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To argue with
Ambrose Evans-Pritchard is risky. He is well-informed,
he has travelled much, writes well and has a sharp intellect. Yet, I must affirm
that he is mistaken in some of the opinions expressed in his recent article
at “The Telegraph” www.telegraph.co.uk “A new Gold
Standard is being born” January 17, 2013.
In the
article he refers to the “(old) Gold Standard dynamic at work with all
its destructive power, and the risk of sudden ruptures always present.”
I take it
that he refers to the pre-WW I Gold Standard, and the financial chaos that
broke out in 1930, to which he refers as “the destructive power”
of the Gold Standard. That chaos should not be attributed to the Gold
Standard as it existed, but to the previous expansion of credit in violation
of the rules of the Gold Standard. The pain of the 1930’s was the
correction which the Gold Standard imposed upon the financial diddling with
credit expansion which the Powers had adopted; what was
“destructive” was their policy of credit expansion beyond
savings. If you stick your finger in the fire, don’t blame fire for its
“destructive power”; just refrain from doing that.
Ambrose
writes: “The global system is supple. It bends to pressures.”
Actually,
there is no “global system”. There is at present only a global process.
A system has,
by definition, parameters. A system is like a billiard-table with no
pockets. The parameters are the boundaries of the table beyond which the
billiard balls cannot move. The parameters of a system ensure its stability
and endurance through time.
A process, on
the other hand, has a beginning, a mid-point and an end, like cooking a
steak, or like a fire-cracker. You light a fire-cracker; then you have the
explosion as the powder ignites instantaneously. The process ends when the
exploding gases collapse. A process does not endure.
From Bretton
Woods (1944) to 1971 the world had a system, albeit a defective and fragile system.
There was a parameter which could not be violated: the US solemnly promised
to redeem dollars held by foreign central banks for gold at the rate of $35
dollars per ounce. That was a system that held world credit expansion down to
a modest rate up until 1971, when Nixon decided to renege on the promise. See graph of “International
Central Banks, excluding gold”.
Since 1971,
there is no “monetary system” for the very simple reason that there
is no longer any parameter to credit expansion.
What we have
had since 1971 is an explosive process of credit creation in the world. Total
world debt is calculated to be 350% of world GNP.
The explosion
– like the explosion of a fire-cracker – is now entering its
collapse phase. There is no way to avoid the collapse: world debt of 350% of
world GNP is unsustainable. There is absolutely no way out of this. The world
has not put just a finger in the fire. It has put its whole body in the fire.
The pain of the coming collapse will be ghastly.
It will be
educational to see how those responsible for the present disaster explain
away the cause: unlimited world credit expansion.
Ambrose
praises the global “system”: “The global system is supple.
It bends to pressures.” Yes indeed, it does “bend to
pressures” – another way of saying that there exist no
parameters, and that what we have is an explosive process of credit creation,
not a system. We shall learn in the near future, that the process of collapse
of credit has “destructive power” in spades.
Ambrose
guesses about the nature of “any new Gold Standard”. He says gold
“will take its place as a third reserve currency”, but “not
so dominant that it hitches our collective destinies to the inflationary ups
[…..] and downs of global mine supply. That
would indeed be a return to a barbarous relic.” In other words:
“Yes but No; the world will muddle through, somehow”.
The global
mine supply that Ambrose mentions is a negligible factor with regard to the
value of gold. If mine supply should double, or if mine supply should
disappear completely, the effect upon the price of gold would be
imperceptible. Ambrose is not aware that the world supply of gold is not just
what comes from mines annually, but somewhere in the region of 170,000 tonnes, because all the gold ever mined – except
what has sunk to the bottom of the sea in shipwrecks or what remains hidden
in buried treasures – has an owner and is potential supply.
The ratio of
stocks to gold-production is the lowest of any commodity. Mine production of
about 2,400 tonnes per annum is about 1.5% of total
supply. It would take some 67 years at the current rate of gold production,
to double the world’s supply. Compare with copper: the above-ground
supply of copper is about three month’s of
copper consumption. The price of copper is very susceptible to changes in
supply and demand. Gold is the paragon of stability.
Ambrose
closes by saying: “Let us have three world currencies, a tripod with a
golden leg. It might even be stable.”
Ambrose
waffles. He is in favor of a Gold Standard, as long as it does not interfere
with credit expansion, by means of which modern states pretend that they are
Welfare States until they go broke and people riot in the streets.
You
can’t have it both ways, Ambrose! The world will either establish a
gold standard and immediate settlement of trade in gold, or it won’t.
And if the world does not get a gold standard, then we can kiss industrial
civilization good-bye.
I realize
that putting things in such drastic terms goes against the British aesthetic
which regards clarity as boorish and as evidence of a lack of suitable
education. But with regard to gold, it is not possible to “muddle
through” as the Brits put it.
Gold is so
highly prized in the real world (uninhabited by Keynesian economists,
financial oligarchs and lapdog politicians) that it will never, ever function
as a world currency, as long as other fiat currencies exist, for the simple
reason that no one in his right mind will want to use gold for payment, if he
has any other means at hand with which to pay a debt or settle a transaction.
Gresham the Brit dixit.
Gold will not
be used as money until some nuclear power that is seller of essential goods
demands payment exclusively in gold, and other lesser powers fall in line. In
the meantime, gold is doing and will go on doing what it did when the Roman
Empire entered its decline, and what it did during the French “Assignat” follies (1790 – 1797): it is going
into hiding.
If the French
experience with gold during the French Revolution is any guide, we have yet
to see the last spasms of desperation of the big powers: persecutions,
confiscations, executions, imprisonment of anyone holding gold. When the dust
settles, as it must, I think we shall see an un-democratic world run by
military men, among whom the most enlightened may perhaps opt for gold and
silver as money, and have done with such nonsense as “suppleness and
bending to pressure”.
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