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Welcome to USAGOLD's "Gilded Opinion" pages. We invite you to browse our index of outstanding gold-based commentary.
Monetary Systems & Productive
Assets
by Professor von Braun
December 10th, 2007
Many commentaries currently
remain focused on any one of a number of issues -- the subprime
crisis, the liquidity crisis, the dollar crisis or the potential
for massive defaults within the banking system itself or from
other counterparty players. Few seem to be focused on what's really
at stake here.
Several years ago an Australian company introduced a non-alcoholic
whisky called Claytons. It was advertised as the whisky you have
when you are not having a whisky, but the idea of a whisky drinker
drinking a whisky that is not a whisky always seemed quite strange,
but stranger things have been known to happen.
Take the monetary system for instance. Currently on a global basis
we have a plethora of fiat currencies, none of which have the
ability to provide for settlement by the central
banking systems themselves. Traditionally, official settlement
of trade imbalances between countries was made in gold. The US
dollar was, in 1944, nominated by Central Bankers as the official
global reserve currency because it could be redeemed for gold
and therefore, so the rhetoric went, holding dollars meant that
other central banks held reserves that were as good as gold.
That concept went out the window with President Nixon's
closing of the gold window on August 15, 1971 and since that time
we have had what is at best described as a monetary system you
have when you don't have a monetary system. The Clayton drinkers
would understand. Since then we have seen the introduction of
the Euro, which seems to be a case of 'if you can't beat them
join them', as in an imitation of the US non-redeemable monetary
system and the expansion of the Japanese banking system by way
of increased liquidity ie: increasing debt levels, into
the banking system.
The US appears to have the advantage over the other players
in this game since they started it and all the other players that
followed suit are stuck with the dollar as a reserve, which in
and of itself may be problematic. If so, whose problem actually
is it?
We hear about the central bankers increasing liquidity and yet
nobody seems to ask the question as to what exactly is liquidity?
Liquidity must come from capital and that capital must be directly
connected to a neutral item, which is why gold was and still is
the ultimate form of settlement. Settlement means the completion
of a transaction and transactions that are "settled"
with debt are not settled transactions at all. They are increased
liabilities.
Under the Claytons look-alike the global monetary systems have
no means to settle anything and therein lies the problem with
most commentaries about economics. To read about China talking
about holding Euros instead of dollars, or for Iran wanting to
be paid in Euros is a joke. Changing the name of rain will not
remove the inherent capacity of falling water to make you wet!
International trade has been going on for thousands of years and
the principle of that trade is essentially the bartering of goods.
Whatever the goods are they are best described as commodities,
and gold's traditional role has been as the ultimate form of settlement
-- of being widely accepted and completing a transaction.
Societies as we know them are dependant upon several key ingredients
for their existence and for the ongoing maintenance of that existence.
Obviously food and shelter are essential but the basic ingredients
are the metals. Without them things tend not to work as well and
modern conveniences are all dependent upon them. In addition,
for societies to maintain themselves, a prudent and inherently
transparent banking system is a necessary ingredient.
What we have seen over the last 75 years or so, since President
Roosevelt confiscated the gold owned by citizens of the United
States and led the US down the New Deal road, (a road it is still
on), is a decrease in the recognition that banking systems, to
actually work successfully, need to maintain asset liquidity.
In the monograph "Liquidity" by Melchior Palyi,
published by CMRE (www.cmre.org),
Mr. Palyi points out that every banking crisis dating back to
the recurrent waves of Venetian bank failures in the sixteenth
century had the same ingredient: "the wholesale liquidation
of debts was the focal point, said debts bought about by a credit
expansion along non-commercial lines, financing long-term loans,
speculative ventures and governmental expenditures on a substantial
scale."
Real estate is of course a non-producing asset and as such is
not a commercial proposition. By commercial I mean that the return
of capital is, at the very least, likely to occur.
Roosevelt effectively removed the notion of the return of capital
from the US society by confiscating the capital and substituted
a system that was dependent not upon the good judgment of its
citizens but rather was dependent upon the introduction of irredeemable
bank notes which were themselves dependent for their ongoing existence
upon the necessity to inflate the apparent value
of non-productive assets such as housing.
Now what we have globally are central banks operating monetary
systems that have little or no asset liquidity available to them.
The global monetary system is dependent upon the continued acceptance
of US dollar denominated debt which, on a larger scale, has little
chance of ever being redeemed for anything that remotely resembles
a tangible, widely accepted liquid asset.
The issuance of debt does not provide liquidity!
It may well be that the continuing asset inflation game that effectively
commenced under Roosevelt and the New Deal is in its final innings
and that the housing debacle that's unfolding will be the straw
that breaks the camel's back. But what would the outcome be?
Perhaps it boils down to two players, as of course do most games.
And in this case it's a classic "us versus them" type
of situation. It's the US central banking system versus all other
central banking systems. As the other CB's are predominately holding
US paper as "reserves" and the US continues to issue
more and more of these "reserves", and while the commercial
banking systems globally seem determined to compete with the principle
of debt issuance for productivity gains, and while officially
there is no neutral component that is required, I suspect it may
well be not the outcome most people are currently commentating
on.
The other CB's are NOT able to dispose of their US denominated
reserves as there is no one else to dispose of them to, so they
are at a disadvantage to the US. The offset to that is that the
once famous and much heralded US consumer is about tapped out.
The internal US banking system along with its investment banks
and mortgage issuers, has gone where no man or banking system
has gone before (other than a handful of pirates, rogue dictators
and some over-zealous colonial powers) and that is they have raped
and pillaged their own population to the degree that their ability
to eat the debt required to fund consumption has far exceeded
their ability to be productive and repay that debt. The sheep
have been shorn one time too many and now their individual treasure
chests are about to be seen for what they are. Empty! No more
can the illusion of wealth be created by the artificial inflation
of house prices and paper assets. The emphasis on the individual's
home equity may well become a thing of the past.
The repercussions of there being no more wool will have some interesting
ramifications, not the least being the shortage of capital to
facilitate the extension of credit, and we are beginning to see
this in the interbank lending markets. Real asset liquidity is
not there which is why banks won't lend to each other. They know
what the others are holding by virtue of their own undisclosed
holdings and their strong suspicions that the other party is holding
similar liabilities. There are few markets it seems for CDO's,
SIV's or any other 3 or 4 letter financial package.
So what does that leave the individual investor by way of a safety
net? We need to remember that the banking system is an imposition,
something that has been imposed upon an already existing system
of global trade. That system is alive and well and the traditional
means of settlement, gold, currently, can be purchased at will.
All the metals can be purchased but as I have written about before
one needs to take delivery of the product rather than leave it
in the hands of the magicians.
In addition those who intend to remain residing in the US need
to look closely at obtaining productive assets or assets that
have the potential to be productive, and by productive I mean
generate the production of commodities that will provide both
cashflow and a return on capital.
The venerable Richard Russell (www.dowtheoryletters.com) sums it up when
he says, "the winners in a bear market are those who lose
the least." The unfolding debacle is likely to be not
your run of the mill bear market as earlier debacles have not
suffered from a global shortage of asset liquidity and dubious
reserves within the world's banking systems.
"How liquid are your assets?" should be THE question
that's on the minds of all investors.
The Prof can be contacted by email at profvonb2@aol.com
Copyright by Professor von Braun. All Rights Reserved. Reprinted at USAGOLD by permission.
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