Thursday, March 22, 2012

Gold, and other currencies

It’s common practice for governments (national, provincial, municipal, parish) to pledge their expected future revenues as security for borrowings. Fair enough. The loans have to be repaid out of children’s and grandchildren’s taxes, but that’s okay. After all, each generation benefits from all the governmental infrastructure it inherits from its predecessors.

A problem arises only when future revenues fall short of expectations. Then, responsible governments hustle around and cut their expenditure, by discontinuing some services and reducing others. Irresponsible governments simply borrow more money. By that measure, Cayman’s rulers (politicians, senior Civil Servants and the British FCO) are irresponsible, as are Greece’s rulers and the other PIIGS’, and indeed every European nation’s government, and America’s.

National governments that find themselves over-borrowed against future tax revenues must watch their chickens coming home to roost. Their national currencies become unstable, as their state revenues steadily decline because of economic recessions. Sooner or later, Greece will be forced out of the Euro and will default on all its debts. The cost of imported goods will rise out of sight. All the other PIIGS will meet the same fate, unless they reduce the scope of government. What about Cayman and the Cayman Islands Dollar? Well, why would different rules apply to them?

Might the Euro fall in value, and/or the Pound Sterling and/or the US Dollar? Not all at once, of course, but in some kind of progressive slippage? The logical question, rarely answered satisfactorily, is: What might they fall in value against? My personal belief is that, in time, they will all be measured against a brand-new international currency based on the prices of certain commodities (selected by the corrupt banksters, who else?). “Commodities” covers all kinds of tradable raw materials: metals, crops, land, meat, even water; the viability of the imagined new currency will depend on which commodities are selected.

In the present absence of such a currency, many financial commentators use an ounce of pure gold as the standard by which they assess the values of national currencies. In 1971 an ounce of gold could be exchanged for US$35, today it is “worth” $1700, give or take. Now, EITHER the price of gold has risen to nearly fifty times its value of forty years ago OR the US currency has fallen to a fiftieth of its former value. Which is it? Well, an ounce of gold buys about the same today as it did back then, which means that its value has remained constant. It’s the paper currency whose value has deteriorated.

Imagine a new-born baby being given a $35 gift certificate in 1971 and his twin given a one-ounce gold coin. Guess which of them would be the most pleased today. The one with the coin could today buy almost fifty times as much stuff as his brother could, with the gift. I can hear my grand-daughters now, “Grandpa, thanks for the $1700 birthday gift certificate (as if...!), but could we please have a gold coin instead?”

Gold isn’t the answer to all the world’s problems. It’s just another currency, and it pays no dividends. But an ounce of it was a better gift than $35 cash in 1971, and most years since then. In forty years from now it might be worth – well, actually, it would be worth the same as it is now. Its value remains pretty constant. But dollar-bills might be worth a whole lot less. That coin might sell for $85,000 (fifty times $1700) in grossly devalued paper currency, when my girls are approaching retirement age.

Of course their pension funds may contain some shares of even higher value (weapons-manufacturers are bound to do well between now and then), but will the fund-managers be shrewd enough to have a diverse portfolio that includes some gold coins? I certainly hope so.