Following World Bank President Robert Zoellick's comments yesterday that Group-of-20 economies should evaluate using gold as a reference point for market expectations about inflation, deflation and currency values, gold broke through $1,400 an ounce confirming to bulls that the sky, for the glittering rock, is truly the limit.
Our friend Dennis Gartman includes the following chart in his morning letter today showing that the US monetary base is presently less than 20% backed by actual gold reserves, and around the level it has maintained over the past decade.
Nouriel Roubini points out that the deficit of gold reserves is in fact common to most of the world's central banks today, where financial leverage of 40 and 50 to 1 is the norm. Roubini maintains that a return to the gold standard today is really impossible, see Roubini: Here's why a gold standard won't work, to wit:
“…many who support a gold standard would say that limiting the ability of central banks to increase their leverage would be a benefit of adopting the gold standard.
Aside from the issue of central banks insufficient current gold reserves, there are the issues that historically plagued gold standard economies. One of the most intractable of those issues was the impact that the gold standard had on traditional business cycles.
… “When you had a traditional gold standard, boom and bust with severe swings in economic activity were the norm—really big ones. It was only once we moved to fiat money that central banks were able to smooth the business cycle, and make it less volatile, as we did during the financial economic crisis…”
Of course, it is reasonable to argue that the business cycles of the past decade have been anything but smooth, and there is no doubt that reckless leverage across households, banks and governments has been the root cause of our present crisis in the world economy. History does support the need for systemic control on spending and leverage, its just that physical gold is an even more impractical candidate today than it was in the 1800's when US banks used to pass around a shared bullion cart from vault to vault in order to fool the auditors who were coming to confirm the mandated reserves were held in each basement.
This is a global, complex mess we have got ourselves into. There is no quick fix. Endless waves of QE are a pathetic treatment aimed at stalling not curing the problems.
As Chinese analyst Andy Xie writes:
“The world is heading towards high inflation and political instability. It's only a matter of time before there is another global crisis. The first sign would be a collapsing treasury market. The Fed is controlling the yield curve through its QE program. But, it is irrational for other investors to play this game. The only reason to stay in is that the Fed won't let the market fall. But, the underlying value is evaporating with rising money supply and the inflationary consequences. When all the investors realize this, they will run for the exits and the Fed won't be able to stop the stampede. If it prints enough money to take over the whole market, the people with freshly minted dollars would surely want to convert their money into other assets. The dollar would collapse too.
The world seems on course for another crisis in 2012. The same people who caused the last crisis are still in charge. They'll get us into another. Iceland is sending its former prime minister to court for causing the banking crisis. A worse fate awaits the people who are causing the next crisis.” See: To Hell through QE for a global overview of the fall out from the US Fed's policies.
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