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Home > Authors > Publius

Orphans of the Sky

December 5, 2012 by The Gold Standard Institute International

Some of my previous articles touched on a major obstacle to the return of gold as money.  I suggested that many of the people best able to aid gold’s fight are also smart enough to make an easy living off the fiat system.  This topic deserves additional treatment.  There is more going on than meets the eye.

The subject came to mind recently when I was thinking about one of my favorite Heinlein novels, Orphans of the Sky.  The book raises fascinating questions particularly relevant to gold supporters.  Set onboard an ancient starship, the story’s protagonists confront problems well known to true monetary scientists.  Although written in 1941, it foreshadows our current plight and offers valuable insights for our cause.

Heinlein imagined far-sighted men conceiving and launching a massive expedition to colonize another star.  Given the immense journey length, they intended the crew to found a sustainable society on the ship.  Only after many generations would descendents of the original “colonists” complete their ancestors’ mission.

Designers compensated for the anticipated inexperience and artificiality of upbringing in those born aboard, but tragedy struck regardless.  Crewmen mutinied and killed the officers, thereby initiating a dark age in the midst of mankind’s highest technological achievements.  Although critical equipment still functioned and surviving inhabitants retained a stable civilized order, their offspring grew increasingly ignorant.

With no readily accessible windows to view the deep space outside, future generations came to regard the ship itself as the entire universe.  Eventually, even the smartest people on board never understood their environment was a ship at all.

Does this sound depressingly like the evolution of prevailing views on the nature of money and banking?  That money is paper or binary code memory rather than gold?  That central banks always existed, and must survive lest our economy implode?  That inflation is unavoidable, and actually beneficial in small amounts?  And that illiteracy and innumeracy hinder most people’s critical analysis of such orthodoxy?

What useful ideas can we take from the story?  The leadership of the book’s closed society maintained control by hoarding surviving knowledge and burying the ship’s origins.  With the passage of time, the rulers themselves came to be born ignorant.  Heinlein’s heroes pieced together the true story and sought to regain their birthright.

But they faced difficulties in explaining it to potential allies.  For example, the ship’s hull being impervious to available tools, how could someone imagine what was on the other side, or why the mental exercise was worth the effort?  And if a prospect could grapple with such ideas, would he simultaneously overcome the fear naturally accompanying this line of inquiry?  Similarly, today few people have the inclination or courage to imagine a world without the Federal Reserve or fiat money.

And this is a big part of our problem.  We are asking people to become real pioneers, when for generations they have not had to think hard on new ideas or solve life-and-death problems.  Those rare remaining elders who experienced the Great Depression are ignored or ridiculed when they talk of prudence and restraint.

It is a daunting task for someone to face reality squarely when neither they nor their parents ever had to do so.  Much easier, unfortunately, to decide to aim for personal security through the artificial intervention of government, either as a recipient of state favors or as a successful player of the political power game.

On the other hand, we are not too far along the road to a medieval society.  And the internet helps our cause greatly.  Windows to the true, wider reality of our world are mere seconds away from someone with even a moderate determination to learn.

This is why we gain the best odds of success by making the idea of gold money less frightening through education.  Unfortunately the typical man today fears the unknown more than his familiar, sad existence under fiat money.  Nevertheless, showing him how greater choice and self-reliance lead to a better life in the long-run is our winning approach.  Education is our best weapon.

Orphans’ heroes eventually succeed, though not exactly in the way their ship’s designers intended.  The book’s final scenes are incredibly moving, as the characters experience viscerally just what it means to confront the bewildering, dizzying unknown and struggle to gain a psychological foothold.

As gold’s standard-bearers our obstacle course is different, but it also can be completed, especially since we have the advantage of history as our guide.  Let us keep up the fight.  Following in Heinlein’s footsteps, Spider Robinson had one of his characters sing some memorable lines about encouraging oneself in a great undertaking:

It would not be so lonely to die if I knew
I had died on the way to the stars.

May each of us, long-time hard money booster or new student, not only maintain our optimism, but also, more importantly, fear nothing.

Filed Under: Publius

Should We Welcome or Mistrust a Surrender by Monetary Authorities?

April 9, 2012 by The Gold Standard Institute International

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As many citizens struggle to re-learn gold’s importance, what are the monetary experts – who never forgot gold’s power – doing to preserve and maximize their advantage?  I am referring, without intended irony, to central bankers.  Can we predict their next moves?

Short-term fluctuations in the dollar/gold exchange rate are of little interest to holders of the physical metal itself.  And I take it for granted that the expected long-term exchange rate is a meaningless number, as the fiat dollar will eventually cease to exist.  By contrast, if the course of the dollar/gold exchange rate over the medium term (1-3 years) can be projected, this is valuable to investors and crusaders alike.

Monetary science cannot determine a demonstrably correct exchange rate value.  We can, however, take a central banker’s perspective, and see where the thought experiment leads.  After limiting gold convertibility in 1933, and abandoning any formal gold link in 1971, is there anywhere left for governments to run?  Their unconditional surrender, and a return to gold and silver as the sole constitutional money, would appear the only logical next step.  Or is it?

The dollar/gold exchange rate was re-valued in gold’s favor after ’33 and ’71.  Whether the full extent of the debasement of the dollar in each case was properly reflected is not immediately relevant.  Both times, the amount of the revaluation was sufficient to avoid the need to return to gold and silver as circulating currency.  Would a third dollar de-valuation, combined with some sort of formal re-linking to gold, do the trick again?

I used to assign a low probability to a third dollar de-valuation as central bank strategy, as it seems the process would be too difficult for authorities to neatly manage.  A recent Jim Rickards interview made me alter my estimates.  He explained how, despite appearances, America was essentially the only nation with a Plan B for coping with the monetary crisis.   The rest of the world is at the mercy of the US.

Rickards was referring to other nations’ gold reserves stored on US soil.  It would be easy for Washington to declare a global monetary emergency, “temporarily” take ownership of foreign governments’ metal, and thereby double America’s de facto gold holdings overnight.  If reported figures are accurate, the total amount would be over 16,000 tons, or roughly 10% of all above ground gold, including jewelry.   It might then be possible for the US Treasury / Fed to defend a new dollar/gold exchange rate.

America could thus stabilize the dollar domestically with some sort of convertibility, and dictate to the world how foreign-held dollars or dollar-denominated debts would be valued in gold ounces.  Alternately, America could neglect its own middle class and hand pick a new set of international allies with selective, favorable restructuring of its foreign debts, payable in gold.

The dollar/gold exchange rate required, whether $5,000 per ounce or $50,000, would be determined by an estimate of how much dollar debasement must be recognized and admitted in order to stabilize the financial system.  If domestic and/or foreign individuals are denied the convertibility privilege, either formally or by setting a 400 ounce bar as the minimum amount redeemable, the exchange rate could probably be set lower than otherwise necessary.

We can’t know whether dollar devaluation might buy global monetary stability for 10 years or 10 weeks.  Would returning to the sort of foreign-government-only dollar/gold convertibility prevailing from 1933-1971 roll back uncertainty sufficiently to allow the required global economic growth?  If economic catastrophe could be postponed by the half-measure of a partial surrender / ceasefire in governments’ war on gold, should citizens rejoice?

For the cause of freedom and individual rights, the side effects would be mixed at best.  Gold’s image as a critical part of the financial system can only be improved if its dollar exchange rate were to increase dramatically.  It would also help the reputation of gold’s intellectual advocates, and hard money promotional efforts should find better financing.  Finally, depending on how other asset class valuation levels adjust to gold’s new prominence, there might arise a whole class of suddenly wealthy investors.  Many of these individuals, no matter how boastful or modest, would become implicit ambassadors for gold.

On the negative side, however, there may be a loss of interest in questions of how the monetary system should operate.  People might think government had already admitted defeat and “returned to the gold standard”.  That the official re-introduction of gold into the financial system gave a mere figurehead role to the metal would likely escape notice.  And, as Robert Landis noted, if the fiat system collapsed totally a few years later, people may again be under the false impression that gold deserved the blame.

A worse aspect comes to mind.  Silver might not benefit from dollar de-valuation.  The Fed would likely prefer if silver actually lost ground on both an absolute and relative basis.  This would keep the idea of bimetallism out of the public imagination.  If bankers fear recognizing gold as money, they must really dread letting silver join it.  Silver coin circulating alongside gold, and once again becoming working wages, would recall a time when banks were unnecessary to a healthy, growing economy.

Overall, it saddens me to conclude, a partial surrender by central banks in their war with gold could be a step backwards for gold money advocates.


Publius
First published in January 2011 in ‘The Gold Standard’, the monthly journal of The Gold Standard Institute.

Filed Under: Gold and Silver, Popular Economics, Publius

Cash4Gold Means Gold for China?

March 8, 2012 by The Gold Standard Institute International

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Inflation is appearing in global food prices, arguably the main cause of recent Mid-East unrest. Economic shocks from the spreading revolution are further stressing the fiat currency system. Central banks may need to expand their interventionist activities yet again, or try an altogether different strategy.

Can we find clues to the timing of monetary authorities’ next major change in tactics? In my last article, I discussed the possibility of a partial retreat by central banks to a semi-convertible gold standard, and the implications for the future of honest money. What might be a logical trigger for such an event?

Today, most physical bullion is already in the hands of long-term holders. Between central banks, the world’s wealthiest families, and the upper-classes of nations such as India where multi-generational gold ownership/inheritance is common, very little metal remains available for large-scale accumulators.

China, Russia and other major nations seek to dramatically increase their official government holdings, yet the institutional market may not offer sufficient deliverable metal. Is there another potential source? Yes – the cash-for-gold industry.

Gold advocates might have mixed feelings about the new mail-in or store-front gold refinery services. While such companies highlight gold’s rising dollar price, and also subtly remind people gold is synonymous with liquid cash, they may ultimately harm the cause of honest money.

First, the positive message to would-be gold owners implicit in these firms’ very existence is distorted by astoundingly bad logic from financial commentators. Gold buyers are advertising regularly, including Cash4Gold’s famous 2009 Super Bowl spot. But perversely this is held up as evidence that gold’s gain in value (the US dollar’s decline) is reaching an end – as though private corporations offering to buy gold from the public were the same thing as the public itself queuing to purchase metal.

To be fair, there are also numerous ads selling gold to the public, often at extremely unfavorable rates. Whether the amounts being purchased by the public offset the actual weight collected by mail-in refineries is unclear, however.

Second, the wide dispersion of gold jewelry in western households can cushion the impact of an unplanned (panic) transition to gold and silver money. To the extent it has been extracted, leaving people with no immediate ability to feed themselves when fiat money fails, there will be additional barriers to a successful transition. A man with no food and no clear hope for improving circumstances has little to loose by rioting.

How much gold jewelry is available in North America for refiners? (I will ignore Europe and Asia, given the higher regard in which gold is held there.) An industry contact tells me the average household owns jewelry containing 0.75 ounces of gold. With 130 million households, that represents approximately 3,000 tons – a major source for potential accumulators. It would not surprise me if the Chinese government was the final buyer for all these mail-in services, or perhaps even the true behind-the-scenes operator of them.

How quickly is gold being extracted from the public? Cash4Gold’s 2010 purchase rate was reported as in excess of 1,700 ounces per day – still less than 15 tons per year. Even assuming Cash4Gold represents only 25% of the market, 60 tons is only a 2% depletion rate. This suggests a long delay before available physical gold truly runs out.

But we know it is a dynamic process. There is a profit to be made… immediately on the operating margins and long-term through appreciation of gold’s purchasing power. So, free market economics correctly dictates that cash-for-gold competitors will pile in until the market is totally saturated and the 3,000 ton resource is largely depleted. Or until the return of gold and silver as money. Where the tipping point might come depends on other circumstances in financial markets. But if, say, 1% of this reservoir had already been processed before 2010, and the current 2% annual rate of extraction doubles every year, fully one-third of this gold will be gone by the end of 2013.

Some interesting recent commentary has highlighted another major pool of available metal. The largest gold exchange traded fund, the SPDR Gold Trust (GLD-NYSE), may also be serving as a final 1,200 ton reservoir for institutional investors, who can source physical gold through the delivery mechanism available to big purchasers. If true, this pool will be drained much faster than North America’s aggregate household jewelry, because of the simplicity of the ETF’s operation. At that point, whether gold mail-in operations can sustain the fiat system will depend on the extent (and rate) of jewelry extraction then prevailing.

Or, more accurately, it will depend on whether the average citizen has awoken to the monetary properties of what little gold he still possesses.

Filed Under: Gold and Silver, Popular Economics, Publius

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