Gold As Unpegged Legal Tender

Gold As Unpegged Legal Tender​

We need to level the currency playing field to enforce a practical, market based boundary on irresponsible monetary and fiscal policy.

Poor System Design​

Our Founding Fathers understood the problems with fiat money and monetary debasement. They attempted to prescribe guardrails in the Constitution to prevent these issues from plaguing the United States of America. Sound money lasted for a hundred years or so. But maintaining strict fiscal discipline is difficult. Eventually, our government removed it's sound money shackles and adopted a pure fiat currency to allow great flexibility with fiscal policy. The prudence with which that has been effected has deteriorated over the years to the point where politicians have famously proclaimed that "deficits don’t matter".

Where sound money used to impose hard boundaries on fiscal policy, fiat money allows a soft boundary that can be exceeded to the limit that nations and peoples have faith in the country's ability to pay off debts. We live in an age of a grand monetary confidence game. We live in an age where we are apparently determined to find out just where the boundary of faith exists by testing the debt ceiling in ever expanding tranches. It is a disasterous state of affairs to employ a system design that relies upon a political class to enforce unpopular or difficult fiscal restraints - to support a greater good at the expense of their own self interest.

Loose monetary policy has led to massive asset bubbles and now years long "transitory" inflation. The Fed's solution to taming inflation is to purposefully handcuff the economy by raising rates - imposing severe economic damage to many industries and people in the process. Irresponsible monetary and fiscal policies are enabled by our pure fiat dollar system.

Waning Empire​

Throughout history, empires rise and fall. Ray Dalio warns that we are nearing the end of the cycle for the current American Empire. Nouriel "Dr. Doom" Roubini has outlined numerous challenges the facing the dollar. He concludes in part:

... the relative decline of the US dollar as the main reserve currency is likely to occur over the next decade.

Stephen Jen and Joana Freire with Eurizon SLJ Capital Limited published a sober analysis of the issue and concluded that:

...
The dollar’s global dominance should be assessed along two distinct lines: reserve and international currency status. Adjusting for exchange rate (price) changes, the dollar suffered a stunning collapse in 2022 in its market share as a reserve currency, presumably due to its muscular use of sanctions. While it is well understood that the dollar had, for close to 20 years, suffered a quiet erosion in its reserve currency status, in 2022, the dollar’s share in global reserves – in real terms – collapsed at 10 times the average speed. Global reserve managers sold a lot of dollars in 2022 when the dollar rallied. The prevailing view of ‘nothing-to-see-here’ on the USD as a reserve currency seems too innocuous and complacent. Having said this, the dollar still enjoys substantial network advantages as an international currency, mainly because of its huge, liquid, and reasonably well-functioning financial markets. The persistence of these preconditions, however, is not preordained. If the US makes more policy errors and abandons the culture of self-examination, there will likely come a time when much of the rest of the world will actively avoid using the dollar. Finally, what needs to be appreciated by investors is that, while the Global South is unable to totally avoid using the dollar, much of it has already become unwilling to do so.

Indeed, the dollar's network advantages are due to be seriously challenged as the BRICS work towards developing an alternative global currency. Saudi Arabia is working towards joining the BRICS, even going so far as to reestablish diplomatic relations with Iran at the behest of China. Should Saudi Arabia support the BRICS currency with their oil trade, the dollar will face a severe challenge to it's network advantages.

We are slowly approaching an event horizon where the petrodollar system will break down and the dollar will lose it's exhorbitant privilege. America will eventually face a currency and sovereign debt crisis. It might 10 years out. It might be 50 years out. It might be longer than that. But it is coming and we, or our children, are going to have to deal with the fallout.

GAULT (Gold As Unpegged Legal Tender)​

In 2011, Rep. Ron Paul introduced the Free Competition in Currencies Act of 2011 (FCiCA). It is a page long bill that would have removed sales and capital gains taxes on gold and silver coin (whether minted by the US Mint, foreign mints or possibly private domestic mints) and removed the legal tender monopoly from the Federal Reserve Note dollar. It would have allowed Joe Public to freely convert gold and silver coin with the dollar at market rates for the weight and purity of the coin(s). It would have given Joe Public and Joe Vendor the option to conduct transactions in dollars or the market equivalent value in gold/silver coin. It would not have imposed any obligations on Joe Public or Joe Vendor - they have free choice to conduct transactions in the medium of their choice.

Individual States have been enacting gold and silver legal tender bills over the last decade or so. As of the time of this writing, 43 States have passed such legislation. Texas is also considering the creation of a State owned digital gold token (crypto coin) backed by gold stored at the Texas Bullion Depository. States are already working to enable a payment infrastructure for transacting commerce (with State governments at least) using gold and silver. Removing the Federal legal tender monopoly on Federal Reserve Notes, and federal taxes (sales, capital gains) on gold and silver is the key to unlocking GAULT's full potential.

Real World GAULT Example​

Recently, there have been a number of countries that have begun dual currency experiments. El Salvador famously made Bitcoin legal tender in September 2021. Central African Republic gave Bitcoin legal tender status in April 2022, but they have since rescinded it. Dominica made TRON (another cryptocurrency) legal tender in October 2022. St. Maarten has politicians advocating for giving TRON legal tender status there as well.

But perhaps the most interesting experiment to date has occurred in Zimbabwe. Zimbabwe has been embroiled in a battle with hyperinflation. In March 2020, they legalised the use of foreign currency for local transactions. This led to the population abandoning the local currency in favor of the US dollar. In 2022, Zimbabwe:

... enacted legislation to entrench the multi-currency system, which makes both the United States and Zimbabwe dollars legal tender for all local transactions for the duration of the National Development Strategy 1 (NDS1), the country's medium-term economic blueprint, which runs until 2025.

But Zimbabwe also did something quite extroardinary in October 2022 when they announced the issue of a new gold coin from their national mint that would also receive legal tender status and retain a market rate for it's bullion value (ie. it was not issued a nominal face value). This is essentially what the Free Competition in Currencies Act aimed to achieve.

The issuance of the gold coins was a success:

...
The Monetary Policy Committee and the RBZ never viewed gold coins as a silver bullet, but a necessary intervention at the time. It was an idea mooted to contain and reverse the accelerated depreciation of the local currency.

The product worked, as we had imagined it would. Immediately after introduction, gold coins drew away attention from the United States dollar. In our books, the effect was very impactful.

Gold was seen as the best product to contain local currency volatilities, as it offered a viable alternative to the United States dollar.
...

The IMF has pressured Zimbabwe to end the gold coin experiment, but Zimbabwe has indicated that they want to continue the program:

...
Reserve Bank of Zimbabwe governor, John Mangudya, believes that gold coins are an alternative foreign currency investment to dissuade traders, investors and other economic players from holding and hoarding forex for speculative purposes.

The International Monetary Fund has cautioned Zimbabwe against gold coins, but Mangudya insists on continuing to issue the assets, which are hedged against movements in the international spot gold price.

“Use of gold coins for mopping excess liquidity is particularly important in the dual currency environ where the public has a choice of holding both the dollar and local currency,” said Mangudya this week.

Zimbabwe has sold about 11 000 gold coins, with 35% of these taken up by individual investors and the balance by corporates.

Against this backdrop, the Zimbabwean central bank says it will not discontinue the gold coins “until such time when there is a high preference” by Zimbabweans “to hold domestic currency-denominated” assets.
...

As of the last report I have seen, Zimbabwe has sold 31,866 gold coins in different denominations through March 10. Zimbabwe is now planning to roll out a digital gold backed token (gold backed crypto coin) much like what Texas is considering in order to allow more of it's poor population to be able to buy smaller denominations of gold.

By all accounts, the creation of GAULT has been a positive development for the country in it's fight against hyperinflation with it's fiat currency.

Time for America to "go GAULT"​

To be clear, America is not Zimbabwe. The dollar is not facing an imminent currency crisis. It likely won't for many years. But there are enough known challenges on the horizon to justify a re-evaluation of "going GAULT" and how it might help America (and Americans) survive or even avert a waning dollar hegemony.

Enactment of a GAULT system would encourage people to save wealth in physical gold/silver coin while continuing to transact commerce with dollars (ie. the status quo) unless and/or until there was a massive devaluation or loss of confidence in the dollar. It would impose a free market restraint on currency debasement which would discourage irresponsible monetary and fiscal policies. This in turn would restore confidence in the dollar as a stable store of value for a global reserve currency.

 

[Joe King]

maintaining strict fiscal discipline is difficult.

No, not really. All it takes, is for the people running things to actually want to apply strict fiscal discipline.

Lacking that, it won't ever happen.

Strict fiscal discipline is not something that accidentally happens.

Spending tomorrow's money today and being able to pay it back later with cheaper money, is a very powerful and tempting thing that has already seduced virtually all politicians for many Decades now.

More importantly though, it requires an electorate who understands the need for the government exercising strict fiscal discipline, and only seeks to elect representatives who will practice it.

If we can figure out how to do that, the actual problem will fix itself.




Sorry for the late bump.

 

[pmbug]

...
Individual States have been enacting gold and silver legal tender bills over the last decade or so. As of the time of this writing, 43 States have passed such legislation. ...

I should clarify that the bills the 43 States enacted were not legal tender bills. They were bills to remove sales taxes on bullion. There is actually a movement amongst the States to recognize gold and silver as legal tender (and/or remove State level capital gains taxes). As of this moment, Utah, Wyoming, Oklahoma, and Arkansas have all passed such legislation. Florida and Missouri have bills pending.

If this initiative continues to expand, it might eventually lead to a national discussion on Federal laws/status. Updates on these developments are being posted here:

https://www.pmbug.com/threads/indiv...r-gold-and-silver-legalization.469/post-87352

 

[nickndfl]

Gold is fungible.