Returning money to a gold – silver standard within ten years
WASHINGTON, February 13, 2015 – It shouldn’t be too long now. It might be soon, if Greece’s new government and the rest of Europe end up going separate ways. It might be later and could be triggered by a number of different economic events.
But just like blowing up a balloon, that sneaky suspicion that the rubber of the balloon can only stretch so far will force us to make some decisions.
The only question will be one of timetable and initiative: On whose timetable will these decisions be made? At whose initiative? I believe it should be ours as neighbors.
So I’ll wrap up this now-seven part series by stating the following: I am not selling a newsletter. I am not recommending investments. I am simply proposing a political message for “rest of us.”
We want our money back.
No, we don’t want a refund on our taxes. As great as it would be if we could stick our current crop of politicians in the boxes they came in, throw in the RMA, and return them for a full refund, that isn’t even what we’re talking about. We’re talking about our money meaning something again. We’re talking about measuring our claim on our gold held on our behalf by the U.S. Treasury. We’re talking about identifying the new American “ruling class” (the “one percenters”) as the political and financial sectors who have presumed to lay claim to our money supply just as kings once did so they could go off and fight their stupid wars over things like who gets to appoint bishops.
We’ll have our money supply back, thank you very much.
But as a practical matter there has to be more than just a political message. We have to have an actual solution. Libertarian rhetoric, in particular, has been calling for “sound money” for some time. But it has not presented a viable path toward this end. I will try to remedy that here. Thus this will be the most “technical” of the installments in this series, and I will have to again plead for your patience… So coffee up, return your seat to an upright position, and tighten your seatbelt…
There are two problems with returning to a gold standard: inflation and deflation. If we take the current “base” of the money supply and compare it with the amount of gold owned by the Treasury, gold would have to be pegged at somewhere around $3,500/oz. Prices for everything else would immediately spike in such a way as to wipe out the savings of ordinary people. Retirees on fixed incomes would be hit the hardest. If, on the other hand, we were to try to return to the pre-1971 value of $35/oz., the money supply would have to contract dramatically. The resulting deflation would be devastating. The attempt to return to an unrealistically low gold price is largely what caused the first Great Depression.
We avoid this by using a different commodity set as our starting point: oil and natural gas.
It is interesting that the timing of the end of this series comes as gas prices have tumbled, due in part (and only in part – geopolitical issues with respect to Russia and the Ukraine are playing an important but behind-the-scenes role) to advances in geological imaging and drilling.
Now when I mentioned oil and natural gas, you probably thought “fracking.” In today’s low price environment, it is very important to understand exactly what is happening in the energy sector. “Fracking” is nothing new, and is not even where the real improvements have been made in oil and natural gas production. Today oil producers are using the geological equivalent of an MRI to identify shale fields under our feet.
The days of “dry holes” – where a well is dug in the failed hopes of finding oil – are pretty much over. And then if you have played a video game on your smart phone, directing the game by turning the phone itself from side to side, forward and back, you have used an “accelerometer.” The same technology is now at the drill bit. As the drill bit sinks into the shale formation, the accelerometer allows the drill operator to turn the bit horizontally, exposing a far greater amount of the formation than before. The geological MRI is what tells them when and how to turn the drill bit.
We have dramatically increased our oil and natural gas production with these improvements. But we are only getting – and this is the real point here – about 10% of the recoverable oil from these shale formations with today’s “fracking” technology.
There has already been a tremendous amount of new wealth created by the improvements in geological imaging and horizontal drilling. We have figured out how the “find” and “reach” the oil and gas. But there is still a tremendous amount of improvement to be made – and thus new wealth – in actually “lifting” the oil and gas.
This new wealth is our way out. And here is how:
First we open federal land to oil and natural gas exploration. Second, we create a “government sponsored enterprise” (GSE) to collect royalties from this exploration. (GSE’s have gotten a bad name from the failures of Fannie Mae and Freddie Mac. But the idea itself can be used in other ways.) We protect the environment by structuring these royalties such that they start high and decrease as environmental protections are increased. The GSE is owned by the U.S. Treasury, which takes it “public” in a stock offering.
By going public, we are allowing the market to value the expected royalty revenue. This value becomes expressed in the price per share of the GSE. And then it gets really interesting:
Because of its vast experiment in creating new money (Quantitative Easing, or QE) the Federal Reserve has a massive amount of U.S. Treasury bonds on its balance sheet. If the Fed were to try to unwind this position by selling the bonds, the price of those bonds would collapse and interest rates would soar. It would be a replay of the subprime mortgage crisis where everyone was racing to sell and no one was buying – only there would be no one to come to the rescue.
But with the Treasury going public with equity in oil/gas royalties we now have something to swap. This would be a classic “equity for debt” swap. The Federal Reserve receives the equity in place of the debt. The Fed then can sell that equity on the open market, take the cash it receives for it and make that money “disappear” exactly as it was made to “appear” in the first place (QE). The advantage here is that the Fed can sell the equity in whatever amount it wants to gradually soak up the excess money in the system. And it can do so without destroying the bond market – pricing for which is benchmarked on the ten year Treasury note.
But the implications of this equity for debt swap are much more sweeping: It essentially reflects a “monetization” of our oil and natural gas resources to a degree set by the market as it values the future royalties. It thus reintroduces us to the idea of money that is tied to something real – starting out with oil and natural gas. An initial five year plan to monetize our oil and gas resources then tells us what needs to be done with gold and silver over the subsequent five years.
Remember that we have to start with the base money supply as it stands today. If we try to go back to a gold price of $35/oz. (which would imply a silver price of about $2.33/oz. since the historic ratio between gold and silver has been 15:1) the money supply would have to be “deflated” drastically and would simply replay all of the mistakes that caused the Great Depression. If we simply revalue gold to account for the base money supply, the resulting inflation will destroy the savings of the poor and middle class and exponentially increase the problem of income inequality.
Yet if we monetize oil and gas resources over the first five years, we then have the market-provided information necessary to know what to do over the next five years. We can use open market sales of oil/gas royalty equity to calibrate the money supply as we reintroduce a gold-and-silver standard (as we had before the Civil War). After ten years we will be left with a money supply that is restrained by our gold and silver reserves as well as by market-predicted royalties for the sale of oil and gas lifted from federally owned land.
And our dollar will be a unit of measure again – it will measure our claim to our gold and silver, held by the Treasury on our behalf, and to oil/gas royalties from land owned on our behalf. We will have our money back.
And these natural restraints will then enforce a preference for objectively productive uses of that money. Those objectively productive uses – along with the wealth and jobs they create – will crowd out excessive government spending (politically preferred uses) and excessive speculation.
But this has to start with a fundamental understanding on the part of us as neighbors. We have to know what our money used to mean. We have to understand how and why it has been confiscated from us. And we have to know by whom – the financial sector profits handsomely from their control of the money supply and then shovels some of that newly minted money to the political sector in the form of campaign cash. And the politicians are quite happy to allow the money printing to continue.
And as the run-up to the 2016 presidential campaign begins we have to have a message: We want our money back.