Gold and Other Failed Bancors
by Andrew McKillop
Strategic Analyst and Advisor
January 28, 2010
WHY ARE GOLD BUGS SCARED ?
Periodic threats to gold's supposed 'natural role' as a strong, solid and reliable money standard always rise when gold prices are at, or near record highs. As the gold price climbs, vested interests stretching from equity asset managers, to central bankers and politicians rally to the task of 'saving the money', and other paper stores of value by acting to push down gold prices. This is a similar ritual, kneejerk reaction to that which surrounds oil prices climbing to supposedly extreme and unbearable peaks. Gold bugs however claim there is no relation of gold and other fetish playthings, or stores of value for investors and speculators.
As a recent 'Daily Bell' (thedailybell.com) commentary claimed, in response to a CNN editorial on why gold prices should or could fall to under one-half their present level:
Gold is not a stock, not a commodity, it is a money metal - and there are factors that influence it that go far beyond supply and demand. By lumping gold in with other so-called bubbles, the (CNN) article in our opinion does investors no service. In fact, it may confuse investors about what gold is and why it is "different" from the fiat-based money instruments like stocks and bonds.
As it happens, stout defenders of Sound Money, like the 'Daily Bell' are also confronted by a new and unexpected risk to restoring gold-based money. Adding another turn to the possible and potential reasons why the December 2009 Copenhagen climate conference was given such bulldozer media and political support, at least in most OECD countries but not emerging China and India, the promise or threat of an entirely new 'money' should be included. The maximum extension of 'climate conscious low carbon' strategies, and the financing of a massive emergency program to shift away from fossil fuels, starting with oil, could include a new "CO2 Bancor". Previous articles by myself have referred to this not-so-bizarre threat to both gold and oil, as the prime stores of value in the globalized economy, with rather easily predictable impacts on world inflation, economic activity, trade and geopolitical relations.
Recent sources of support to Keynes ideas for a centrally managed global reserve currency, that he called Bancor, have not only come from the IMF, World Bank and more discreetly from political leaders in several G20 nations, but from central bankers including Zhou Xiachuan, governor of the People's Bank of China in a March 2009 speech. Unexpected to some, Chinese support for Bancor could be traced, by many, to Chinese worries about the future buying power of their endlessly mounting trade surplus and 75%-majority US dollar currency reserves. As we know, at the G20's 'global green summit' in London, 2009, the assembled heads of state approved the idea that the IMF should issue money-equivalent instruments with a US dollar value up to about UD 250 billion. Logically, given the power of 'climate catastrophe' talk in many countries at that time, well before the December 2009 Copenhagen shakeout and continuing oil fear among politicians and bankers this IMF currency creation initiative could include something equivalent to "CO2 Bancor".
We can easily ask if a CO2 Bangor would be deflationary or inflationary, and whether it would tend to restore economic growth. More simply, we first need to ask if it is credible and we could argue that it is only a little less impossible than fully functional, global gold-backed money.
Dollar devaluation or depreciation, as well as the Keynesian doctrine of spend now and tax (or devalue and inflate) later are all targeted to raising economic activity. The drivers for this include economic psychology and geopolitical drivers, and the net results are complex. Paper money devaluation has interesting impacts even on gold production, as well as oil, other minerals, and bioresource production strategies. This extends to 'rearranged' mineral and bioresources, called manufactured products, for example Chinese or Indian value added exports.
Due to dollars being the overriding currency utilised for trading anything, a currency context of declining dollar value, relative to US debt and relative to other currencies, and the rising dollar price of gold, oil or any other traded resource or product tends to push producers to raise production in the short term. In an inflationary context, disguised as dollar depreciation rather than rising prices inside an economy, industrial players will build stocks of the raw materials they need for future production. In an inflationary context, the borrower is king, enabling industrial players to launch massive investments. Central bankers other than American, rather than selling their gold stocks to other central bankers in an attempt to create gold selling sentiment, enabling them to buy back the yellow metal later and cheaper, if gold prices fall, can watch their national money appreciating against the dollar.
For all non-American players this will limit inflation, perhaps to zero, allowing central bankers outside the US to signal to media and politicians that "all is well". Inside the US, inflation can be disguised by a large variety of statistical tricks and astucious selection of data, as used to mask the real level of unemployment.
In some ways, therefore, the US dollar already fills the role of Bancor, in the sense that its creation and circulation has no need at all to relate to fundamentals. Not for nothing, 'Time' magazine in 1999 named Keynes as one of the 20th century's most influential persons, writing: "His radical idea that governments should spend money they don't have may have saved capitalism".
WHAT IS CO2 BANCOR ?
With a CO2 Bancor, we can surmise, capitalism can create virtual money and survive the final energy crisis, when the after-peak oil fall in global energy supply begins to be really serious, well before 2020. The supposed objective of CO2 Bancor would be to wean the world economy off oil, coal and gas while preventing too sharp deflation, but preventing hyperinflation during the long and difficult adjustment process. All that is needed is confidence, we can add, and this sticking point is the most difficult for Sound Money defenders.
As the 'Daily Bell' said in a January 27 piece:Critics who think that the U.S. dollar will be replaced by some new global currency are perhaps thinking too small. On the world horizon looms a new global currency that could replace all paper currencies and the economic system upon which they are based. The new currency, simply called Carbon Currency, is designed to support a revolutionary new economic system based on energy (production, and consumption), instead of price
The risk of a "CO2 Bancor" which in fact is a BTU Bancor, is not so far-fetched as it might appear. Nothing, including gold mining and recycling, is outside the scope of energy fundamentals. Extracting gold from deep mined gold operations where mine depths are an average of close to 4000 metres below ground, and ore body 'richness' is around 4 grams per ton winched to the surface, obviously needs quite a lot of energy - around 500 kWh direct, per ounce. This energy cost will tend to rise as resources shrink, and will explode at certain predictable thresholds.
CAN WE HAVE A GLOBAL GOLD CURRENCY ?
The ultimate indicator of mineral wealth or the lack of it is crustal abundance, which is determined as far as we know by entropy linked astrophysical and nucleosynthesis parameters and processes. Crustal abundance tells us why gold costs more than uranium or iron - showing why a money based on aluminum coins and pulp-based paper notes is more feasible, and of course more exposed to inflation and counterfeiting than a money based on rare or very rare energy intense metals and minerals. Gold, with a crustal abundance of around 1 part per billion (ppb) is obviously better placed to resist these threats than iron or aluminum with a clarke or crustal abundance of around 50 million or 82 million parts per billion.
By exactly the same reasoning, we can also see why gold can never become a 'world money', despite claims to the contrary, but can remain a a prized token for bartering and exchange of needed good and services. History since the 18thC, when paper money seriously started, shows that anything proposed or suggested as a physical substitute for paper money that is sufficiently rare, will be insufficiently ubiquitous.
We can apply that reasoning to gold. Taking a very approximate figure for the total above-ground world stock of gold, placed at around 140 to 200 k tons by most authorities and by the World Gold Council at around 150 000 tons , or 150 billion grams, this equates to not more than 20 grams per person worldwide. Much less than 50% could under any scenario be mobilized, and distributed by an imaginary IMF Global Gold facility imbued with a universalist save-the-planet policy directive, allocating about 10 to 12 grams to each person currently living on the planet. This would be their entire "real money" holding, for keeping a self sustaining, non inflationary economy in existence and operation, or simply buying their beans-and-rice for a couple months ahead.
Another reality limit on a global gold-backed currency is to compare the potential stock of physical gold that could in theory be mobilized and distributed, with total money in circulation. Taking an estimate for world M1 + M2 aggregates, growing at double digit rates in several countries, at a 2009 total equivalent to about 40 000 billion USD, each of these notes and near-money instruments, both electronic and paper would have a tiny fraction of 1 gram of physical gold backing it. Consequently, any potentially manageable gold-based world money would need or would force a massive contraction of money in circulation - obviously with extreme deflationary impacts, lethal to the global economy as we know it.
To be sure, the sound money interval would be short. After a series of rather predictable revolts, revolutions, civil wars, and international wars, paper money (or other easily produced 'fiat' money) would again be produced and circulated.
BEATING THE ENERGY CRISIS WITH BTU BANCOR
Defenders of CO2 Bancor (in fact BTU Bancor) claim they can avoid this predictable sequence. Their new money, essentially energy chits or coupons, would be tightly linked with world energy production and consumption, while also aiding financial effort for transiting to renewable energy, and away from polluting, depleting fossil fuels. Central bankers, this time including Ben Bernanke would be happy to have a new, easily produced and circulated money, replacing the nation-linked monies they are forced to manage.
Keynesian logic would then generate a happy spiral of economic multipliers, with the fun logic extending to central bankers having no further need to ward off speculative attacks on their national monies, which would be progressively or rapidly removed from circulation. Launching ever larger renewable energy and energy saving programs to stave off 'climate catastrophe by 2099', leaders might believe that global economic growth would tend to recover Belle Epoque (now defined as 2004-2007) average rates, but without the stressful fall in the world value of the US dollar, nor endless rise of oil prices.
Much more real world drivers for CO2 Bancor in fact exist. Through 2008-2009 political leaders in the G20 countries have borrowed massive amounts to operate 'Keynesian inspired' deficit financed economic recovery programs. Total amounts could be above USD 11 000 bn, and national debt in many countries has reached exotic and unsustainable highs. Probably with or without economic recovery attaining better than about 2% a growth in the OECD countries, inflation must return. With quite strong economic recovery, the growth of inflation should be stronger, but typical Keynesian logic allows the opposite to be imagined as the reality. Trade deficits of many large OECD countries are simply financed by debt, are growing even in weak recovery from recession, and are unsustainable.
Replacing all national moneys with a go-anywhere single world money would massively aid the writing off, and hiding of past errors, debt and delusions, both Keynesian and neoliberal. Debt forgiveness would be truly democratized and vastly extended upward from a periodic gift to the world's poorest countries. Stealth would of course be needed in the run-up to introducing this new money, like any other process of forcing out old moneys, such as the Euro's introduction in 2002. Too much forewarning would predictably generate real extremes for gold prices, but not oil or the fossil fuels because the betting would be on sharp deflation following the introduction.
The forced introduction of the extremely overvalued Euro, firstly causing deflation and a mini recession in the initial 12 Eurozone countries, could well be another factor favoring the bold imagination and audacity of CO2 Bancor supporters. Timing is all, making the right moment for steamrolling the new global single money into place when inflation starts seriously rising, and resists the array of tricks used to hide reporting it. Timing may however have been derailed or slowed by the Dec 2009 COP 15 farce ending with no serious agreement, but standoff between the emerging countries, and the OECD group.
The key question as to energy transition being aided, or not by global energy-linked single money may have several answers. The potential for either intense deflation or extreme inflation both exist. Plunging the global economy into long-term near zero economic growth would surely exercise a powerful modifying impact on oil prices, to put it mildly. Also buying time for transition, the new deflationary single money would achieve its energy targets. Extreme inflation would surely be the gravest risk, leading to results easily including international war, and economic collapse after a short interval. This again would buy time for energy transition, but through a rather different process!
© 2010 Andrew McKillop
Andrew McKillop | Author & Consultant | Email