“De Nederlandsche Bank (DNB) holds more than 600 tonnes of gold. A bar of gold always retains its value, crisis or no crisis. This creates a sense of security. A central bank’s gold stock is therefore regarded as a symbol of solidity Shares, bonds and other securities are not without risk, and prices can go down. But a bar of gold retains its value, even in times of crisis.” – DNB’s Gold Stock
The quote above is from the “Payments” section of the Dutch Central Bank’s website. Incredibly, it goes on to suggest the possibility of a systemic collapse: “If the system collapses, the gold stock can serve as a basis to build it up again.” Quite stunning, in my opinion, coming from the Central Bank of a country that was first to offer a negative interest rate mortgage…
It’s been 48 years since the U.S. Government unplugged the gold standard, thereby enabling the world’s Central Banks to plug in their fiat currency printing presses. This in turn gave rise to a series of asset bubbles and unfettered credit creation. Don’t forget that the junk bond bubble in the 1980’s led to an acceleration in the creation of paper money, which in turn fueled the internet/tech stock bubble, followed subprime debt/real estate bubble and the current “everything” bubble.” Which may the last bubble…
The chart below, shows M3/M2 vs the “real” GDP since 1971 and illustrates the problem:
Note that the Fed discontinued publishing the M3 money supply data in 2006. The U.S. at the time was the only major industrialized country that refused to publicly disclose M3. Also note that “real” GDP is calculated using the Government’s highly muted measure of price inflation. A real real GDP line would be shifted down on the chart and project at a lower trajectory.
The difference between the two lines somewhat measures the degree to which the U.S. fiat currency has been devalued or has “lost its purchasing power.” However, the graphic does not capture the creation of credit. Debt issuance behaves exactly like money printing until the debt is repaid. Think about it. A dollar borrowed and spent is no different than a dollar created by the Fed and put into the financial system.
But think about this: since 1971, the U.S. Government has never repaid any of the debt it issues. It has been increasing pretty much in perpetuity. This means that $22 trillion+ issued and outstanding by the Treasury Department should be included in the money supply numbers – until the amount outstanding contracts – which it never will…
Alasdair Macleod, in “Monetary Failure Is Becoming Inevitable,” summarizes the eventual consequence embedded in a morally hazardous currency system:
If history and reasoned economic theory is any guide, the demands for credit by the state will terminate in the destruction of government currencies. For the truth of the matter is inflation of money and credit has created the illusion we can all live beyond our income, our income being what we produce.
“Destruction of Government currencies” is really just a politically/socially polite phrase for “systemic collapse.”
Whether intentional or unintentional, the Dutch Central Bank has alluded to this possibility, which I see more as an inevitability, with just the issue of timing yet unresolved. I would argue, however, that the financial system liquidity issues currently addressed by the reimplementation by the Fed of repo/extended repo operations – and the inclusion of foreign banks in the liquidity injections – reflects the growing instability of the global financial system.
Furthermore, the suddenness of these systemic “tremors,” suggests that the Central Banks are losing control of a system dependent on fiat currency and credit creation that expands at an increasing rate in perpetuity. Unfortunately for the paper money maestros running the Central Banks, the value of fiat currency approaches zero as the supply of currency and credit heads toward infinity.
In all likelihood, the recent rise in the price of gold, which has been driven by escalating demand for physical gold – notably by eastern hemisphere Central Banks – reflects the increasing visibility of an inevitable collapse in the global fiat currency system. The Dutch Central Bank has made it clear that it sees gold as an ideal asset for wealth protection when the next crisis erupts.