Friday, October 31, 2008

Will Russia Be First?

"There used to be a habit of framing old Tsarist bonds and putting them on the wall. Lenin's decision to renege on the Russian imperial debt meant that it became mere paper, interesting only as a historical relic. In the light on the recent financial crisis in the USA, could the same thing happen now to the bonds issued by the American government, and could the country which has dominated the world for the last half century now enter history as a bankrupt state? And what could Russia do in the circumstances? ... The total state debt of the USA will rise to over $11 trillion. It is obvious that such a colossal debt can never be repaid. Instead, it will be serviced by more debt in the future. The contrast with Russia, which has painstakingly sanitised its state finances to the point that it now has more money to lend than the IMF, could hardly be greater. ... In America, this basic culture of debt is aggravated by the fact that other countries use the dollar itself as a reserve. This means that they United States can export dollars in order to pay for its imports without the dollar losing vlaue. ... The USA can therefore export paper currency almost indefinitely--the famous 'deficit without tears' analysed by the great French economist, Jaques Rueff. ... But the collapse of those markets is only a symptom of a much deeper problem, the basic insolvency of the American state itself. ... The idea of gold convertible currencies is extremely unpopular among most economists: they dismiss gold as a 'barbarous relic' (to use the famous phrase of John Maynard Keynes). ...Russia has less to fear than other countries from the introduction of a currency convertible into gold. Governments are typically hostile to gold because it reduces their discretionary power over the currency and the economy: they say that the money supply cannot be made dependent on the production of gold mines. In reality, this argument is bogus because the amount of gold already in existence vastly exceeds the yearly production, so mining does not have an appreciable impact on supply", John Laughland (JL), 24 September 2008 at

I remember Rueff's comments in 1966, 42 years ago. I have made JL's point about gold's "stock-flow" ratio. Since it's the highest of any commodity, it is best suited for money. JL is a British historian. Do I expect the world to return to the gold standard? Yes, after the dollar collapses and no viable alternative emerges. See my 1 November 2007 and 1 March 2008 posts.

1 comment:

printfaster said...

Another thing long overlooked by economists, that I like a lot is that the marginal cost of gold supplied in mining is directly related to labor costs.

There are huge reserves of gold, but cost of releasing them from the ground depends both on labor and technology. Both labor and technology costs are then reflected in gold supply and pricing.

As we discussed earlier, nations can control their money supply by simply changing what the banks will pay for gold. Changing the bank price of gold also can elicit hoarding or conversely dishoarding, thus altering supply.

What the banks don't like is that gold prevents them from issuing endless unsecured credit. Got CDOs?