by Alasdair Macleod, GoldMoney:
Financial developments in the Russian and Chinese axis are being generally ignored. The confirmation by Russia that a trade settlement currency for an expanded BRICS is on the agenda at the Johannesburg summit later this month has barely been reported, and even sound money advocates are highly sceptical.
But all will be revealed in three weeks’ time. Meanwhile, this article looks at how gold standards could return in the wake of a new gold-backed trade settlement currency, if that is what emerges, using the currency board model as a template.
TRUTH LIVES on at https://sgtreport.tv/
This is followed by an explanation of why gold reserves must cover the bank note issue. I assess the cover afforded to both the rouble and the renminbi, incorporating assumed levels of non-reserve gold bullion held by both Russia and China. The conclusion is that both nations have ample cover to implement proper gold standards. And that gives the opportunity for other allied nations to implement currency boards with the renminbi.
The availability of above ground gold stocks to support a global retreat from fiat currencies back to the stability of legal money — gold — is then addressed. The conclusion is that with bullion having migrated in vast quantities from the west to the east in recent decades, there is a deficit for the fiat-committed western alliance and nations in its sphere of influence to back their own currencies.
A gold standard is similar to tried and tested currency boards…
All the vibes coming out of the Russian and Chinese axis strongly point to a new gold-linked trade settlement currency being proposed at the BRICS summit in Johannesburg later this month. Until the details are revealed, we won’t know what this proposal actually is, whether it will fly, whether it will be simply imposed on BRICS members, or if they will have a say about its introduction and if so its form. All we can deduce is that Russia is leading this project and as an educated guess it will incorporate work by Sergei Glazyev.
What we do know is that the majority of the world measured by population and GDP (on a PPP basis) is becoming confident enough to throw off the yoke of American imperialism, and with it will go the hegemonic power of the fiat dollar. And remaining tied to the dollar, it would appear that the days of western fiat currencies are similarly numbered.
In the western alliance, economists and investors alike will have to re-educate themselves about how the relationship between gold and credit works, and what is required to ensure that the link between them endures. Our politicians will have to wean themselves off from their habitual promises to give everyone everything. They will have to stop believing that they know how to deliver outcomes better than free markets. Social legislation must be rescinded, regulations annulled, and responsibility for the actions of individuals handed back to them.
The position of Russia, China, the members associates and dialog partners of the Shanghai Cooperation Organisation, and BRICS+ is far stronger. None of them are burdened with the social and socialist responsibilities of the so-called advanced nations. They are in a position to operate currency boards to secure the value of their credit systems. But instead of a currency board attached to the dollar, it must be attached directly or indirectly to gold. A gold standard can be regarded as a type of currency board — indeed, it was its forerunner.
According to the IMF,
“A currency board combines three elements: an exchange rate that is fixed to an anchor currency, automatic convertibility (that is the right to exchange domestic currency at this fixed rate whenever desired), and a long-term commitment to the system, which is often set out directly in the central bank law. The main reason for countries to contemplate a currency board is to pursue a visible anti-inflationary policy.”[i]
It was the way in which colonial Britain ensured that a colony’s currency was firmly tied to sterling. I remember from my youth in Kenya that the Kenya shilling was exactly the same as a British shilling at twenty to the pound. That rate held until independence in 1963. Today, there are 181 KES to the pound, and the pound has also lost 99% of its purchasing power since 1971 measured in gold.
The IMF article goes on to say,
“A currency board system can be credible only if the central bank holds sufficient official foreign exchange reserves to at least cover the entire narrow money supply. In this way financial markets and the public at large can be assured that every domestic currency bill is backed by an equivalent amount of foreign exchange in the official coffers. Demand for a “currency board currency” will therefore be higher than for currencies without a guarantee because holders know that rain or shine the liquid money can be easily converted into a major foreign currency in the event of a testing of the system. Currency boards’ architects contend that automatic stabilisers will prevent any major outflows of foreign currency. The mechanism works with changes in money supply within the currency board country — a contraction in the case of a flight into the anchor currency — which will lead to interest rate changes that in turn will induce investors to move funds [back into the currency board currency].”[ii]
The operation of a monetary authority becomes strictly limited to controlling the currency issue, swapping the domestic currency for the anchor currency on demand. It must be prohibited from funding government spending, the government operating its banking facilities with commercial banks instead. Banking supervision must be devolved to a separate agency to ensure that the issuance of domestic currency does not get bound up in responsibilities as lender of last resort.
