The Asia Times Online portal (www.atimes.com) posted the following interview of Antal E Fekete requested by a gold-friendly hedge fund. Antal E Fekete has since 2001 been consulting professor at Sapientia University, Cluj-Napoca, Romania. In 1996, Fekete won the first prize in an International Currency Essay contest sponsored by Bank Lips Ltd of Switzerland.
Part Two (see the first part in “Expert reports” for 14.09.2010)
Why a gold standard? Why not pick a basket of precious metals, or of some other marketable commodities to serve as the standard unit of value?
American money doctors are in the habit of ridiculing gold in comparing it to frozen pork bellies that, horribile dictu, have been trading in the same pit since gold was expelled from the monetary paradise. This reflects a mindset suggesting that gold, at best, is just one of several marketable commodities, and a basket of wider selection could provide a better monetary reserve than gold.
This position is false. Gold is no frozen pork bellies - wishful thinking of the American money doctors notwithstanding. The reason is that the marginal utility of the former declines more slowly than that of the latter. In fact, the marginal utility of gold declines more slowly than that of any commodity (or a basket of any commodities) known to man. That's what makes gold what it is: the monetary metal par excellence. That's what makes gold the only monetary asset that has no counterpart as a liability in the balance sheet of someone else.
Incidentally, there are only two monetary metals: gold and silver. Other precious metals such as platinum and palladium are not monetary metals. What sets monetary metals apart from other precious metals is their stocks-to-flows ratio. They are a high multiple for the monetary metals, but a small fraction for other precious metals.
Critics say that historically, under the gold standard, the world economy languished, trade was sluggish, technological and therapeutic innovation was unexciting, in a word: the gold standard has never worked well. How do you answer that?
This allegation is just the opposite of the truth. The heyday of the gold standard was during the 100 years' period between 1815 (the end of the Napoleonic wars) and 1914 (the start of World War I). This was the age of transcontinental railways, intercontinental shipping, when all the key inventions were made that ushered in the age of electricity, of the internal combustion engine, of aviation, of wireless telecommunication, of the X-ray, etc. Financing these discoveries and their applications in transportation, telecommunication, and therapeutics would have not been possible without the gold standard and the accumulation of capital that it facilitated.
Introducing a gold standard hardly seems possible today, in view of the gigantic injections of new currency into the economy world-wide. How could the gold standard handle that?
It wouldn't. The new gold standard would let the regime of irredeemable currency run itself aground and boil in its own juices of excess fiat money. When it can no longer handle the task of delivering food and other necessities to the people, when it can no longer provide employment to the majority of the population, the gold standard will spring back to life spontaneously.
People have to eat, and they also have other necessities. They must have work to be able to earn a living. It will dawn on the world, maybe unexpectedly for the majority, that gold has a place underneath the Sun. Gold is that hard core of capital that can be destroyed neither by inflation nor by deflation, that will survive any consolidation of balance sheets. Gold is at the heart of the healing process of the world economy that makes survival possible.
Is a gold standard the ultima ratio to cure the human weakness, the belief that you can multiply wealth by printing money without limits? Is it not true that no central bank could ever stand up to do-gooder politicians?
Friedrich Hayek, the Nobel-laureate Austrian economist thought so. He said that there would be no need for a gold standard but for the propensity of governments to spend beyond their means.
I don't believe that. I see gold everywhere, independently of the government's spending propensities. Even without a gold standard, gold has a role to play in forming prices, wages, rents, the rate of interest. It helps to find the balance between short- and long-term satisfaction; it determines the marginal productivity of capital and labor. It is like air, we don't see it yet it's there and, without it, there is no life.
You need a yardstick to measure value. Gold is the raw material of which that yardstick is made.
In the past, states also went bankrupt, some repeatedly, eg, ancient Athens, Rome, or France in the 17th and 18th centuries. This shows not only that such occurrences are possible under a gold standard, but also that the powers-that-be could always circumvent limitations put on coining money and restrictions on banking whenever the idea of scarcity of gold takes hold. What makes you think that a future gold standard may be more successful, and could endure for a long period of time?
There is no hard-and-fast limit on the amount of self-liquidating credit that can be safely built on the unit weight of gold. Improvements in clearing techniques, such as those in telecommunication, freight-forwarding and warehousing will increase the amount of credit outstanding while there is no corresponding increase in gold bearing that credit. It is this property that makes gold the ultimate extinguisher of debt. It is simply not true that restrictions put on the economy by the gold standard are "contractionist", and that the "powers-that-be" are justified in breaking those fetters.
Gold is not scarce: in terms of its stocks-to-flows ratio gold is the most abundant substance on earth. But for the gold standard to endure man has to have confidence in the promises of government to pay gold. If this confidence is impaired, gold tends to go into hiding and then the system may break down. The answer to the problem is that the government must keep faith with its subjects without fail.
What is your opinion of the governments' handling the great financial crisis, the Greek crisis, the crisis of the euro, and the other currency crises brewing? How long can they contain the "debt-firestorms"? Will they be able to extinguish it with a shower of new debts?
The governments of the industrialized countries bear full responsibility for bringing the world to the brink of this crisis - the greatest financial and economic crisis ever. They should have resigned in admission of their guilt, and let new governments armed with a better economic theory take over and work out the remedy. Instead, they doggedly cling to power. Their analyses of the causes of the malady are faulty; the remedial measures they have recommended are the old nostrums, incredibly inept, nay, counter-productive.
Take the example of the runaway growth of the debt tower. The great financial crisis, the Greek crisis, and all the currency crises still at the brewing stage, are part of the same problem, namely, the debt problem. It goes back to the year 1971. On August 15 of that fateful year, the US government defaulted on its international gold obligations. By now the debt tower threatens with toppling, and burying the world economy under the debris.
The reason for the exponential growth of debt in the world is that the international monetary system has been lacking an ultimate extinguisher since 1971. Total debt in the world can only grow, never contract. We should do well to remember that, since time immemorial, gold has successfully acted as the ultimate extinguisher of debt - until it was forcibly removed from the international monetary system in 1971. Paying debt in gold extinguished the debt, period. Since 1971 governments have pretended that paying debt in US dollars extinguished it, too. But in fact it did not. Debt was merely transferred from the debtor to the US government and kept accumulating. Transferring debt is not the same as extinguishing it. Debt accumulation has a natural limit. This limit has now been reached.
Your description of the debt-tower as a firestorm is apt. Governments of the leading industrialized countries will not be able to contain the firestorm they have started. They are just pouring oil on the fire.
How will the current situation unfold? Do you think resolution will come in the form of hyper-inflation or deflation?
One has to be careful with these terms. Both inflation and deflation mean destruction of wealth through destroying the value of obligations; the former through depreciation, the latter through default. It is also possible to have a mixture of both simultaneously.
But if you insist on my answering your question, chalk me up in the deflation column. Signs of deflation are all around us. Rivers of new money are unable to turn receding prices and interest rates around. Confidence in promises to pay is evaporating. Banks do not trust one another with overnight money. Paper gold is being pushed down the throat of those wanting physical gold. Worse still, vanishing confidence has reached the stage of contagion. Paper wealth is disintegrating before our very eyes. The domino-effect is spreading: the collapse of one firm brings down two other. Most frightening is the shrinking of employment. It is leading to a break-down in law-and-order. Governments are completely unprepared and think that it is just a matter of printing more money, for which they are superbly equipped, to prevent further contraction.
Your answer to my next question would certainly interest our readers very much. Are you invested in gold, silver, and other precious metals? Would you still buy them at these elevated prices?
I take exception to your use of the word "investing". To my way of thinking, holding monetary metals is not investing but more like taking out an insurance policy. I don't think the other precious metals (or stones, for that matter) make good investment. As far as the monetary metals, gold and silver, are concerned, you would be well-advised to buy some more every month routinely, regardless of the price. You should look at your holdings as you look at your fire insurance policy. If you never need to collect, well, so much the better.
At the optimum, you would track the value of your assets not at their dollar price but at their gold equivalent. In other words, you would carry your balance sheet, both on the asset and the liability side, not in dollar or euro units, but in gold units (ounces or grams). It takes self-discipline to do that, but this is the only way to avoid the pitfall of always looking at your own face in a curved mirror. The torsion of the image may easily translate into torsion of the mind.
I come to my final question, if I may. What do you think the gold price will be in terms of US dollars or euros in three to five years' time?
I am sorry, but I am not a practitioner of clairvoyance. I think I would compromise my reputation as a scientist if I ventured to answer this question. Besides, I don't think I am very much interested in knowing. Guesses at the future price of gold are dime a dozen.
A more appropriate - and interesting - question may be whether the dollar and the euro will still be around in three to five years. I am not sure about the euro, but I think the dollar will definitely be around three years from now. Five years - maybe not, but I wouldn't be surprised if the staying power of the dollar extended beyond five years.
It is dangerous to underestimate the strength of the poison you have to live and work with.
