Big banks do not typically give themselves over to political pronouncements, but that did not stop the Erste Group from declaring on the front page of its gold report published last month, “The foundation of a return to ‘sound money’ has been laid.” The Austria-based financial services provider surveys the new dynamics of gold and monetary policy and finds that not only is its price likely to continue to rise, but so will its acceptance by governments as money.
“The past months have shown a clear trend: gold has been more and more regarded as the purest form of money and increasingly less as a commodity,” writes Erste analyst Ronald-Peter Stoferle. He tracks this status change in the way financial institutions like J.P. Morgan are accepting gold as collateral, states in the U.S. are pushing to declare gold as legal tender, and foreign central banks are adding it to their reserves. Why the movement to gold per se? It is an emphasis on asset-based rather than debt-based money. As Stoferle puts it, “The possession of gold is tantamount to pure ownership without liabilities.”
The rise in gold’s dollar-denominated price, going back not just the last couple years but the past decade, is impressive: 17 percent per year on average since 2001. This performance is indicative of a remonetization phenomenon rather than a bubble. Investors and central bankers have woken up to the reality that paper currencies decline over the long run because governments cannot resist pump priming in the face of economic slowdown.
The pump priming meant to nudge the economy out of the early 2000s recession spawned the housing bubble and its disastrous endgame. No central bank action, and virtually every possible one has been tried, has turned things around. The Erste report acknowledges a system failure: interest rates cannot go any lower, government debt has saturated the economy, and the misery index (the sum of the unemployment and inflation rates) in the U.S. is close to its average in the 1970s. Indeed, the real economy in addition to the financial system is deeply flawed. Forty-four million Americans are on food stamps and the effective unemployment rate is closer to 20 percent than the reported 9 percent.
Stoferle deftly links the rise in inequality in the U.S. to its monetary policy. Today, a CEO earns 425 times the average worker’s wages; in 1980 the disparity ratio was 24:1. “Monetary dispersion is not neutral,” he writes. “Market participants who receive the new money early and exchange it for goods benefit in comparison with those who get the newly created money later. We can see a transfer of assets from late money users to early money users.”
This is the Cantillon effect posited by Irish economist and Adam Smith predecessor Richard Cantillon: price inflation is relative and staggered as “newly created is distributed neither equally nor simultaneously among the population.” Picture banks and their favored borrowers with access to the Fed’s zero interest rate program borrowing dollars and investing in assets that have either higher yields like Treasuries or long-term security like gold. Later on, consumers without those resources or sophistication are punished at the gas pump and grocery story by the resulting price inflation. Printing money doesn’t just cause financial disorder; it stokes inequality.
Political opponents of the gold standard have said in the past that people will not tolerate the sacrifice of monetary and fiscal flexibility that comes with it. But people are losing tolerance for monetary and fiscal flexibility run amok. Zero inflation and balanced budgets or rising inflation and debt crises? It’s obvious which choice of outcomes is more in demand these days.
Stoferle envisions a future in which people routinely ask for the price in gold rather than the price of gold. Given that its production rate and supply growth are so stable, gold’s value is certainly beyond question. What aren’t beyond question are the paper currencies which have caused so much economic disorder and destruction recently. Gold’s transition from an investment to money will continue until people can freely and legitimately transact in gold and gold-backed currency.
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