Thursday, April 7, 2011
Reference Point: Gold – Update #2
Yesterday President Obama vowed to veto the Republican’s short-term spending bill, and today Washington is facing a possible full-on government shutdown in less than 26 hours when the cash funding runs out.  Not only that, but while the cash will run out at midnight tomorrow, April 8, it appears the national credit card will be all used up a little more than a month later, on May 16.  Calling this a dire situation may be an understatement.
Meanwhile, over in Europe, they have just released the new market-based revaluation of their monetary reserve assets, including gold. They do this once every three months. It sort of lets the world know the true, market-based strength of their monetary foundation. It’s not that the currency is redeemable in government gold like the old gold standard. They simply make sure physical gold is available, tax free, at the floating market price. You can even buy it at the bank. This acts as a nice counterbalance for those who worry about saving in a depreciating fiat currency. And by publicly reporting the gold revaluation every quarter, the European Central Bank leads this stabilizing practice by example.
By contrast, the U.S. Treasury gold has never been marked to market. It is still marked on the books at the price set, not by the free market, but by the edict of President Richard Nixon in 1973:
U.S. Treasury website:
“The book value of gold is currently $42.2222 per troy ounce.”
Federal Reserve website:
“3. Gold stock is valued at $42.22 per fine troy ounce.”
U.S. Mint website:
“The gold is held as an asset of the United States at book value of $42.22 per ounce.”
Here’s the latest from the U.S. Treasury:
Quarter-end revaluation of the Eurosystem’s assets and liabilities
In line with the Eurosystem’s harmonised accounting rules, gold, foreign exchange, securities holdings and financial instruments of the Eurosystem are revalued at market rates and prices as at the end of each quarter. The net impact of the revaluation on each balance sheet item as at 1 April 2011 is shown in the additional column “Difference compared with last week due to quarter-end adjustments”. The gold price and the principal exchange rates used for the revaluation of balances were as follows:
Gold: EUR 1,007.250 per fine oz.
USD: 1.4207 per EUR
JPY: 117.61 per EUR
Special drawing rights: EUR 1.1161 per SDR
Now this may not seem like a very big deal to the casual observer. But I’m about to tell you why it should at least be an option on the minds of everyone in Congress, the White House and the U.S. Treasury, especially today.
But first, you may want to review my last RPG update:
After refreshing your memory of the last update, you may notice that the valuation of the Eurosystem’s gold actually dropped by EUR 16.7 billion since last quarter. But that’s okay. That’s how it is supposed to work, as the reference point for currencies! Because you’ll also notice that the U.S. stockpile of gold rose in market value $15 billion during that same timeframe. As I wrote in Update #1:
The Fed doesn’t even have actual gold on its balance sheet… It has “gold certificates” issued to it by the U.S. Treasury from the past monetization of U.S. Treasury gold at $42.22/oz. I suppose, technically, if the U.S. Treasury wanted to revalue its gold to the market price today, the proper yet antiquated process would be for the Fed to credit the Treasury’s spending account with new dollars representing the difference in price. Today that would be about $355 billion fresh dollars for Congress to spend.
And today, three months later, that amount of untapped U.S. hard asset equity is $370 billion! The reason U.S. gold went up and European gold went down is simply because the dollar went down and the euro went up. That’s the point of Reference Point Gold! It’s what Robert Zoellick, head of the World Bank, was talking about. It’s really no big deal! But today it may be a big deal to Congress.
On Monday, Treasury Secretary Geithner sent a letter to Senate Majority Leader Harry Reid, John Boehner, the Speaker of the House, Nancy Pelosi, House Democratic Leader, and Mitch McConnell, Senate Republican Leader warning that the U.S. Credit Card will be maxed out by May 16. Geithner wrote:
I am writing to update you on the Treasury Department’s projections regarding when the statutory debt limit will be reached and to inform you about the limits of the available measures at our disposal to delay that date temporarily.
In our previous communications to Congress, we provided regular estimates of the likely time period in which the debt limit could be reached. We can now make that projection with more precision. The Treasury Department now projects that the debt limit will be reached no later than May 16, 2011.
If the debt limit is not increased by May 16, the Treasury Department has authority to take certain extraordinary measures, described in detail in the appendix, to temporarily postpone the date that the United States would otherwise default on its obligations. These actions, which have been employed during previous debt limit impasses, would be exhausted after approximately eight weeks, meaning no headroom to borrow within the limit would be available after about July 8, 2011. At that point the Treasury would have no remaining borrowing authority, and the available cash balances would be inadequate for us to operate with a sufficient margin to meet our commitments securely.
As Secretary of the Treasury, I would prefer to avoid resorting to these extraordinary measures. The longer Congress fails to act, the more we risk that investors here and around the world will lose confidence in our ability to meet our commitments and our obligations.
If Congress does not act by May 16, I will take all measures available to me to give Congress additional time to act and to protect the creditworthiness of the country. These measures, however, only provide a limited degree of flexibility—much less flexibility than when our deficits were smaller.
For these reasons, default by the United States is unthinkable. This is not a new or partisan judgment; it is a conclusion that has been shared by every Secretary of the Treasury, regardless of political party, in the modern era.
Treasury has been asked whether it would be possible for the Treasury to sell financial assets as a way to avoid or delay congressional action to raise the debt limit. This is not a viable option. To attempt a “fire sale” of financial assets in an effort to buy time for Congress to act would be damaging to financial markets and the economy and would undermine confidence in the United States.
Selling the Nation’s gold, for example, would undercut confidence in the United States both here and abroad. A rush to sell other financial assets, such as the remaining financial investments from the Emergency Economic Stabilization Act programs, would impose losses on American taxpayers and risk damaging the value of similar assets held by private investors without generating sufficient revenue to make an appreciable difference in when the debt limit must be raised. Likewise, for both legal and practical reasons, it is not feasible to sell the government’s portfolio of student loans.
Nor is it possible to avoid raising the debt limit by cutting spending or raising taxes. Because of the magnitude of past commitments by Congress, immediate cuts in spending or tax increases cannot make the necessary cash available. And, reductions in future spending commitments cannot supply the short-term cash needed. In order to avoid an increase in the debt limit, Congress would need to eliminate annual deficits immediately.
As the Congressional Research Service stated in its February 11, 2011 report:
“If the debt limit is reached and Treasury is no longer able to issue federal debt, federal spending would have to be decreased or federal revenues would have to be increased by a corresponding amount to cover the gap in what cannot be borrowed. To put this into context, the federal government would have to eliminate all spending on discretionary programs, cut nearly 70% of outlays for mandatory programs, increase revenue collection by nearly two-thirds, or take some combination of those actions in the second half of FY2011 (April through September 30, 2011) in order to avoid increasing the debt limit. Additional spending cuts and/or revenue increases would be required, under current policy, in FY2012 and beyond to avoid increasing the debt limit.”
None of those budget policy choices is feasible or responsible. As a consequence, given that Congress has imposed on itself the requirement for periodic increases, there is no alternative to enactment of an increase in the debt limit.
I am encouraged that the leaders of both parties in both houses of Congress have clearly stated in public over the last few weeks and months that we cannot default on our obligations as a nation and therefore have to increase the debt limit. Because the date by which we need to increase the limit is growing nearer, I hope that the leadership in both houses will help us impress upon all Members the gravity of this issue and the imperative of timely action.
President Obama is strongly committed to working with both parties to restore fiscal responsibility, and he looks forward to working with Congress to achieve that critically important objective. In the meantime, it is critical that Congress act to increase the debt limit so that the full faith and credit of the United States is protected.
I hope this information is helpful as you plan the legislative schedule for the coming weeks.
Timothy F. Geithner
Rock, meet hard place. Indeed!
Now I certainly do not have the solution to America’s debt or budget problems. But it does seem to lil’ ol’ me that Congress has right now run up against a hard wall. And I do know a way they could at least buy themselves a little more time to figure it out.
Okay, here goes. Now pardon my French, but Timothy Geithner is a moron. I realize it is too much to ask that anyone in Treasury understand currency theory, since no school has taught currency theory in generations, but why Tim even mentions “Selling the Nation’s gold” when it has so far only been monetized up to $42.22 per ounce is beyond ignorant. How about this? Rather than selling the gold, why don’t you just value it like the rest of the world? Why not just mark it to the market price of gold on the Treasury books? If you, Congress, are going to insist on an honest accounting of America’s liabilities, why not properly account for her ASSETS as well?
And then… the U.S. Treasury, under the daft guidance of the G-man, can issue new gold certificates to the Federal Reserve. As anyone with even a rudimentary understanding of double-entry bookkeeping knows, the balance sheet must balance. For every asset there is a liability, and vice versa. This is basic stuff. You don’t need to be a banking “expert”. And so far the Fed only carries $11 billion of the Treasury’s gold on the asset side under the gold heading. Today we have room to add $370 billion more, and that means fresh Fed liabilities—also known as U.S. dollars—these accruing as fully paid-up credits to the Treasury account for the government to use however it deems appropriate.
Again, I realize this doesn’t solve any of the big problems, but it does buy some time. And furthermore, it is not a bad or reckless thing to do. It is the right thing to do! America has an untapped asset. You can use it without selling it, for gosh sake! And just like the old gold certificates, the new ones will NOT be redeemable by the Fed or other banks in physical gold. They will simply be an accounting entry on the Fed balance sheet. In the future, that gold can be mobilized, if necessary, in defense of the U.S. dollar. But only with the approval of Congress. The physical gold remains the property of the United States. It will simply be monetized by properly revaluing it as the monetary reserve asset that it is, and placing it—at its proper valuation, updated quarterly—on the asset side of the central bank’s balance sheet, just like the ECB.
I want to be very clear here. This has absolutely nothing to do with Ron Paul’s bill. Nothing against Ron Paul, but he may not like this because he has other plans. And this has nothing to do with a new gold standard, or legal tender laws or ending the Fed. You don’t have to be a gold bug to support this. It is simply common sense. What isn’t common sense is the U.S. having the only darn gold hoard in the world that’s valued at the ridiculous price of $42 an ounce, having a Treasury Secretary then talk about selling that asset, and having a Congress that’s about to shut down the government because it can’t find some money.
You want honest accounting? Well how about accounting honestly for our… that’s right, OUR assets?
You know, I’ll bet even Obama would go for it. The timing is quite apt. Did you know that this week is the 78th anniversary of Executive Order 6102? That’s right. 72 years ago this week, Obama’s role model, Franklin D. Roosevelt “forbade the Hoarding of Gold Coin, Gold Bullion, and Gold Certificates” by U.S. citizens. And in his acceptance speech in 2008, Obama talked about people putting “their hands on the arc of history” and bending it “once more towards the hope of a better day”. How auspicious would it be for him to now harken back to the FDR gold confiscation, on the eve of a government shut-down, while finally setting the U.S. gold free?
I’ve even got a catchy name for the new Executive Order. He could call it “Executive Order: Freegold”. And it would buy you, Congress, some much needed time; it would buy a new $370 billion deposit in the Treasury account; and it would usher in the currency-stabilizing effects of Robert Zoellick’s and the ECB’s Reference Point Gold.
I do realize that some of you will scoff at such a “small” figure as $370 billion in the grand scheme of our debt and deficit. But gold becomes more and more useful and efficient at higher and higher values. This is not just a cheap accounting trick for the U.S.—rest of the world be damned. No, this is paradigm of global and personal reserve asset value, based on unencumbered equity and physicality, rather than debt and paper promises.
And not only might these new gold-revaluation dollars be spent on government obligations, but any given periodic rise in the price of gold could also be used as an “asset swap” (gold certs for Treasuries) right on the Fed books in order to mitigate the swelling of the Fed’s balance sheet and the money supply, or just to retire some of the debt. Other Central Banks are already well out in front of the U.S. on this Mark to Market paradigm. And once again the timing for a bold move like this is very well suited to the present undertaking of international monetary reform. The U.S. could once again be the hero!
Now, as you all know, I am not an activist. I am only an observer. But if some of you were to send this post to your representatives in Congress as a sort of “Open Letter to Congress”, I could certainly look the other way. It would probably only take one member to actually “get it”. But then again, that may be asking too much of Congress.