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Gold Deficits and T-Bond Fantasies

Commodities / Gold and Silver 2016 Jan 19, 2016 - 05:08 PM GMT

By: DeviantInvestor

Commodities

Fantasy #1: 

My name is John Q. Public.  I live a good life, make lots of money (never mind how) and have debts such as a mortgage on a great house – $375,000, a Cessna – $150,000 (my air force), and a sweet little two mast sailing ship – $78,000 (my navy).  Also my wife and children (my army) spend a lot of money.  My total credit card debt is $97,000.


But this was a bad month for revenue collections and there was only one thing to do.  I called the customer service agent at my bank – the 3rd State Bank of Chicago, and asked for a credit limit increase.  The friendly customer service agent asked how much I wanted my credit limit increased and I suggested from $100K to $200K.  She checked with the credit computer and it beeped back “fine.”  She added, “Mr. Public, we are running an after-Christmas special on credit limit increases this week.  For a one-time payment of $25 we’ll increase your limit another $100,000 to a total of $300,000, and you’ll be eligible for another guaranteed limit increase in six months.  Would you like to approve that $25 charge to your account?”

I said, “Sure.  That would make me very happy.”

She took a moment, pressed a few buttons, and said, with a smile in her voice, “Mr. Public, your happiness is important to us.  Your credit limit has been increased to $300,000.  From the bank whose motto is, ‘Nothing can go wrong’ we thank you.  Have a wonderful day.”

And John Q. Public lived happily ever after, spending on his credit cards, and regularly increasing his credit limit.

Fantasy # 2:  

President Nixon in 1971 thought long and hard about “closing the gold window” and decided against it, in spite of heavy lobbying from his powerful banker friends.  Instead he ordered that all excess expenditures be funded from the US gold stored at Fort Knox instead of from borrowed dollars.  Trucks left Fort Knox and the other gold depositories every week, drove to New York, and delivered gold to the foreign and domestic creditors of the US who had accepted dollars in trade for goods, oil, foreign aid, services, and military support.  This continued for a very long time and the government eventually ran balanced budgets. (Remember – fantasy!)

And the US government spent money and national savings in the form of gold for many decades and the politicians, bankers, and citizens lived happily ever after.

Fantasies and dreams should be checked against reality. 

Banks might increase credit lines forever, Fort Knox might never run out of gold, everyone in the Middle-East might “play nice” for the balance of this century, and government deficit spending might go quietly into the night.

But it is important to test assumptions, examine fantasies, and check facts.

Regarding Fantasy #1:  Most commercial banks don’t continually increase credit limits.

Regarding Fantasy #2:  Fort Knox would quickly deplete its gold if deficits were funded by selling gold, and Fort Knox may be nearly empty now.  Let’s do the numbers.

  • In round numbers the official US gold holdings at Fort Knox and other locations is 260,000,000 ounces. Impressive if you believe it!
  • In round numbers the official US government debt is $19 Trillion. Impressive!
  • Gold is priced at about $1,100 per ounce (January 2016) so the US government official national debt is about 17.2 billion ounces of gold. Oops!  The math shows there is a shortage of about 17 billion ounces of gold.
  • Officially the US gold stockpile was over 20,000 tons in the late 1950s and about 8,000 tons (260,000,000 ounces) in 1971. Under fantasy # 2 above, the US gold stockpile would have been entirely sold in a few months of 1971 (and most other years) if deficits had been paid with gold.  The US would have been issuing IOU Gold certificates for the past 40+ years.  Oops!

IOU Gold Certificates:

No one would accept IOU Gold certificates knowing there was no gold left in the official stockpile, and knowing that the debt exceeded all the gold ever mined throughout history – supposedly about 5.5 billion ounces.

Fantasy # 3:  T-Bond bubbles:

But the US government owes nearly $19 Trillion in T-Bonds and Notes.  US T-Bonds are generally accepted and as good as cash because everyone knows the T-Bonds will be redeemed by US dollars – because we can borrow the necessary dollars into existence to pay back the other dollars we borrowed into existence to pay for those other dollars for deficit spending and so on.

Does the dollar and debt game sound circular?  Dollars and T-Bonds are accepted because dollars are accepted.  Debt is paid back by issuing more debt.  As governments spend too much and create more debt, governments necessarily create more debt to repay because of accumulated interest and future deficits, so governments create even more debt to repay the debt plus interest.

The US government would have run out of gold in a few months of deficit spending during the 1970s but the Fed is still creating dollars – obviously because they can be created with the punch of a button while gold can’t be similarly created.

Fantasy # 4:  Central Bank Created Wealth

Central banks pretend to create wealth and assets by borrowing them into existence and they pretend there are no dire consequences.  Supposedly the Fed’s balance sheet has increased about $3 Trillion since the 2008 financial crisis.  That is equivalent to roughly 150 billion “man hours” of labor or most of a year’s labor for every worker in the US.  Or, that $3 Trillion is roughly 15 times the total value of all the gold supposedly stockpiled in Fort Knox.  Pressing a button a few times and creating $3 Trillion is not equal in value to nearly a year’s labor for all US workers.  Similarly, that $3 Trillion in “funny money” is not equal in value to nearly 3 billion ounces of physical gold mined from the earth.  The central bank fantasies temporarily appear real.  Expect that fantasy to eventually pop!

The world would not accept IOU Gold certificates knowing those certificates could never be paid.  When will people stop believing the narrative regarding IOU dollars, euros, pounds and yen and realize that something from nothing is not real, printing currencies does not create wealth, and we can’t tax and print ourselves into prosperity?

Okay, we all know central banks aren’t going away, deficit spending will continue, and the $200+ Trillion in global debt is growing rapidly toward $300 Trillion.  That $200+ Trillion in debt is someone’s liability and another’s asset.  The financial and political elite do not want those supposed assets to default – hence the printing and borrowing scam will continue.  Expect more central bank intervention, currency devaluations, and higher prices on average.  This includes the prices for gold and silver.

CONCLUSIONS:

  • The governments and central banks of the world will borrow, spend, and create more debt – until the financial system is reset.
  • Central banks and governments can’t create gold with the punch of a button so they use digital debt based fiat currencies instead.
  • An individual can’t borrow and spend in forever increasing amounts, and neither can governments.
  • A new President, Prime Minister or Premier will NOT make it better.
  • Gold will remain valuable after the reset and well beyond the next century. Dollars, pounds, euros and yen are on the “endangered” list.

Gary Christenson

GE Christenson aka Deviant Investor If you would like to be updated on new blog posts, please subscribe to my RSS Feed or e-mail

© 2016 Copyright Deviant Investor - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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