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The Gold Economy

|Includes: Randgold Resources Limited (GOLD)

I am quite often asked by readers “what do you think will happen?” in some monetary Armageddon-scenario, such as the complete collapse of the entire, global fiat-currency system, or ‘merely’ the collapse of their own, domestic paper. It’s a very reasonable question, since many precious metals commentators (including myself) regularly warn readers that this is a very real possibility, if not a near-inevitable fate.

I generally decline to attempt such answers, since there are so many important, additional economic “variables” to contend with – not to mention the numerous social and political variables involved. What I can attempt to do is to suggest how some narrow facet of our futures might evolve. In this particular case, I shall attempt to construct a plausible, hypothetical model of how the majority of our commerce might take place in a “hyperinflation” scenario.

While this is a scenario which is far more likely for the U.S. (and the U.S. dollar) than other nations/economies, the reckless manner in which the seemingly brain-dead “leaders” of other nations are following the U.S. in trying to drive their currencies to zero certainly suggests that if the U.S. is the first economy to implode via hyperinflation that it won’t be the last.

In reading the thoughts of other astute writers on this subject, there are some common themes which represent near-certainties in any economy subjected to hyperinflation. The first thing which we can rely upon is the instant creation of some form of “blackmarket”. This does not necessarily imply a criminal basis of operation, but merely a parallel system of commerce for that economy.

The reason this must come to pass is obvious: the official paper currency immediately becomes effectively worthless. This means that merchants do not want to sell much of (if any) of their merchandise using this near-worthless paper – since they can’t even replace their inventories with it, because in the time between when a customer makes a purchase and the retailer orders new inventory, the paper has lost so much value that it won’t even replace (at a wholesale level) what was purchased at a retail price.

This automatically means that most members of the society will have to find alternative means of making payment. To some extent, this can be done through barter, however (again) merchants will be very likely to avoid such a form of trade because they can’t replace their inventories with a pig or a bushel of wheat.

This means that citizens must find an alternative currency to survive – and here is where things get very scary for Americans. In Zimbabwe, when their own gross economic mismanagement eventually caused this extremely resource-rich economy to descend into hyperinflation, the inhabitants were able to fall-back on the U.S. dollar – the world’s “reserve currency”, and (by far) the most abundant form of paper on the planet.

If (when?) hyperinflation hits the U.S., what will U.S. citizens use for currency? Canadian dollars? Mexican pesos? The obvious problem is that relative to the U.S.’s huge population (and economy) there is far too little of these currencies (or any other, one currency) – especially in actual, paper form – to supply more than a small fraction of the need for any smoothly-operating blackmarket in the U.S..

This inevitably means that gold and silver must form an important part (and likely the most important part) of the blackmarket U.S. citizens and businesses will need to survive. Here is where the government’s attempts to lie to us and steal from us can be turned against them. When I look at my (“legal tender”) 1-oz Gold “Maple” and see its nominal value of $50, and my 1-oz (legal tender) Silver “Maple” and see its nominal value of $5, it no longer angers me, it makes me laugh.

What is “legal tender”? It means our government has made this an official currency, and it is bound by all the same legal principles as any other form of “legal tender”. Let’s put aside that thought for the moment, while we consider the nominal value of these alternative forms of legal tender.

With silver currently priced at $22.50 (in Canadian dollars), and with gold priced at $1345, why do my coins read “$5” and “$50” respectively? That answer is very simple. If a Silver Maple was priced at $5 one year, $8 the next, $11 the next, and so on, even the near-comatose sheep who comprise the vast majority of the North American citizenry would begin to think ask themselves why the same silver coin costs $5 one year, and a few years later it costs $22.

While these individuals may have to pull off their socks first (to devote more “calculating power” to the question), eventually they are going to figure out that the same silver coin isn’t actually worth than four times as much, but rather the value of their paper has dropped by more than 75%.

This is the same paper which these people are given as wages each week. Assuming that their employer hasn’t allowed these employees to reduce their effort by more than 75% over this time-frame, these apathetic couch-potatoes are eventually going to realize that not only are they being cheated every year on their wages, but that they are being cheated by a greater and greater degree each year.

As I have pointed out in a number of previous commentaries, in “real” (Shadowstats-adjusted) dollars, the Average American worker now earns what their great-grandparents earned back in the Great Depression. After wages had steadily risen for roughly 40 years following that economic nightmare, they have now been steadily falling for roughly the same length.

Forty years of improvement in the American standard of living have been stolen from average Americans, through their governments (and both political parties) lying to them about inflation for 40 years, while U.S. employers conspired to reduce their real wages (not to mention farming-out millions of their best-paying jobs).

After all that lying, cheating, and stealing – and all that the average person has suffered as consequences; for those who have had the foresight to protect/insure their wealth by converting it from one form of legal tender to another (namely gold-dollars and silver-dollars), our governments want to steal from us again.

You’ve made a capital gain,” they say, should we ever “sell” some of this legal tender – in the biggest lie of them all. Since it is the same gold (or silver) coin and and the coin was “legal tender” then, and is legal tender today, if I “bought” a Silver Maple for $5 (i.e. engaged in a currency-swap), and later “sold” it for $22 (swapped it back for paper), there is no $17 “profit”. Obviously, it now takes 22 paper-dollars to purchase what I could have bought for 5 paper-dollars only a few years earlier, and the $17 difference is not a “capital gain”, but rather it is the amount of value which paper-holders have lost (by holding paper) over that span of time.

What is important to note here is that even if we play the government’s game, and pretend (for argument’s sake) that it was even possible to have a “capital gain” by simply holding different forms of the same nation’s “legal tender”, we see the inherent theft taking place here. As a matter of the most elementary logic, if our government wants to claim we can make “capital gains” on our gold-dollars and silver-dollars, then it must allow capital losses from holding our paper-dollars (since all are legal tender).

With the paper-dollars outnumbering the gold-dollars and the silver-dollars (by many factors), it is financial suicide for governments to allow capital gains and capital losses to individuals holding different forms of our national, legal tender. To claim we can make “capital gains” on our gold-dollars and silver-dollars (but can’t make “capital losses” on our paper-dollars) is not only blatant hypocrisy, but blatant theft.

Irrespective of whether our governments continue to attempt to steal our gold and silver (through capital-gains taxes) or whether they give in to sanity and justice, and abandon such an inherently evil and hypocritical policy, gold-dollars and silver-dollars would be the most important currencies of any U.S. blackmarket.

If capital gains hypocrisy is abandoned, it can operate as a legal (and open) “blackmarket”, if capital gains hypocrisy is maintained, it will be a hidden and illegal market. The only real difference is that in the illegal version, the government not only gets zero capital gains taxes (since no transaction is ever reported) it also gets zero sales tax.

Given the impossible task of monitoring the daily cash-based commerce of over 300 million Americans, presumably even this corrupt, banker-serving government will have to cave-in to expediency and allow the legal, open use of gold and silver legal tender – because (and here’s the “carrot” for the government) the sales tax in such gold-dollar and silver-dollar transactions would be paid in gold and silver (and add badly-needed “hard currency” to government coffers).

This presumes that the government simply didn’t institute a new form of stealing – i.e. some extremely high consumption tax. If that happens, customers and businesses (again) will simply operate illegally, to avoid such a tax. Since the average person will literally be struggling to survive (as will businesses), the legality of transactions in a hyperinflation environment is completely irrelevant – except for the very wealthy, since they are the only people who have anything left to lose.

I will thus assume that the government caves-in to reality and allows open gold-dollar and silver-dollar commerce to take place legally. What we would immediately see for every business is two (or three) price-schedules for their inventory: prices for items in paper-dollars, and prices for things in gold-dollars (and/or silver-dollars).

Here is where we get to use the lies and deceit committed by our governments against them. Astute businesses and individuals will not price their items in gold or silver based upon the commercial value of the metal, but using the nominal value of the legal tender.

This means if you went to an auto dealership to look to purchase an automobile, and saw that the price was $50 billion paper-dollars, you wouldn’t have to “pay” the dealer with a measurement of gold by weight equal to that $50 billion (i.e. 10 to 15 ounces of gold). Instead, you would see that the gold-price would be $500 or $600 gold-dollars or silver-dollars – based on the nominal, legal tender value of those coins (minimizing sales tax).

As a footnote, I would add that using our bullion in such official transactions results in an official capital loss, based upon the purchase price of $500.

There are two reasons why this is both a moral and legal way of conducting commerce. First of all, by the time that hyperinflation hits any economy, a “dollar” (in paper form) is a concept which completely loses all meaning – because the value changes so fast that by the time you create (and distribute) a “definition” (i.e. a particular rate of exchange) it has become totally obsolete.

Citizens, businesses, and even the government itself need some firm point of reference for the price-structure of the entire economy to avoid total chaos – and an even more total collapse of the economy. Thus, while paper “dollars” would quickly become nothing more a national joke – comprised of a lot of ink and a lot more zero’s, gold-dollars and silver-dollars would become the de facto “currency standard” of the United States – if it wanted to be able to engage in any international trade (such as importing oil).

The absolute need for these gold-dollars and silver-dollars to widely circulate within the U.S. economy is a very powerful argument against any potential “confiscation” by the U.S. government – since as much as it would like to steal the gold and silver of its citizens (again), the amount of additional economic destruction which this would cause would seem to preclude such draconian action.

The argument against confiscating gold and silver bars is similar – but not as absolute. Furthermore, bars are not legal tender. When you purchase bars, you are specifically buying your gold and silver as a “commodity”, not a currency. The distinction that we can “spend” our (legal tender) gold and silver minted-coins, while we must “sell” our bars is more than pure semantics – given the choice by our governments to deliberately designate one form of bullion as “legal tender”, while another form is clearly not.

This is one of the primary reasons why I buy all of my gold and silver in minted-coin form, or rather, I swap my paper legal tender for gold and silver legal tender. As I pointed out in a previous commentary, swapping one currency for another for the purpose of “spending” the second currency is not a transaction which is subject to capital gains tax.

The most obvious example is when we obtain a different currency to use on a vacation. Should the foreign currency appreciate between the time we acquired it and the time we spent it, we are not required to pay capital gains tax on this “profit”. There is no legal principle or statute which differentiates between swapping one’s domestic legal tender for a foreign form of legal tender (to spend it), and swapping one’s domestic legal tender with another domestic legal tender (to spend it).

Note the important exception to this principle. People who speculate in the “FX” markets by buying and selling various foreign currencies (as well as their own domestic currency) are subjected to either capital gains or “income” tax on any profits – as they are quite obviously buying and selling these currencies as commodities. Similarly, people who engage in regular “trading” of gold and silver will be subject to either capital gains tax or income tax on any profits, because their actions show that they are also treating gold and silver as “commodities”, not currencies.

The other obvious exception to this taxation principle is with respect to those who purchase paper-bullion products, such as (so-called) “bullion-ETF’s”. Anyone purchasing bullion in paper form can expect to pay capital gains taxes – since it is impossible to ever “spend” such paper, only to sell it.

In deliberately discouraging its own citizens from acquiring gold and silver through massive amounts of anti-gold propaganda (not to mention perpetually manipulating these markets), the U.S. government is only exacerbating the severity of the national crisis which will ensue when it finally completes its mission to destroy the U.S. dollar (as an informal means of defaulting on its massive debts).

Given its pattern of behavior, many of its residents may not trust the U.S. government to act in a sane and rational manner after it has destroyed the U.S. dollar. Specifically, they may still fear that the U.S. government will engage in the self-destructive act of (once again) confiscating their bullion. As I have outlined above, this would result in a much greater level of chaos and economic devastation.

At the very least, this would mandate that Americans transfer the majority of their wealth outside the country (or as much as possible). Even then, one has to wonder if there are any places outside the U.S. where U.S. citizens can hide their wealth from the ‘tentacles’ of the multinational bankers who are the U.S. government?

Our world of paper currencies is rapidly failing. “Real money” (i.e. gold and/or silver) is the only salvation for this banker-spawned monetary debauchery. And the more our governments fight against this necessary evolution, the more damage they will do to themselves, and the more harm they will inflict on their own citizens.

Disclosure: none