Paul Brodsky

Gold: Not Just for Gold Bugs Anymore

I believe the Amero would include only North American economies, which would likely exclude (and enrage?) most of global trade. Conceivably it could be used should a new global regime be rolled out.

There are two issues of immense practicality that need to be considered before a classical gold standard can be adopted globally however:

1) political forces have for years embraced the power to control a nation's money supply - we very much doubt that the enablers and beneficiaries of the current fiat money system will yield to such a seemingly rational solution without a fight.

2) given the massive growth in global paper "reserves" of the last 40 or so years, the equilibrium price of a gold peg today is simply shocking in terms of its magnitude (in all major currencies - not just the US dollar).

Regarding point # 2, simple back-of-the-envelope calculations imply that for existing US dollar bank reserves to be made exchangeable into gold, the current exchange ratio (or price) would be approximately $8700 per ounce - and growing every time the Fed increases its balance sheet. (The figures for the large Asian economies are multiples of this by the way.)

We come to this figure in a rather straightforward manner and readily acknowledge that more precise calculations can be made (regardless, the qualitative nature of this point will remain valid we suspect):

a) the US reports official gold holdings of approximately 8100 tonnes, or, about 286 million ounces
b) the liabilities of the US Federal Reserve's balance sheet equal, today, approximately $2.5 trillion
c) simply dividing "b" by "a" yield an equilibrium gold price of ~ $8700 per ounce

These cold hard facts will make a classical gold standard politically difficult to propose and adopt no doubt. Nonetheless, the logic and rationale of such a proposal are indeed fundamentally sound and, at a minimum, provide the basis for a constructive debate going forward.

Gold: Not Just for Gold Bugs Anymore

As a co-author of the piece, I find the mere discussion of re-adopting a new monetary regime - that we all seem to agree is necessary - to be heartening. I encourage all interested parties to follow the link and read the entire piece, "A Not-So Modest Proposal." My partner, Lee Quaintance, and I go through a methodology for re-pricing gold to a practical level and the likely consequences of doing so. In it we outline the mechanics behind re-instituting a gold-peg.

We realize US and European policy makers do not currently have the political cover to start discussing a gold standard - even if they felt it were necessary. However, it is becoming increasingly clear to us - and maybe to you - that the G7's global authority is being diminished as those of emerging economies are rising. There will have to be a new, more equitable global monetary regime in the coming years. Our hope is that the US policy makers do get in front of this inevitability so they can outline terms of trade that all the US a leading role.