The death of paper money & the reemergence of a global gold standard

In the years ahead we will witness the death of paper money and the reemergence of a global gold standard. This article examines why this transition is inevitable, how it might occur, and how to protect yourself from it.

Why a return to some form of global gold standard is inevitable

In the coming months and years governments around the world will do everything in their power to prevent a global depression. They will do this by printing massive amounts of new money and pushing it out into the global economy – something which will result in a collapse in the value of paper money.

Eventually, as their actions fail to produce lasting economic growth, people will lose faith in governments’ ability to resolve the crisis. Crucially they will also begin to lose faith in the paper money these governments issue, and ultimately it is this loss of faith in what is essentially worthless money that will necessitate our return to a gold standard.

This is the first time in history that no currency on the planet is backed by anything tangible, they are all fiat. History teaches us that fiat (paper) currencies do not stand the test of time. They have been tried many times before but every fiat currency since the time of the Romans has ended in devaluation, hyperinflation and eventually, collapse. In fact, there have been 34 instances of hyperinflation in the last 100 years alone, the majority of which took place in the 20th century with fiat currencies.

Four scenarios for returning to a gold standard

In his excellent new book, ‘The Golden Revolution: How to Prepare for the Coming Global Gold Standard’, John Butler states that a, “currency can only function as such if there is a general consensus that it provides a stable store of value. Without this trust, money, no matter what form it takes, will be abandoned – either suddenly in a crisis, or gradually over time – in favour of something else.”

Mr Butler also makes the case that, “the world is rapidly moving toward some form of global metallic standard, in which money, at least in official, international transactions, is linked directly to gold, silver, or both”.

In his book, Mr Butler, who was a Managing Director at Lehman Brothers, Deutsche Bank and Dresdner Bank, lays out four scenarios for returning to a gold standard.

Scenario one

In the first scenario Russia suddenly announces its intention to return to a gold-back currency. This was a scenario which was originally put forward by Jim Rickards, author of Currency Wars: The Making of the Next Global Crisis, during a war-game exercise at the US Department of Defence.

In this scenario Russia’s return to a gold standard is motivated by the desire to improve its global economic position, as well as the desire to inflict economic harm on the United States due to a disagreement over its foreign policy.

A gold-backed ruble would become a threat to the US dollar, since for the first time in over 40 years investors around the world would have the choice between holding unbacked US dollars issued by a country with almost $16 trillion in public debt, a $1.3 trillion annual budget deficit, and a massive looming entitlement problem, or holding a currency backed by gold.

Even if investors were only to diversify a small percentage of their capital out of US dollars it would cause serious problems for the United States, which brings us to the next scenario.

Scenario two

In the second scenario the United States pre-empts such a move by Russia, or some other country, and takes steps to return to a gold-backed dollar. This move would require a massive change in fiscal and monetary policy, as well as a considerable adjustment in the political process. It would also require a programme of education so that American citizens understood why it was necessary.

Scenario three

In the third scenario the BRIC countries club together and form a new currency block that is backed by gold. This scenario is similar to the first one, however this time Russia gets together with Brazil, India and China to form a new currency block which is backed by gold from all four countries.

Again this scenario might not be as far fetched as it seems since all four countries have recently expressed their concern about US foreign policy, and their combined gold reserves would be the fourth largest in the world behind the US, Germany and the IMF.

Scenario four

In the fourth scenario the financial markets, in particular the gold vigilantes, force one or more governments to back their currencies with gold. In this scenario investors continue to do what they have been doing for the past 12 years, only on a much larger scale. I.e. Rather than holding rapidly devaluing paper currencies, they instead opt to hold (and transact in) gold.

The behaviour of these investors is not dissimilar to that of the bond investors during the 1970s. These so-called bond vigilantes forced the US government to reign in its profligate spending (and hence inflation) by demanding higher returns for holding US debt.

The gold vigilantes may eventually force the US, or some other country, to return to a currency backed by gold. This would mean that the currency could not be issued without limit – something which would help restore faith in it.

No one should underestimate the impact a return to a gold standard will have. As Mr Butler puts it, “The practical reality of the transition to the coming global gold (or bimetallic) standard is going to be substantially different from the global fiat monetary and financial regime of today. It is not just money that is going to change. The nature and business of banking will also be affected, as will finance in general.”

The bottom line

Those that stand to lose the most from the coming paper money collapse, are those that don’t see it coming and therefore remain holding paper currencies even as rising inflation eats into their value. Anecdotal evidence from inflationary episodes in countries such as Argentina and Brazil suggest that most people don’t take steps to protect their wealth from inflation until it reaches as high as 50%.

The big winners in this transition from faith-based money to gold-backed money will be the early adopters. I.e. those that make the transition before a large part of their wealth has been eroded by inflation.

  1. Before gold could ever make for an efficient and liquid currency, it had to be “de-pegged” from any fixed value. There simply isn’t enough of it for a FIXED pegged system so consistent with market law, the trade value has to be reflected in real-time. That took place in 1971 when the fixed peg of $35 USD/oz was abolished. Nice work even if nobody does see the logic. The challenge from there was to find a simple and convenient way of “splitting the enhanced weighted value” as the fiat price of gold was set free and allowed to rise. In the mid 1990′s payment processors started to show up in the market that dealt with the transfer of 100% gold backed currency, not gold backed dollars or gold backed fiat currency but gold backed weight which essentially meant the transfer of gold ownership title by way of electronic transfer. All gold payments are denominated by weight, although these payments can be measured out by using fiat currency (in real-time) or by selecting a simple weight. Classical bullion store properties have now married with real-time liquidity with the click of a mouse. The great wedding is at hand in the information age. You cannot pour new wine into old wineskins …. so true.

    • There is plenty of gold. It’s the price that needs to change. At approximately $10,000 per ounce gold will have the same relationship to total international reserves as it did in the 1980′s.

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  4. Whether or not you believe that we will one day return to some form of gold standard, depends to a large degree on whether you believe that fiat (paper) money lies at the root of the current economic busts.

    My contention is that it does. Money should perform three roles: First it must act as a medium of exchange, second it should act as a unit of account, and lastly it should provide a store of value. The problem with fiat money is that it can be printed without limit, and therefore it doesn’t provide a good long-term store of value.

    For example, since the formation of the Federal Reserve in 1913 the US dollar has lost 96% of its value, since 1980 it has lost nearly 64% of its value.

    To my mind there is a clear link between fiat money, the supply of money and credit (see debt supercycle), and the huge boom and bust we are now experiencing. This process is best described by the Austrian theory of the business cycle.

    Returning to sound money, i.e. money that is backed by gold or a basket of commodities, isn’t the whole solution, but it is a large part of it. Another part of the solution involves moving away from fractional reserve banking to full reserve banking.

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  6. Together with almost everything that seems to be developing within this particular area, many of your perspectives tend to be rather exciting. Having said that, I am sorry, because I do not give credence to your entire theory, all be it refreshing none the less. It looks to me that your commentary are not completely validated and in simple fact you are generally yourself not even completely certain of the point. In any case I did take pleasure in examining it.

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