Gold in a Bretton Woods 3 World is Worth More
Dear Michael Every, Bretton Woods 3 is a Thing
Housekeeping: Have a good holiday with friends and family. We are traveling andwill not be hosting a Founders discussion this Sunday. The Weekly report will however go out. Here is one feature write up for today. Tomorrow’s will have some Inflation Q and A responses in it as well.
Where We Are Right Now
The world is bifurcating in generationally irreparable ways. Covid, trade sanctions, and war have underlined western supply-chain dependencies and vulnerabilities to Eastern economies.
Meanwhile intractable ideological differences1 have all but set the world on a path towards increasing mercantilism concurrent with receding globalization. The world is splitting in two along trade lines as a function of these deep differences manifesting in global protectionist policies.
Nation-states are going their own way to ensure economic survival. Money as a tool of international trade is now set for bifurcation as economies split into pro and anti dollar factions. These divisions manifest largely along East and West lines. How did we get here? Western sanctions may have forced Eastern hands.
Sanctions Hurt USD Status
Sergei Glazyev, Bank of Russia in a recent interview:
“Having frozen Russian foreign exchange reserves in custody accounts of Western central banks, financial regulators of the US, EU and the UK undermined the status of the dollar, Euro and Pound as global reserve currencies. This step sharply accelerated the ongoing dismantling of the dollar-based economic world order.”
Outside our Western bubble, there is a growing reluctance by nations to hold Western currencies in their foreign exchange reserve custodial accounts. Why?
The risk of sanctions and confiscation by the West can remove a nation’s ability to economically exist. Not to mention the questionable safety of those western Fiat currencies given the condition of their own economies now.
Why should emerging anti-dollar nations continue using the US dollar for crossborder transactions at all with anti-dollar trade partners if there can be an agreed substitute?
The US bank reserve sanctions on Russia may have forced China’s and Russia’s shared hands to step up plans to get off the dollar.
Intractable Ideological Differences
Before getting into the plan China and Russia have, it may help at a very high level to outline a key monetary difference between the West and East as alluded to in the first section.
[ EDIT- Feel free to skip right to the section entitled Golden Yuan Ascendant if you like.- VBL]
The world’s halves are at pronounced odds when it comes to perception of stores of value. The East largely believes Gold is one. Western Economists largely do not think it has value at all outside of its tiny industrial usefulness.
What is Money?
Western economists believe debt ( future value of money) does not matter and therefore money has no value in itself. They believe that all value is created by what mankind does to resources and therefore money is just a medium for exchanging that man-made value. This is why MMT has become something of a thing to them.
The East, which is more materialistic and less involved in abstractions than the West, believes natural resources and money itself can have value just by existing. Therefore, their new money will be partly linked to commodities.
Zoltan’s Collateral Crisis As East-West Battleground
Remember when Zoltan commented on the commodity collateral crisis? That was a taste of things to come.
Commodities are collateral, and collateral is money, and this crisis is about the rising allure of outside money over inside money.
Stated then: Collateral is the foundation on which the financial system is based. Collateral equals money in the realest sense. That Eastern collateral is a large and grossly undervalued part of the current core’s monetary valuations.
The West appreciates physical collateral less than the East. We value futures, derivatives and those things created on top of the spot markets. The East believes the foundation of global trade as represented in actual spot markets was grossly underappreciated. Thus, a collateral crisis which we have yet to get out of ensued.
Those commodities have an intrinsic value that can be measured. Even if their value is only potential in nature and must be forged by mankind to generate economic wealth, these resources can also be measured in potential value. Therefore to the East more than the West, that basket of commodities has a fundamental value attached to it. Gold is a slightly different, more interesting case.
Gold cannot be made into something better than itself. Which means, while being a natural resource that takes real energy and human effort to extract, has no practical industrial economic application. It cannot be improved upon and has no broad industrial use. Therefore it is perfect as a store of value. It truly is G-d’s (natural, organically made) money.
It does not matter if we in the West agree with this or not. What matters is: this is largely what the East believes. Gold, whose continued existence is repulsive to post enlightenment Keynesian economists, is much more than a relic to those who understand its value as an asset that exists in nature, yet cannot be improved for human consumption. Which is the other reason China is going to use it to replace the dollar.