US Gold Reserves - Short 20th Century history

What trajectory did the US gold reserves follow in the last century?

Below is a World Gold Council chart that might be accurate, although there is some debate today about exactly how much of the US gold reserves are accurately accounted for. Some say a portion of it is no longer there, some say that a percentage has been used in financial transactions that would involve claims to some of it. But the chart is probably not far off.

You can see that gold began leaving the country starting in the mid-1950s. By the end of that decade a few wise financial advisors were recommending investing extra savings – i.e. savings one could afford to risk – in numismatic gold and gold stocks. (It was illegal to hold gold outright.)

The reason was that the gold standard kept the official dollar price at $35, but there was so much dollar inflating going on that foreign countries were smart enough to get gold instead of holding onto dollars (which dollars had been received in payment for imports), and this was causing the unofficial market gold price in dollars to rise.

That’s why in 1971 Nixon probably looked at a similar chart and finally said stop, no more, we’re “closing the gold window.” And that’s when the dollar price took off, as wise advisors had predicted it would. More accurately, that’s when the exchange rate for dollars plummeted and price inflation in the US began to explode. (Yes, price inflation can be late to the party, but it always follows a period of monetary inflating.)

(The yellow line represents the dollar price of gold.)

Note that this chart stops in 2005. Here below is the chart from Kitco for the last three days. The dollar price is up to $2,290 as of this writing, even touching $2,304 for the first time in history. Not a bad investment, right? (But I’m not an investment advisor.)

Gold always seems to reflect the reality of the value of money, even if it no longer is officially an element of any country’s monetary standard. Who said the gold standard is dead?

What is Stagflation?

Someone recently asked me to explain the term “Stagflation."

Some of you probably remember the Nixon years, the early 1970s. This is the period when Stagflation was flagrant. It’s simply the combination of two words, stagnation and inflation.

Everyone seemed shocked that both could occur at the same time. This is because back then (and still in the minds of a few today), a Keynesian theory called the Phillips Curve was in vogue. It said that “inflation and unemployment have a stable and inverse relationship.”

https://www.investopedia.com/terms/p/phillipscurve.asp

But in fact this turned out not to be true, since in the early 1970s we had high price inflation and high unemployment combined with low GDP, which by itself is often described as stagnation.

The term “stagflation” was first used by an Englishman, according to this website. The article gives such a good description of the issues involved that I really think you would find it interesting. 

So what is the real reason my electric bill is going up?

My electric bills have been going up for the past few years, so I decided to analyze the data to figure out what was changing. Was it the consumption? Was it the per kWh charge? Was it the taxes? Maybe the service charge(s)? Or something else?

The consumption was pretty predictable and regular. Interestingly enough during these inflationary times, the per kWh charge was exactly the same over an eight year period. Taxes and other state charges didn’t seem to be modified very much, and the monthly service charge was also unchanged.

So where is the culprit?

In California, they have come up with what was supposed to be a credit to our account due to the use of renewable energy. They must have thought that renewable energy sources would provide less expensive electricity. 

Starting in 2016 in our case, this line on the bill was a very tiny credit. But as time has gone by, that column has morphed into a charge climbing steeply. See the result on my chart below.

This supplemental charge is calculated as a percentage of total consumption multiplied by the kWh price, so it moves up and down with changes in consumption. But you can still see the trend. Where it used to be a negative number, it has now reached a level of about 30% of the kWh rate, and hence of the whole bill.

This “Energy Cost Adjustment” has become a way for the company to increase our price while maintaining the per kWh rate. Perhaps they’re just trying to deal with California’s crazy laws, but it’s still VERY SNEAKY, don’t you think?

So is it just an underhanded way of increasing the price? Or did everyone simply misjudge the cost of renewable energy? 

Updated Proprietary M&Ms Inflation Gauge

I’ve made some revisions to my M&Ms inflation gauge, this time basing it on calculations of the “per ounce” price rather than per packet price, while still expressing the chart values on the historical price of a 1.69 ounce packet. 

Somewhere I read that the M&Ms company claims they always sell the small packets at 250 calories per packet. I have some issues with that, because I have noticed over the years that the size of the packets on sale seem to vary from year to year. However, assuming it is true, that would be the 1.69 ounce packet, according to the linked website. So I have chosen that size to be the anchor for this new graph.

You will note that I’ve left lots of room for future price inflation – and for my own stick-to-it-ive-ness given my advance age....

Enjoy! Hopefully along with a packet of Peanut M&Ms, which are my favorite! (Although the chart is based on the old classic.)

What is a Flight from the Dollar?

A friend asked what a “flight from the dollar” looks like. I can certainly give my understanding expressed in easy-to-understand language.

A “flight from the dollar” happens when the citizens, or even the global financial system, rejects the dollar as a store of value. Here’s a little history to explain the context.

In the late 1800s, a dollar could be exchanged for 1/20.67 of an ounce of gold. This was the “gold standard,” whereby a dollar was “worth” (i.e. could be exchanged at any bank for) 1/20.67th of an ounce of gold. The banks accepted freely any amount of dollars in exchange for gold at that rate. The standard, as long as it remained in place and was respected, helped banks maintain a safe amount of reserves, a conservative amount of loans (made with real savings), and well-backed credit advances (i.e. credit creation based on commercial paper such as bills of lading and the like); and it kept the economy on a relatively even keel. The fact that every bank had to give out one ounce of gold for $20.67 in paper money kept them – and the dollar – honest, so to speak.

In 1913, the US created its first central bank, which became the arbiter, instead of private banks, of the amount of credit creation that would take place. The original rules applied by the central bank were pretty sound. Credit loans to banks were based only upon commercial paper. However, in the longer term the rules changed. Within a couple of years the central bank began to do what central banks have done for centuries, i.e. they began creating extra additional credit, which the government used to cover wartime and other expenses. 

The first episode of inflationary credit creation (what economist Edward C. Harwood labeled “inflationary purchasing media”) appeared during World War I. As the US central bank began to allow the expansion of credit above what was prudent (according to Harwood), the government spent it on the war effort. When the war was over, the central bank tried to contract that credit, which forced the country into something of a recession in the early 1920s. 

Then during the subsequent years Harwood noted that a lot of “inflationary purchasing media” had still not been cleared from the system, which was maintaining prices too high and encouraging bubbles in real estate (in Miami at the time), and in the stock markets. By 1928-29 he began to warn the public through articles published in financial journals that the previous monetary expansion was still in the system, which would probably end in another contraction. 

Indeed, a peak was reached in 1929. The central bank noticed the problem and tried to correct the imbalance by contracting the money supply. It was the right thing to do, because the excessive credit did indeed need to be withdrawn. Was the contraction too quick? Was the timing wrong? No one really knows, although multiple theories exist. At the same time, the government put in place some very strict trade policies that caused complications in the import-export markets, and we got the 1929 crisis, which extended several years into the 1930s.

In 1933 Roosevelt, in an attempt to save the gold standard, decided one day (literally) to force people to turn in their gold so that he could devalue the dollar down to 1/35th of an ounce. He explained that he didn’t want private “speculators” to profit from the devaluation. He also started the country on a centralizing-regulatory-socialist binge with his New Deal policies. Ownership of gold was outlawed. Much money was wasted in the various efforts, and the economy didn’t recover until the 1940s. By then the second world war was brewing. 

When the soldiers got home in 1945, they went right to work and got the place up and running pretty quickly, thereby probably absorbing the excessive credit created for the war effort. Given the difficulties experienced in the 1920s, the Western World decided that they needed to fiddle with the gold standard again. Global officials met up in Bretton Woods in New Hampshire and decided that the world would go onto a modified dollar-gold standard, i.e. the dollar would stay on the standard at 1/35th an ounce, and the rest of the world would use the dollar in international transactions. Somehow, they thought this would be better than a plain gold standard. 

This plan gave the US both a tremendous advantage and a tremendous disadvantage. The advantage is that nations needed to exchange their exports for dollars in order to do business, and some countries’ banks also bought tremendous quantities of US bonds as capital assets. Therefore the US could print just about whatever it wanted, and the dollars flowed around the world and never came home to roost. It's called “seignorage.” 

The disadvantage is that it is the equivalent of giving a credit card to a 16 year old.* 

It worked pretty well at first back in the early 1950s, but lavish money printing soon started again, creating another bout of creeping price inflation in the US. After all, it is not easy (or perhaps it’s impossible) for central bankers and politicians to determine with precision the amount of dollars that should be created and shared to maintain the Bretton Woods global monetary system. In around 1959, Harwood and others began to notice that in spite of the Bretton Woods fix at 1/35th of an ounce per dollar, the “price” of an ounce gold in dollars was increasing above $35 in certain markets. In other words, people were realizing that the dollar was losing its value. That’s when Harwood started getting people onto gold numismatic coins, gold stocks, gold “annuities,” and Swiss financial instruments, some of the very few ways to invest legally in gold and safe foreign assets.

This state of affairs lasted far longer than anyone thought possible, until 1971. France was getting wise about the loss of value of the dollar, and De Gaulle began asking for his nation’s gold at the official $35 price. Gold at $35 had become a good deal. It all came to a halt when Nixon “closed the gold window,” i.e. refused to pay out gold for dollars. (See this for a detailed explanation.) 

Since then, even though in the mid-1970s Americans could start owning gold again, the world has been on what is called a “fiat standard,” i.e. no standard at all. Over the rest of the decade, gold went from $35 to $800 in 1980, 23 times its previously fixed exchange rate. 

That’s a flight from the dollar.

Even though no longer in an official monetary role, gold still remains a good barometer of the value of currencies around the world. The dollar has continued to decline, and today the ounce of gold costs around $2,026. Yes, the gold exchange rate is “volatile.” But in fact it is not gold that is volatile. It is the paper currencies. After all, smart people watch economic policy and events, and when things start to get frisky, they start looking for ways to preserve the purchasing power of their money. The increased demand creates exaggerated swings in the “price” of gold. But in fact the one thing that remains constant is the underlying, on-average, longer-term stability of gold’s purchasing power. 

And the “price” of gold is one way you can measure the “lost value” of the dollar.

_____________________

* Today the US debt is over $34 trillion and climbing rapidly. This is WAY more than US production can sustain (about 145% of GDP). It is also especially dangerous when price inflation and cheap public borrowing sets in and when the Fed (rightfully albeit somewhat late) decides to take corrective action via higher interests rates. Over the past year or so, the yearly interest rate on the debt is now up to $500 billion, which is about 2/3 of the entire annual US military budget. (And here’s another interesting chart that I hadn’t seen before.)

Measuring Economic Freedom vs. Human Freedom

The Fraser Institute's study of economic freedom in the world for 2022 (data from 2020) has just been published. As usual, the stars of the show are Hong Kong and Singapore, with New Zealand not far behind. The US is at seventh place.

One might ask: How can an island that is completely under the thumb of a Communist nation be the most free nation in the world? And how can a country (New Zealand, No. 4) be considered free if its people just passed a law forbidding anyone born on or after January 1, 2009 from buying tobacco, ever? Not just before they reach the age of 21, but forever. (Good luck with that....)

Free image from Pixabay.com

Okay, I get the measuring sticks used by this study. They are purely economic. The measurements concern:

• Size of government
• Legal systems and property rights
• Sound money
• Freedom to trade internationally
• Regulation

But aren't there a few more criteria that they should include? For example, I could imagine adding these:

• Freedom of the press
• Not just the size but the intrusiveness of government
• Government stability and autonomy
• Monetary stability

And maybe others.

In researching this question, I answered it for myself. Fraser has also published what it calls the Human Freedom Index. In this study, Hong Kong drops to the 34th place, Singapore to 44th, and the King of the Roost is ... wait for it ... SWITZERLAND!

I could have told you that. My favorite country.

Here are the criteria for the human freedom index:

• Rule of law
• Security and safety
• Movement
• Religion
• Association, assembly, and civil society
• Expression and information
• Relationships
• Size of government
• Legal system and property rights
• Sound money
• Freedom to trade internationally
• Regulation

So be careful which index you use for decisions about your future. Frankly, what is economic freedom without human freedom, I ask you?

The Dollar's Reserve-Currency Status Might Be In Jeopardy

If you have ever wondered about the global use of the dollar as a reserve currency, you might be interested in this article now published at Seeking Alpha.

(I hope you can open it; if not, I can send a transcript. Just leave a comment, which I will not publish, with your e-mail address.)

What Should Young People Do With Their Money Today?

We are living in unusual times. The US has never had so much debt, and its central bank has never created so much money out of nothing. Most central banks around the world are following suit. 

As of March 27, 2022 at 4:45 PM Eastern Time
Watch it evolve here:
National Debt Clock

History suggests that at some point the crap will have to hit the fan. What will that moment look like, and how will it affect the younger generation? 

Most youngsters have no idea what’s coming or how to protect themselves. Those that have some savings probably won’t have much choice other than to put them in a bank account. Most will have little money to save, so they will be forced to go with the flow, "play it by ear" as I like to say.  

But still, there are traditional rules to follow. The first rule seems to be to put some money aside as soon as one is able. The purpose is to build a cushion for the proverbial “rainy day.” Young people should do this now before trouble begins. And this advice applies most urgently to young families. Common knowledge says to put away, little by little, about six to twelve months of living expenses. 

Young people should keep credit to a bare minimum, pay off the principal every month, and watch impulse buying. Be smart and humble. Make do with a good second-hand car and merely adequate housing until they have the necessary savings put aside.

And budget, budget, budget. My own rule as a young adult was actually very simple: “Spend nothing above the essential, with only very rare exceptions.” That worked very well.

Buying of gold coins can be entertained at some point once the above is achieved. (But be careful where they are stored.) 

Then one could venture out towards other investments. Examples: Depending on one’s capacity to manage rental property (land or habitat), and also on the state of the real estate market (i.e. not now), that might be an option. Depending on one's plans for moving or not, one could buy a home.

Then, if finances permit, there's the option of branching out from there to rental property of some sort. That’s assuming, of course, that one will not be changing jobs and moving to another state right away, and that one has the time and inclination to devote to this side business (for that's what it is).

Eventually stocks and bonds can be considered, in an effort to build up a retirement account that will grow and provide an adequate income later in life. One can find reasonable advice about that almost anywhere. Caveat: If the investor decides to go with an investment advisor, just be careful about the fees. Compare, compare, compare.

And here again, watch the timing in a “macro” sense. The best time to buy is when the market is in a recession and the investor's own employment situation is secure – a rare combination. Some say don’t try to time anything at all. Just start accumulating little by little over time. That’s possibly the safest way to go about it.

If the whole show comes to a halt because of the monetary nonsense that has been going on since the last century, then it will be survival mode for most of us. The young will do whatever they can just to get through it, but they will have little to lose. Those who have some savings will need to keep a level head, not panic, and stick to the basic rules we have trusted to date.

One really can’t say much more. The current situation is unusual in many ways, and yet in other ways it's classic. As has happened so many times throughout history, currencies all over the world are all being debased, which is easy to do because they are all reliant on a “fiat” monetary system. In other words, no currency in the world has a solid foundation, such as a gold standard or equivalent, as was common in the past. They have all been manipulated, inflated, and deformed to the point of potential rupture. 

In our modern world, cryptocurrencies have been introduced, which is of course new. We don't know yet how they will turn out. Meanwhile, some old standbys are still available. One such is gold, which retains its “barometer” function over the long term, from what one can see so far. 

The Swiss franc is also still a beacon in a sea of monetary folly. In the 1970s it was 4 Sw.fr. to US$1. Now it’s 1 Sw.fr. to US$1.07. Unfortunately, Switzerland no longer accepts US citizens' money in their banks, due to burdensome reporting regulations between the two countries. Other forms of investing there might exist, however.

It would seem to me that a disruption is inevitable. But if, when, and how? Only a fortune teller would pretend to know. 

So When Will the Next Recession Strike?

Lots of elements of our current economic situation point towards a disruption of the status quo sooner or later. Here is a list:

• The Federal Reserve has been blowing up the money supply over the past few years, with the result that markets are skewed, e.g., real estate and the stock market, which I will come right out and say are bubbles.
• Price inflation has raised its ugly head, inspiring Fed actions that may or may not work. (John Williams on his website Shadowstats would show a much higher figure, but he's behind a paywall now. [Congrats to him, but too bad for us.])
• The Covid responses around the world have disrupted the supply chains and been responsible for a least a part of the price inflation – but which part? Hard to say. Here's a chart giving only the supplies that Russia provides. You can imagine the rest of the world.
• The world seems to be dipping into a precursor of World War III, or at least a period of daring moves on the part of some globally aggressive players, which makes everyone jittery.
• The dollar's reserve currency status is undergoing a test as China and Russia pair up to circumvent recent sanctions on Russia's banking system.
• The yield curve has recently started to invert, which some say is a harbinger of bad times to come.
• US bonds have been extremely expensive for the past few years (yields are the inverse of the cost of the bond), but loss of reserve currency status could definitely put a wrench in those works, causing a flight from the dollar and from US bonds. (Having said that, the US bond still seems like the tallest reed in the field of bond choices.)

Even from a business cycle point of view, one can be certain that there will be a recession, and probably sooner rather than later. But as I’ve said before, no one has ever consistently (important word there) predicted when a recession will occur. So any effort to do this is really risky. The chances of being right are probably about 50-50, but the resulting damages from being wrong are astronomical. 

On the other hand, I see no reason one can’t try to protect oneself from potential recessions all the time, which is what E.C. Harwood and others at AIER wrote about over the years. (Send me your e-mail in the comments, which I won't publish, for a copy of his last book, The Money Mirage.)

The Money Mirage
by
E.C. Harwood

Will the Federal Reserve governors stop trying to increase interest rates (which increase is supposed to depress price-inflationary pressures) because of the war and its effects on the US? Or will they plow through with their original intent and risk being blamed for any damages that critics might later say (justifiably or not) that they caused? 

A more interesting question is: Do the Fed governors really know what they are doing? If you've read a few of my blog posts, you know my answer to that one.

My guess is this: Should any whiff of recession come around the corner during this war and its consequences, the Fed will soften its interest-rate-raising program. But who knows if we will get that whiff? Only time will tell.

So I hear Europe has energy problems

A friend asked me recently if Europe has energy problems. Yes, I replied, and for a number of reasons. 

Europa on the back of a bull (Zeus)
From Creative Commons

Off the top of my head:

- Everything including electricity, gas, heating oil, and gasoline is overtaxed and therefore expensive.

- Price inflation is happening everywhere in the world including Europe, particularly in those commodities.

- With the recent price inflation, the EU as a whole and each individual country feel the necessity to help the lower income brackets (e.g., students, the unemployed, low income families) with stipends to cover the increased cost of heating oil and electricity along with everything else.

- Given the Climate Change hysteria, there is great pressure to diminish the use of fossil fuels in everything including heating and cars, which puts more pressure on the electric grid.

- Popular sentiment is still very anti-nuclear, and yet Europe, and most particularly France, is extremely advanced in nuclear technology. France has the most energy input from nuclear in the world, I believe, and could be completely energy independent because of it. But the politicians are dismantling them one by one to please the progressives. Macron is currently trying to persuade the country to develop nuclear energy, but it will be an uphill battle. So far he has faced little blowback. (Do you suppose people are beginning to see the problem?)

- Germany has many coal burning plants, but likewise they are dismantling them to please the progressives. The more this happens, the more expensive and rare energy gets. They will soon be beholden to Russia for their natural gas supply.

Europe has little natural gas and refuses to frack (again, for the progressives). Therefore, a number of other countries will be buying more and more of it from Russia. Most of it comes in through two major pipelines, one through Eastern Europe, and a new one coming in under the Baltic. The US has been trying to stop that pipeline, but obviously Europe doesn’t want to stop it and so they have been kowtowing to Russia. The US was providing lots of natural gas for the past few years, but Biden, by stopping the pipeline construction, has indirectly stopped that.

- The wind mills and solar panels are beginning to irritate the locals, e.g., in the North Sea where it disturbs the fisheries, and across the countryside that is still very populated. Plus these types of energy are really not economical and will not solve the energy needs.

So you think they have problems?