As the US dollar falls into ruin
Luke Gromen told Dale Pinkert on the Forex Analytics July 22nd F.A.C.E. show that the U.S. went to China last fall and asked the Chinese to strengthen the Yuan. The Chinese said if the United States wants a weaker dollar, they need to let it go versus gold, implying that the gold market is influenced by the government’s hand.
Pinkert, being a currency trader, expressed concern that the dollar could be devalued overnight by government fiat, and asked how the executive branch could engineer such a devaluation. Groman matter-of-factly pointed to Section 2.10 of the Financial Accounting Manual of the Federal Reserve Banks and said the President could tell the Treasury Secretary to tell the chairman of the Federal Reserve to remonetize gold.
Indeed, the first paragraph of Section 2.10 reads:
“The Secretary of the Treasury is authorized to issue gold certificates to the Reserve Banks to monetize gold held by the U.S. Department of the Treasury (Treasury). At any time, Treasury may reacquire the gold certificates by demonetizing the gold.”
Gromen is well respected in mainstream financial circles, speaking often on financial networks. He told Mr. Pinkert that the Fed had 260 million ounces of gold and if the dollar were revalued vis-à-vis gold, a la FDR in 1933 or Nixon in 1971, unilaterally to, say, $20,000 an ounce by government edict, for every $4,000 increase in gold $1 trillion would be created. So, in the case of Gromen’s hypothetical $20,000 revaluation, five trillion would be created to go in the Treasury’s General Account (TGA) “free and clear” as he says. The Treasury could then retire $5 trillion of debt and Uncle Sam’s debt-to-GDP ratio would drop from 122% to 70%.
Gromen called this a “Nixonian Shock” that possibly a Trump Administration would implement in the first half of 2025. Once the debt was reduced by $5 trillion the Federal government could then ramp up its debt level again. Dollar weaker, debt level lower. It’s a win-win. Except, of course, this would be very inflationary. But so is the U.S. financing its debt with short-term T-Bills. Gromen makes the point that countries which finance deficits with short-term debt, because no one will buy their long bonds, are known as “banana republics.” This is the current path of the U.S.
In “The Case Against the Fed,” Murray Rothbard wrote that the 260 million ounces of gold held at the Fed were statutorily valued $42.22 per ounce and the price he said was, and he was writing in 1994, an “absurd undervaluation on its face, considering that the gold price on the world market has been varying from $350 to $380 an ounce in recent years.” Turns out that those were the good old days. Now gold trades for more than $2,400 per ounce.
Murray’s plan was to end the Fed by selling its assets and to liquidate the central bank’s liabilities. Its gold would have to be revalued to provide the capital to repay the liabilities. When he wrote in 1994, the amount of the then Fed liabilities, $404 billion, would have to be divided by the 260 million ounces of gold to produce a per ounce required revalued gold price, $1555 per ounce. “If we revalue the Fed gold stock at the ‘price’ of $1555 per ounce,” Rothbard wrote, “then its 260 million ounces will be worth $404 billion. Or, to put it another way, the ‘dollar’ would then be defined as 1/1555 of an ounce.”
Using today’s figures per the Federal Reserve’s H4.1 report of June 12, 2024, to update Rothbard’s calculation, the Fed’s liabilities are $5,515,715,000,000. The Fed hasn’t bought any more gold unlike some other central banks. Gold would now have to be revalued at $5,634,761 per ounce or a dollar would be defined as 1/5,634,761 of an ounce.
The dollar’s value has been demolished in just the 30 years since Rothbard wrote “The Case Against the Fed.” While the candidates argue about the border and the rights of the unborn, who will speak up for a currency that continues to have its purchasing power ruined? Imagine what little value will be left three decades from now.
Originally Posted at https://mises.org/
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