Monetary Disorder and the Role of Gold
August 24th to August 31st
The debt taken on by the US government has reached huge proportion, thanks to the scrapping of Bretton Woods system (wherein the US dollar was backed by gold) and printing of the money by the central bank. Government debt is the basis for the fiat money. Servicing it may be the reason why interest rates might have been kept artificially low. Unfortunately this debt is also held by banks. Hence bank deposits may no longer be risk-free. The current monetary system is failing and needs to be reformed. This is the prime message of Louis Boulanger’s Presentation hosted at the speaker events 0rganized by IAIP in various cities in India (Mumbai, Delhi, Hyderabad & Kolkata) from August 24th to August 31st. Members turned out in numbers. The event also qualifies for 1 CE credit.
Louis discussed on (1) Money – its origins & the role of the state, (2) Gold – on why it is money & nothing else, (3) Crisis – nature, fiat abuse, currency wars, predicament and (4) Bullion – demystifying it.
Citing Carl Menger’s essay in 1892 Louis said that money as a concept started as a social practice. It was naturally discovered by man that gold was the best medium of exchange for buying and selling goods because of its saleableness. It was a reliable unit of measure of value and so was considered a good store of value as well. The role of state came in much later through state recognition of gold as money & regulations, minting of coins and so on.
When paper money was introduced it was backed by equivalent quantity of gold or silver. Louis compared the one US Dollar note in the first half of 1900s and now. Earlier words like certificate, backed by Silver, are no more written over it. The linkage between physical gold and paper money has long been broken. In 1971 President Nixon unilaterally declared the US dollars owned by foreign states were no longer redeemable in gold; thereby ending gold exchange standard set in 1944 in Bretton Woods.
Thomas Jefferson, the third President of the USA, had in his time already warned the government not to allow private (central) banks to issue currencies (print money). That warning has been ignored and the government debt has ballooned. It took 191 years for the US government debt to cross the first $1.0trillion (between 1791 to 1982). When G W Bush took over as President the debt stood at $5.7tr. When Obama took charge the debt stood at $10.6tr. The current debt stands at $16.0tr. The US government raised the debt ceiling by $2.4tr (93rd time it was increased) between August 2011 to January 2012. Government Debt is the basis for the fiat money. Unfortunately government bonds may no longer be able to carry “risk-free” status.
Amidst the current monetary disorder Louis explained the role of gold. Alan Greenspan in 1999 had told that “Gold still represents the ultimate form of payment in the world. It is always accepted”. Gold is nobody’s liability. It doesn’t have counterparty risk. It is the only commodity produced for accumulation. It has lowest diminishing marginal utility of all goods produced. It cannot be debased by creating it, the way Governments do with all their currencies today. In a negative real interest rate environment its price increases.
With central banks turning net buyers of gold, Louis leaves us with an important question “Is the return of gold standards likely in the foreseeable future?”
Whatever be the case “Money” needs to be reformed!
About the speaker:
Louis Boulanger, CFA, is the founder and director of LB Now Ltd. in Auckland, New Zealand. His firm specializes in private wealth management and also helps investment firms in the Asia Pacific region come into compliance with the Global Investment Performance Standards (GIPS). Previously he was an Executive Director of Mercer Investment Consulting, where he was responsible for the strategic asset allocation advice given to institutional clients.
Louis is the founding President of the CFA Society of New Zealand. He has participated actively in the ongoing development of GIPS and is currently serving a two year term as GIPS Council Chair. He holds a BSc from Laval University in Canada and is a fellow of both the Canadian Institute of Actuaries and the New Zealand Society of Actuaries.
Contribution by: Chetan Shah, CFA, IAIP Volunteer
Photographs by: Santosh Samal