You may have seen it before and not known its name, but Exter’s Pyramid is one of the key reasons for gold price calls reaching as high as $50,000 an ounce to stabilize the next financial crisis…
John Exter (1910 – 2006) was an esteemed American economist. A former member of the Board of Governors for the Federal Reserve, founder of the Central Bank of Sri Lanka, and head of the NY Fed during the failed London Gold Pool.
Today John Exter is now mostly known for creating Exter’s Pyramid, which he designed and used about 50 years ago.
Further along in this article we will diplay both his original and now updated illustrations of asset classes in terms of their overall risk of default (potential for bankruptcy) and overall estimated notional values then and today in 2018.
Exter’s early adulthood spanned the 1930s Great Depression. A young John Exter saw his Chicago bond trading father lose everything when the US stock market crashed in late 1929. This shocking incident spurred his interest to study and better understand what factors were responsible for the Great Depression of the 1930s.
After graduating from the College of Wooster (1928-1932) John Exter went on to study at the Fletcher School of Law and Diplomacy and in 1939, to Harvard for graduate work in economics.
After a stint at MIT during World War II, Mr. Exter began work on the Board of Governors of the Federal Reserve System as an economist. In 1948 he first served as adviser to the Secretary of Finance of the Philippines, and then as the Minister of Finance of Ceylon (now Sri Lanka) to develop its central bank. He eventually became the first governor of the newly organised Central Bank of Sri Lanka in 1950.
In 1954 the Federal Reserve Bank of New York appointed John Exter as vice president in charge of international banking and gold and silver operations.
While speaking at the Detroit Economic Club in 1980, Mr. Exter stated that when he took charge of gold and silver operations at the New York Fed in 1954, US gold reserves were valued at $24 USD billion (gold was valued then at a fixed price of $35 USD oz).
A collusive attempt to contain gold prices soon followed, and the USA lost a large swath of the gold reserves it took in from its citizens in 1933 as a result.
Exter’s debt pyramid has been able to keep expanding as financial innovation and economic financialization has introduced ever more leverage into the global economy.
The mushrooming derivatives market with its credit default swaps, collateralized debt obligations, mortgage backed securities, etc. have all taken top risky residency in this more modern inverted Exter pyramid.
According to Exter’s model, those derivatives with the weakest and furthest links from base money are the first to be rejected and potentially bankrupted. As confidence vanishes and a broad based liquidation process ensues, the higher risk asset class values cascade into their underlying collateral. The financial spillover effects flow down the pyramid impacting even the least risky securities, and near the tip of the pyramid, paper currency itself.
In most financial crisis, physical paper currencies are unlikely to default in the short term within the nation they have legal tender status in (hyperinflations the lone outlier).
But unlike physical gold bullion, government fiat currencies can be created at will and devalued by mere decree. Measuring and forecasting the masses confidence in fiat currency is difficult to do accurately. Their breaking point is a known, unknown amongst central banks. What is indeed known is that throughout history and without exception, all monetary proxies stemming from physical bullion coins eventually become worthless given enough time.
Gold bullion forms the smallest and soundest base in the inverted pyramid diplaying highest to lowest risk asset classes. This is because physical gold bullion is universally the most recognized default proof asset an investor can own. It is for this reason central banks own about 1 out of every 5 ounces of gold ever mined within their very own vaults.
All physical precious metal bullion items are extremely scarce by nature and do not require the performance of other parties to always maintain some measure of value in the financial market. This is precisely why gold bullion remains the safest asset to own outright.
Why It Matters: ( Spoiler Alert: GOLD IS GOING to $50,000 oz )
Yes indeed $50,000 oz gold sounds crazy.
But even PIMCO bond salesmen have openly opined for a Federal Reserve gold bullion buying program to the tune of $5,000 oz so choose you target and your asset allocations accordingly.
Learn more about bullion with our free 21st Century Gold Rush guide here at SD Bullion.
About the Author
James Anderson has a BA in finance from Loyola University New Orleans. He has both worked and invested in the physical investment grade bullion markets prior to the 2008 global financial crisis.