Dreams of the Gold Standard

June 24, 2011

by Linda Brady Traynham

We all have daydreams that aren’t going to come true, ranging from fanciful ones like trying to talk my dear Charles into riding shirtless ten or fifteen minutes a day until he is a rich, mahogany brown so I could photograph a Texas version of my Duke emulating Vladimir Putin, racing down a mountainside like a centaur, his AK-47 held as though it had grown from his right hand, his face alive with sheer animal joy, still brawny bare chest making the Babushkas’ hearts go pit-a-pat. Charles declined, and on his head be it if I start having fantasies about Vladimir. One more appropriate for this site is the dream of a gold-backed currency. I’d do better imaginaing Vladimir coming to visit and riding my horses because it is vaguely possible that could happen. Or buying a tanning bed. A Gold Standard cannot happen under the current political regime, and it couldn’t happen if we threw all the rascals out, rescinded or repealed every law and regulation written since 1913, and elected someone as sensible as I am Empress of the Twin Universes. The story of mankind is colonization, stabilization, rise, empire, decay, fall, dark ages, and repeat–and we’re approaching the fall, having spent ourselves into penury and been regulated into near helplessness. If they are more careful than they have been thus far and lucky the future belongs to BRIC…although I consider worldwide depression and famine more likely.

The political impossibilities are quite enough since overturning the Fed would require revolution a doubtless unpleasant way to change the monetary system. More to the point, we cannot go back on a gold standard because far too much fiat currency has been created, we hold too little gold, and we have far too many debts. If we go look we’ve still got some gold in the ground, but even that isn’t a permanent solution, as Spain discovered when treasures ships in profusion arrived from the new world. Ironically enough, gold and silver themselves in over-abundance functioned exactly the same way today’s Bernankes ($100 bills) do: too much money chasing too few goods. The Fed doesn’t even know how much increasingly useless paper is floating around out there! It is anyone’s guess if there is actually gold stored in Fort Knox. For the purposes of demonstration, and not counting what it would cost to mint those purported gold bricks into coins, let us stipulate that the USA holds…it really doesn’t matter; as Congress said, “Think of a really big number.”–ten million ounces of gold. If we stipulate fancifully that there are only five trillion dollars in USA currency extant, what will an ounce of gold be “worth” in a forced domestic trade? What about gold in private hands, either as coins or jewelry? Do we count that? It doesn’t matter. Go get your calculator if you must and figure out what the exchange rate would have to be to collect all the dirty, worthless paper with little silk threads in it and exchange them for thin disks of gold and silver.

THEN what do we do about our foreign creditors? They are going to want gold for their USD, and they aren’t going to like the exchange rate. Neither would you and I! If it were set at $5,000/ounce, and you make $90K, your new salary would be an ounce and a half of gold a month–and not only would it be a nightmare trying to pay your bills (for two reasons) but the logistics would be disastrous. What could be done about the trillions of “entitlements?” Even by debasing the currency in the swap from USD to gold governments would not make enough to pay the bills. We have already established that if every cent the top 10% makes or has were confiscated it wouldn’t be enough to cover current expenditures and no force short of barbarians through the gates has ever caused governments to reduce expenditures more than very briefly. Bernanke has managed to hold the interest rate at incredible lows for some years, but he isn’t going to be able to do so forever. I’m still astounded he took a second term; a less rash man would have sidled gently out from under. Real disaster would be refinancing at 5-7%.

It doesn’t even help if new currency is issued and exchanged (at great expense) because paper money is only more convenient to carry around. It has no intrinsic value, and we’re back to the “full faith and credit” that the issuing body will actually hand us an ounce of gold in return for the correct paper receipt. Amazing what can be done with paper currency. I still have some silver certificates (worth more as curiosities than they are in silver), and some left over from Hawaii during WWIII which are stamped in red stating that they can only be spent in the Islands, not taken back to the mainland. In theory that was to keep Japanese counterfeit confined to Hawaii, but who knows.

Chuckle…I had a long conversation with a landman today finalizing paperwork so that an oil lease can be activated. She was gleeful over having sold her SLV at $45, as well she might be. Letters of credit and cashier’s cheques are very useful for transporting large sums. In theory, so are digital transfers, but I always wonder what would happen if your electronic money just…disappeared. I had an interesting case about six months ago when I used an on-line form to send about seven thousand dollars, and discovered several months later that the firm had not done what it had been paid to do. They insisted they hadn’t been paid, the computer insisted they had, and the sole saving grace was that my bank agreed the money had not been withdrawn.

I agree completely with all the reasons we should not be using funny money; it is unconstitutional, it permits the “creation” of money and accumulating enormous debts, it is resented increasingly by other nations, it makes possible a culture of “entitlement,” it allows manipulation of figures to present long-term costs as less than they ever turn out to be, it tends to promulgate trade deficits, it can be counterfeited, and so forth. We still cannot go back. It is not possible politically, and an attempt would be roughly like pulling down every dwelling in America and building yurts and cliff dwellings.

I have noted that more and more professionals advice holding cash because stocks and bonds (as purchased by most) are too dangerous, although an expert I usually consider extremely sound is talking about getting back into bonds. Umm…no. Can’t buy that one; a bond is a promise of future payment, not COH. In case of default or the dollar losing the status of the world’s currency reserve, green backs will retain some value perhaps a month, but redeeming bonds will be impossible for anyone without serious connections in international banking.

There aren’t any good solutions, including having every nation on earth agree (hysterical laughter) to default at once. Default on what? What we owe each other? Insane promises the US has made to foreign nations? Disastrous promises made to citizens for political reasons? How do we stop and start over? Will we go through monetary musical chairs? There is no fiscal equivalent of the “no fault” divorce and bankruptcy only works if it gets rid of all debts and allows the person or entity to start clean with basic housing and the ability to earn living expenses.

I knew I should have written about Coronal Mass Ejections! A nice little article on man-made and “act of God” EMP, talking about solar cycles , discussing claims that “a severe solar storm would be much worse than a 9.0 magnitude quake and could leave about two-thirds of the country’s nuclear plants without power for one to two years.” Gee, we could be having fun considering 130M people without power and how next year is the end of an eleven year cycle and we’re about due for the “once in a hundred years” storm. No need to worry; on average we have 18 hours from the time the sun belches an enormous bubble of highly charged gases that can travel up to six million miles an hour. Chances are we’ll do better solving that problem than wriggling out of the financial messes caused by corruption, vote-buying, deliberate waste, and pretty fairy tales that everyone can lead a nice, safe middle class life like the Cunninghams on “Happy Days.”

What we really want is a stable currency along with a stable interest rate, traditionally 4%. What are developing are panics, lengthy recessions, stagflation, and growing fright and anger. I pledged to think of something “nice” that could happen, and I can only think of two. First, I could be wrong. Who am I to think I know better than the self-proclaimed “best and brightest?” Well…to be brutally blunt, I think I’m a very nice lady who has had a long, pretty priveleged life who is concerned about the future and usually calls a pig a pig, although I do know how to concoct sentences such as, “As always, it is not the case that stochastic analysis can compensate for human variability.” Meaning that in a world of random chance and individuals anything could happen.

Second, supposing that nothing drastic occurs politically here or abroad, I think it probable that we have between seventeen and nineteen months during which we can do our best to improve our financial positions and make decisions. For the simple reason that what most of at least America is going to be doing during that time is arguing about politics. Mr. Obama has never gotten off the campaign trail and the pack has been in full bay after Sarah Palin long after the first Tuesday in November, 2008. Times are going to get harder and we’re going to look at our belts wondering where a big nail and a hammer are to punch new holes. My best guess for August 2nd is that the Republicans will geek and raise the debt limit without getting anything of value for that concession. Expect higher prices, lesser quantities and quality, and inspect “special” offers carefully. I have a card on my desk from the local Chrysler-Dodge-Jeep dealer. It exclaims they will provide a free alignment inspection and rotate tires for a mere $14.95. The offer includes rotating four tires (since most of you only have a donut), inspecting them, and measuring the tread depth. That’s nice. However, if you don’t pay whatever else they demand to balance those tires and align the front end you may end up worse off than you were before. Of course I believe in such services. It’s just that I’d go look and see if there were at least one little lead weight attached to one of those wheels afterwards. Buy a fifth tire, too. The dinky donut is only good for a few miles and you might be a long way from nowhere when you had a flat.

It won’t hurt you to make a concerted effort to reduce expenses, pay more attention to your trading, keep an eye on the world around you in terms of social behavior and what is bottoming, and do your best to be in far better financial shape a year and a half from now. That’s a short term goal and you can do it. If there is a miracle and we’re almost over the hump, you’ll be in better shape than most and have learned some useful skills. If not…you’ll have a long headstart on those who did nothing. By the way; Mr. Obama was right. Get yourself a tire gauge and learn how to use it. Pick up an inexpensive device that plugs in to what I think is a cigar lighter and politically correct cars call a port that will air up a tire. Funny how frequently small precautions keep minor trials from becoming major difficulties.

Linda Brady Traynham is a deeply disturbed Texas rancher and writes for The Mesh Report.