down—it’s a rigid mathematical inverse. This is how suppression of short-term rates causes suppression of long-term rates.

This poses a problem for investors. Every investor has a minimum yield he must earn in order to meet his goals, such as retirement. When the yield available in government bonds falls, this gives the investor a strong push to other bonds with higher yields. Some Treasury bond owners sell, and go into AAA corporate bonds. This, of course, pushes up bond prices and pushes down the yield. This pushes some AAA corporate investors into AA bonds. And so on.

The net yield earned by every investor is pushed lower. However, at each step in the process, the effect is diminished. The wave of credit does not quite make it all the way to the other side of the pool, where the small businesses are trying to get wet.

In a free or semi-free market, credit is generally plentiful and inexpensive for mature, large enterprises. When well managed, these companies offer a low credit risk. Conversely, it has always been difficult for startups to obtain credit. When they can get it, they have to pay dearly. In other words, there is a credit gradient.

A gradient describes a change in concentration of something as you move through a range of coordinates. For example, this is a color gradient.

Of course, there is always a credit gradient. Only now, the Federal Reserve has exaggerated it to an extreme. They have made the gradient steeper.

The biggest players are drunk, chugging as much as they want. At the same time, the scrappy disruptors with the greatest opportunities to improve our world are more dehydrated than ever. Worse yet, the innovators have to try to compete for resources with the large corporations.

The credit gradient is artificially enhanced. The end result is not surprising.

I came across this paper, by the Brookings Institute. Authors Ian Hathaway and Robert Litan found that “Like the population, the business sector of the U.S. economy is aging. … The share of firms aged 16 years or more was 23 percent in 1992, but leaped to 34 percent by 2011—an increase of 50 percent in two decades.”

Entrepreneurial young companies are not hiring, or in many cases, surviving. The older, larger ones are all that remain. Their hiring is anemic compared to that of younger companies. The proof is in the labor force participation rate, which shows the percentage of working age people who are employed or seeking employment. It is now down to a level last seen during the Carter Administration in the late 1970’s.

Although there are other factors that contribute to this dismal reality including minimum wage and labor law, taxes, environmentalism, subsidies for crony companies, and regulations, the artificially enhanced credit gradient deserves the lion’s share of the blame.

Keith Weiner – President the Gold Standard Institute US

Part I : Reviving A Free Market Gold Standard

by

by Ken Griffith
I was born in 1971, three months after Richard Nixon abandoned the gold standard. For my entire life I have heard gold bugs lament the demise of the gold standard and clamour for a return to it. The purpose of this article is to propose a Free Gold Standard formed through private action by forming a new organization called the Gold Standard Society.
I have come to the conclusion that a government-imposed gold standard run by a central bank is not likely to solve the money problem. Politicians and honest money are like (snake) oil and water—they don’t mix. The politicians and central bankers can be relied upon to debase any currency that they control. No nation given such power has ever resisted this temptation for long.
My gold bug friends hope for the US Government to return to the gold standard. However, it has become increasingly obvious that If we wait for governments to solve this problem, we will still be waiting until the end of time. [1]
The only way the world will ever see a true gold standard again is if it can be achieved through the free market without state intervention. We are the free market, so let’s get busy!
First Try - The e-gold Era
You may not be aware that we briefly enjoyed a free-market gold money system that arose on the Internet and survived from 1996 until 2008. Led by e-gold.com, the “gold economy” of the Internet grew to the point that it was doing 80 metric tonnes per year of person to person gold transactions. At its peak there were seven digital gold issuers and an international network of exchange agents, and over two million account holders. Digital gold was the fastest and cheapest way to move money around the globe. The gold was changing hands at the rate of 80 turnovers per year.
The e-gold era came to a tragic end when agents from the US Treasury department indicted and closed down all of the digital gold companies based on American soil. Their crime was not having money transmitter licenses as required by the USA PATRIOT Act. Some of them had applied for licenses but were told in at least one case [2] by state regulators that they did not qualify because gold was not money.
With 80% of the digital gold market seized and frozen the movement died.
You may read more about that decade of digital gold and why it ultimately failed here.
Digital gold collided head-on with the ever-growing regulatory bureaucracy that grew out of the wars on drugs and terrorism. The financial regulators did not have a category for it. (Today Bitcoin is facing the same problem.)
Government did what government does best - it crushed the nascent industry by prosecuting those involved for not having the right licenses.
While the digital gold movement ended tragically, we should take a moment to look at the remarkable accomplishment that e-gold and their competitors achieved together.
They succeeded in getting a market of over a million people to use gold as money. That gold money was turning over so fast that the velocity averaged 80 turnovers per year on a base of about 64,000 troy ounces of gold (roughly $25 million in 2002 dollars). [3] They succeeded in building a gold money system with multiple institutions and agents around the world.
The most remarkable thing about e-gold and friends was that they demonstrated that Gresham’s Law does not apply under the conditions present on the Internet. They proved that it is possible for gold to vibrantly circulate as private money in today’s economy.
Digital Gold 2.0
In the intervening years Bitcoin has stepped into the gap left by e-gold. However, I would argue that it does not serve the role of international electronic payments nearly as well as digital gold did - and never will. [4]
Technophiles may love Bitcoin, but those of us who are true gold bugs know that in the long run it cannot replace gold as money. I would very much like to see the gold community raise up an answer to Bitcoin.
Given the decade of success of the first generation of digital gold, it should be possible to create a new Free Gold Standard if we take care to avoid the mistakes of our predecessors.
I believe the following seven elements are needed (though not necessarily all at once) to create a new Free Gold Standard.
1. Jurisdiction
First, we must recognize that we need to be based in jurisdictions that do not penalize the use of gold as money. The users and customers can be anywhere in the world, but the financial institutions at the heart of a Free Gold Standard must be in friendly jurisdictions. This means we need countries that:
Have no VAT or sales tax on monetary gold.
Have no capital gains tax on monetary gold.
Have no law against free minting of gold specie.
Have no major conflicts of interest against gold as money (eg. the US Treasury)
These requirements rule out the USA, but a surprisingly large list of countries meet the first three conditions, including even the European Union. [5]
Switzerland, Hong Kong, Singapore and Dubai are top jurisdictions that meet our requirements (with London getting an honorable mention).
2. Primary Specie for Contracts
Second, we need a standardized specie for gold contracts that is small enough to be practical for daily transactions. There are many manufacturers of 1 gram wafers, and even smaller specie, that could be used for this purpose.
3. Digital Gold Payments & Accounting
Third, we need a peer to peer (P2P) digital gold payments and accounting system [6] that allows for multiple issuers of digital gold to clear payments between each other.
We need a way for gold payments to clear between institutions in the same way that Alice can write a check to Bob on her BOA account, which Bob can deposit at Wells Fargo.
Ideally this electronic payments software should work on smart phones. We would prefer to see a decentralized system with dozens of digital gold issuers who are compatible with each other. Unlike the Bank of England, we want to put the gold near the people, and in their hands.
4. Agent Network
Fourth, we need an international network of exchange agents, who will trade digital gold for physical specie as well as fiat. These can be bullion dealers, pawn shops, remittance providers, grocers, forex bureaus, mobile money agents, and ATM machines. The agent network is the most important element to achieve mass adoption by the public. [7] [8]
5. Electronic Exchanges
Fifth, we need electronic exchanges to make the markets efficient and help us discover exchange rates. Gold is our currency, and we need efficient foreign exchange between gold and fiat currencies. Therefore we eventually need an electronic trading market. [9]
6. Dispute Resolution System
Sixth, we need a way to rapidly and efficiently settle disputes across borders between users of our Free Gold Standard. Crime, fraud and disputes between users brought e-gold and friends to the attention of the jaundiced eye of the US authorities. It is essential to have a uniform “rule of law” that works worldwide for our members and users. For this reason, we need an arbitration forum and a contract that binds every member and user of our services to settle any disputes in our arbitration forum. [10]
7. Regulatory Model
Lastly, but most importantly, we need regulatory model that fits into the existing legal environment and doesn’t require governments to pass new laws or make new categories for us. We need a roadmap for how to configure digital gold issuers under current law, in order to avoid running afoul of government regulations.
Conclusion
The first generation of digital gold currency systems proved that Gresham’s Law can be overcome and there is a market for using gold money in today’s economy.
That early gold system failed primarily for lack of a strong regulatory model and because they were domiciled in the USA. The USA, as the issuer of the global reserve currency (USD) has the greatest reason to fear and discourage the use of gold as money.
Unsurprisingly, the US Treasury acted in their own interest and carried out a jihad against digital gold on American soil - ending the movement, for a time.
The time is ripe for a Free Gold Standard. I believe this can be achieved if we take care to avoid the mistakes of our forbearers.
The Free Gold Standard requires seven elements:
Friendly Jurisdiction(s)
Standardized Specie
Digital Gold Payments and Accounting System
Agent Network
Electronic market(s)
Arbitration Forum
Regulatory Model
If we who believe in the gold standard continue to wait for government to create it for us, it will never arrive. If we wait until the current global financial system fractures and collapses, we may find it too late, or we may find that IMF SDR’s become the new de facto world currency.
If we want to see a gold standard, we need to create it ourselves. For the 21st century gold standard, we need a new organization to create a contractual framework for gold money - The Gold Standard Society. In this series of articles I endeavor to lay out a roadmap of how to get there.
Ken Griffith was part of the first generation of the digital gold currency movement and is co-founder of Dinero Limited, a company that provides multi-currency digital payments software to the people that need it.
[1] The IMF’s 2014 bailout loan to Ukraine is denominated in IMF “special drawing rights” (SDRs) instead of US Dollars. This is a good indicator that the powers that be see the end of the US Dollar, but are planning for yet another fiat currency to replace it, rather than returning to gold.
[2] e-Bullion.com was denied a money transmitter license from the State of California in 2002 because they did not handle cash.
[3] While it is true that part of that turnover was due to Internet crime, the majority of the transaction volume was legitimate business.
[4] Ken Griffith, Bitcoin - A Jack of All Trades is the Master of None, DGC Magazine, February 2014
[5] Council Directive 1998/80/EC of 12 October 1998, supplementing the common system of value added tax and amending Directive 77/388/EEC - Special scheme for investment gold. [Official Journal L 281 of 17.10.1998] http://europa.eu/legislation_summaries/taxation/l31012_en.htm
[6] Following Fekete, I consider the exchange of “real bills” to be part of the “accounting system”. But for the sake of those who don’t know what bills of exchange are or why they are necessary, we just call it “accounting in gold”.
[7] MPESA grew to 30 million users in five years primarily due to their agent network in Kenya.
[8] GoldMoney.com created a well-regulated digital gold currency system, but prohibited independent agents from serving their customers. Without an agent network GoldMoney users never took to using GoldMoney as money. Their velocity stayed close to 1 for the entire decade that they allowed peer to peer payments.
[9] The development of Bitcoin is instructive here. First Bitcoin was only used as peer to peer money (2008 - 2011). Second, people created Bitcoin brokers, to trade for fiat (2009-present). Later, the first Bitcoin live traded exchange was created (2011). Soon there were dozens of exchanges (2013). Exchanges were the single largest factor that facilitated the rapid growth of Bitcoin.
[10] This has been achieved very effectively by CA Cert, an international organization with 20,000 members. We suggest imitating their model. http://cacert.org

America Needs The Gold Standard More Than Ever

by

Republished from Forbes Magazine:

http://www.forbes.com/sites/keithweiner/2014/06/24/america-needs-the-gold-standard-more-than-ever/

The godfather of modern economics, John Maynard Keynes, dismissed the concept of gold as money—the gold standard—as a “barbarous relic.” Another economics titan, Nobel Prize-winner Milton Friedman, conceded that gold is good in theory, but opposed gold in practice, arguing that a return to a gold standard is “neither desirable nor feasible.”

Both Keynes on the left and Friedman on the right got it really, horribly wrong.

The gold standard is neither barbaric nor impractical, and it is more urgently needed every day. This is because the standard of paper money is failing. It has set in motion an accelerating series of crises, each worse than the previous. The nation cannot continue to borrow to infinity, nor can the U.S. endure zero interest much longer.

Campaign poster showing William McKinley holding U.S. flag and standing on gold coin “sound money”, held up by group of men, in front of ships “commerce” and factories “civilization”. (Photo credit: Wikipedia)

An examination of history supports the case for gold. Under the gold standard in the 19th century, the quality of life of most people improved faster than ever before, or since. It didn’t last because, unfortunately after the turn of the century, war preparations required huge expenditures.

Waging what was later called the Great War could only be financed by one means: debt. And there was only one way to borrow. In most countries, a central bank was already established, and by 1913 even the freest country had created a central bank. They called it the Federal Reserve.

Central banking is simply central planning—government interventions—applied to money and credit. The gold standard is simply a free market in money. Intervention conflicts with a free market, and gold lost the battle. It’s no coincidence that economies collapsed one by one after the war.

All too soon, men were marched off to war again. By the end, much of the world was reduced to rubble and desperate political leaders sought credit to finance postwar reconstruction. The U.S. named its terms: other countries had to treat the U.S. dollar as if it were gold. The Allies signed the treaty, at Bretton Woods in New Hampshire.

But the U.S. dollar was not as good as gold. It was merely Uncle Sam’s promissory note. Perversely, the greater the world’s demand for money, the more debt the U.S. government could issue, which enabled more spending. The crisis came to a climax in 1971, when President Nixon’s gold default created the current system. By Nixon’s decree, the dollar became an empty promise, backed by literally nothing.

Since then, we have had a worldwide regime of irredeemable fiat money. Debt has exploded, doubling about every eight years. The interest rate skyrocketed until 1981, and then went into free fall. The financial system will soon collapse, though when is hard to predict.

Gold, because it empowers savers to keep debt and interest in bounds, can prevent catastrophe.

The main argument against gold is that we need loose monetary policy to get out of recessions. The crisis of 2008 debunks this. Our monetary planners didn’t see the crash coming, and their short-term patches—stimulus and bailouts—have fixed nothing. The next crash looms.

The practical argument against gold is that we don’t have enough of it. This is simply untrue. The 19th century gold standard was run with just a few hundred tons of the metal in London, a tiny fraction of what the US has today. The argument is also frivolous. If the market is allowed to set the value of gold, no particular quantity is necessary.

There is also an argument against a lone country adopting gold. Currency devaluation encourages exports, lifting employment and the economy. It is true, so far as it goes. A falling currency cheapens export goods in world markets. But to fixate on this point ignores destruction of business capital and rising cost of imports, including raw materials. Japan’s economic history confirms this. The yen rose along with exports for decades. Since 2012, the yen has fallen. Japan’s balance of trade is falling with it.

Everyone is better off under gold. Even if other countries remain tethered to failing paper currencies, America should adopt the gold standard. Stable money will allow Americans to thrive. A major component of prosperity is the discipline gold imposes on government spending.

Keynes was wrong that gold is barbarous. Indeed, without gold, the world is now careening toward barbarism. Friedman was wrong that gold is impractical and the West’s teetering economy proves it. What we need more than ever, with the U.S. leading the world, is a path toward adopting gold as money.

Keith Weiner - President the Gold Standard Institute US

Recent News

Contact Us

philipbarton@goldstandardinstitute.net

Related Websites

Gold Standard Institute US