Porter Stansberry: "Enough Already, Let's Return to the
Gold Standard!"
Source: Karen Roche of
The Gold Report
(9/12/11)
http://www.theaureport.com/pub/na/10866
The money supply increases naturally by exactly the amount of
increases in productivity in a healthy economy, notes Stansberry
& Associates Investment Research Founder Porter Stansberry. He
doesn't have to point out that the economy isn't healthy, nor that
the money supply expands every time the printing presses run to
bail out a failing business and bring on a new iteration of
quantitative easing. The solution is a simple (albeit not
necessarily easy) one, Porter tells us in this exclusive
Gold Report
interview: Return to the gold standard. That will happen, he says,
when the people say, "Enough!"
The Gold Report:
You've written a lot about the gold standard recently, and an
article in your S&A Digest argues that we should greatly prefer
gold-backed money because it would limit the ability to increase
the money supply. It goes on to point out that increasing the money
supply essentially causes inflation. If regulations prohibited
governments from expanding the money supply, would fiat currency be
as good as the gold standard?
Porter Stansberry:
In theory, it could be, but in practice that's never
happened. I suspect that the market wouldn't have much faith in
such rules, and they'd be abused eventually. During the Volcker and
Greenspan Federal Reserve periods, from roughly 1981- 2006, two
central bankers created a de facto gold standard because they
remained relatively consistent vis-à-vis money supply targets.
Volcker absolutely targeted money supply, as did Greenspan up
until about 1999. He moved away from that stance due to Y2K fears
and then the 2001-2002 recession. So we've seen long periods in
fiat systems where money supply growth was targeted and fairly
reliable.
The problem, of course, is that the gold-standard rules don't
apply across the banking systems. When the Fed was targeting money
supply, bankers lobbied for all kinds of changes related to reserve
ratios, which allowed them to massively increase the leverage on
their balance sheets. Famously, the investment banks-Bear Stearns,
Lehman Brothers and others-went from, say, 15:1 to 50:1. That had a
tremendous impact on the amount of credit in the economy, which
ultimately led to the collapse we well remember. Then the Fed
started to radically increase the money supply to help reduce the
impact of those bad loans.
That's a long way of saying that efforts to mirror a gold
standard by rule have never been effectual in history, and they
haven't worked in America over the past 40 years.
TGR:
So changing the reserve requirements, in essence, increased
the money supply.
PS:
Let's talk definitions. When I'm talking about the monetary
base, I'm talking about the size of the Fed's balance sheet, which
is the foundation of the U.S. fractional reserve banking system.
When you increase the size of the Fed's balance sheet, you can have
multiple increases of the actual money supply from that base. By
targeting that base, Volcker restrained credit growth in the
economy. Greenspan was less successful at that because he chose to
expand the monetary base for political reasons.
In any case, just controlling the monetary base did not control
the impact of increases to banks' balance sheets and leverage
ratios, simply because they lobbied successfully to change the
rules. They got permission to increase their leverage. The monetary
base didn't change, but the money supply increased due to the
actions of the banks. It would have been impossible under a gold
standard for the simple reason that the banks would be subject to
runs on their gold. That doesn't happen in a paper system.
I'm not saying that there would never be another run on a bank,
but bankers would have a palpable fear of losing control under a
gold standard because the market discipline is so much fiercer now.
They never would have leveraged 50:1 under a gold standard. It
would have been completely implausible.
But as long as there's this notion that they can get a bailout
of any size by turning on the printing press, maybe the discipline
isn't quite so sound. That's exactly what we're seeing. So rather
than allowing runs on the bank or rather than allowing banks to
default and for depositors to lose, the government is printing as
much money as is required and is giving it to the banks.
TGR:
Is expanding the money supply actually a bad thing?
PS:
In a healthy economy, the money supply would increase
naturally by exactly the amount of increases in productivity. In
fact, one of the main features of the gold standard is that it
creates a balance between creditors and debtors. Creditors are more
willing to lend money because they know the money they're going to
be repaid will be sound. Likewise, borrowers are more reluctant to
take on debt because they know there's not an easy way to repay
it.
One of the main reasons you should prefer a gold standard is
that it limits increases in the money supply to real increases in
productivity. A second reason is that it simultaneously limits the
availability of credit. Those limits mean that powerful interests
in the economy and/or the government can't simply create whatever
credit they need to buy whatever assets they want. In a true free
market, credit is relatively difficult to come by and can't be
manipulated by the various interest groups.
But in a free market that uses paper currency, it's very
difficult to actually maintain ownership of key assets because
competitors in the marketplace may have access to political capital
that allows them to buy whatever they want. You see this all the
time in various industries, particularly those influenced by the
government. In media, for instance, a very small number of vested
interests end up owning and controlling all media properties
because they have access to credit that their competitors don't.
That's very difficult to pull off in a gold-standard system.
TGR:
When you say they have access to credit that their
competitors don't, are you talking about on a worldwide basis?
PS:
I'm talking particularly about the U.S. system, where the
well-connected, money center banks-J.P. Morgan, Bank of America,
etc.-essentially have access to unlimited amounts of credit, and
they can finance almost any kind of takeover they choose,
especially if it's favored by the government that they do so. They
can do that because, again, there's so much flexibility in the
monetary base, and credit is so easy to come by. It can be printed.
You can't print gold, so under a gold standard, the government
wouldn't allow the banks to have that much credit because it
wouldn't be able to bail them out.
TGR:
So if the U.S. went to a gold standard, wouldn't
international companies have an advantage over those based in the
U.S?
PS:
No, not at all. If our currency were backed by gold, it would
be very difficult for foreign investors to buy U.S. assets. One of
the big calamities of our current situation is that by devaluing
the dollar by 20% over the last three years-which is what's
happened-our government has made everything in the U.S. 20% cheaper
for foreign investors. We're burning the family furniture to keep
the heat on in this country.
It doesn't make any sense to devalue an economy the size of the
U.S. by 20% merely in the hopes of making the stock market or
employment go up a couple of percentage points. Giving away your
country by devaluing your currency in order to produce economic
activity is madness. That couldn't happen under a gold
standard.
TGR:
One of your articles drew the link between devaluing the
currency and calling it what it is: inflation. Your great chart,
the
CRB Futures Index Growth since 1955
, shows a spike in 1971 when the U.S. went off the gold standard,
and then bounces around rather wildly, never going back to the '71
levels. Presumably, that shows how the dollar's purchasing power
has declined, and you relate it to inflation. Interestingly, you
also wrote that well-known economists-including some at Stansberry
& Associates-continue insisting that there's no inflation. What
arguments do they use to support their viewpoints, and why are
those arguments flawed?
PS:
The most well-known person in the deflationist camp is Robert
Prechter, but there are many others, including some who work for me
who are persuaded by those arguments. We have a running debate
because I think these people are foolish to be able to look at any
long-term chart of the dollar's purchasing power and claim any
deflation's going on.
TGR:
When did this trend in decreasing purchasing power begin?
PS:
Pick your date, and the dollar has lost 90% of its purchasing
power from that day. A good way of thinking about this is to think
about being a millionaire in 1900. To be a millionaire in 1900 was
just unheard-of rich. At the time, gold was worth $20 an ounce, so
to be a millionaire then, you'd have been worth 50,000 ounces of
gold. And today? That amount of gold is worth about $100
million.
So gold's supply-and-demand dynamics haven't changed that much,
and its intrinsic value, I would argue, hasn't changed at all. What
has changed, of course, is that the value of our dollar has
collapsed by almost 100%. If you go through history and you realize
that in 1971 gold was worth $35 per ounce, you can see that it's
declined 97% since then.
Just during the time Greenspan was at the Federal Reserve, the
purchasing power of the dollar fell by about 50%. There's no
deflation in our money supply, and therefore no real lasting
decline in prices. For people to say otherwise, I think, is
incredibly stupid. No evidence whatsoever suggests that a
fiat-backed currency system will ever cause a lasting deflation.
And to believe that a short-term decline in prices in one market or
another is tantamount to deflation is simply bad economics. It's
not true at all.
You have to look at broader measures of prices to see the impact
of inflation, and you have to understand the impact of increasing
the monetary base. If you increase the monetary base threefold,
over time you're going to see a very large increase in prices.
Then, beyond all these nuts-and-bolts aspects, just look at
history. Where is the fiat currency that collapsed because it
became too valuable?
TGR:
Part of the logic in going to a gold standard is to eliminate
the inflation or eliminate the devaluation of the dollar. Isn't
some level of inflation a good thing?
PS:
Why? Why should the monetary system favor one party over
another? Why should debtors have an advantage over creditors?
Doesn't that retard lending? Doesn't it retard economic growth when
creditors constantly worry what the inflation rate's going to
be?
TGR:
Speaking of economic growth . . .
PS:
The fastest period of wealth creation in American history
happened in the decade of the 1880s, during which the U.S. was on
the gold standard. If you go back all through history, you find
that economies do better with sound money. It's no mystery why. You
can't make long-term investments without stability in the money.
The instability does nothing but increase the prestige and power of
the vested interests who control money supply, interest rates and
the inflation rate. It makes it impossible for everyone else to do
business.
Why isn't a gold standard automatically the status quo in a
democracy? Why would anyone ever want to get away from that,
allowing the government to have both the swords of justice and the
scales of money under its control? The outcome is always the same
disaster. Credit grows uncontrollably and eventually the printing
presses have to get turned on to pay back all the debt. Needless to
say, we're in the midst of one of those scenarios now.
TGR:
Were any economists in 1971 warning that at some point down
the road, abandoning the gold standard would trigger these credit
problems and massive inflation?
PS:
Absolutely, and some great economists were raising these
issues as early as 1933, when FDR began to really move the U.S.
away from the gold standard by making gold inconvertible, meaning
that you couldn't go exchange your dollars for gold at the bank.
From that point forward, we were really on a pseudo-gold standard.
All the economists who warned about what would happen were
right.
TGR:
And people apparently didn't know the history of fiat
currencies.
PS:
True. Also, of course, it takes a lot longer for paper
systems to break down than people expect because they're completely
reliant upon the confidence of the people using the system, and
it's in everybody's best interest to play "hear no evil, see no
evil"-nobody wants to see the whole house of cards crumble. But
eventually it does crumble and people hedge their potential
inflationary losses by buying gold and silver. That's happening
now.
TGR:
A common argument is that there isn't enough gold either in
vaults or in the ground to return to the gold standard. The amount
of gold above the ground was estimated at 158,000 tons in 2008, or
5 billion ounces. The nominal gross domestic product (
GDP
) in the U.S. is $14 trillion.
PS:
The nominal GDP has nothing to do with the monetary base,
which is where to look in terms of understanding a healthy ratio
between gold and the dollar. The monetary base in the U.S. is a
fraction of the GDP-about $2.865 trillion. Even so, if you tried to
back every single dollar with an ounce of gold, you'd have an
astronomical price of gold-that won't work.
You want a gold standard that you can get to without taking 50
years or without greatly reducing the amount of money in
circulation in your economy-a sensible transitional period that
isn't so deflationary that everyone goes bankrupt. Going from a
situation in which we'd had inflation of 4-6% a year over the last
40 years to a period where you're actually having deflation of the
monetary base by 4-6% a year in order to get back on the gold
standard would devastate debtors. You want a transition that treats
creditors and debtors fairly and gets the economy back on a fixed
standard, from which point we can move forward.
But you don't need an ounce of gold backing every single dollar
to maintain the standard in the vault. You need good lines of
credit so that demand can be met. That was done over long periods
of time, hundreds of years, very safely, very effectively, with
relatively small amounts of gold in reserve.
Obviously, you need more reserves during times of crisis when
people are nervous about the system. But what makes the system work
is that the price at which people can demand gold remains
unchanged. And people need faith that balance will return even if
there's a disruption in the demand system. After the Civil War, for
instance, it was important that the greenback returned to its
prewar value, that the gold standard was reinstated at the same
price. And that price remained in effect all the way until 1933. So
it's not important to have an ounce of gold to back every single
dollar; it is important, however, to have a reserve system that
works, confidence that it works, and the political will to stick to
the price to ensure that it keeps working.
TGR:
That good credit you mentioned, especially when you hit
economic bumps-where does that credit come from?
PS:
The various large bullion banks would have swap lines with
one another. If there's an economic problem in Germany, for
example, the Fed might lend gold to the German Central Bank to meet
requests for the redemption. You can do it any way you want.
TGR:
Would other countries also have to return to the gold
standard to have that international credit option?
PS:
The U.S. could do it alone, but it would certainly work a lot
better if more of our trade partners agreed to the same standard.
The economic area would be larger, too, so there would be more
diversification of labor and more economic growth.
TGR:
You've suggested that we could return to a gold standard by
setting a target date 10 years in the future and then allowing the
market to reach the appropriate price level. Taking only 10 years
to get it back in balance sounds optimistic.
PS:
It really depends on what you want the price to be. After the
Civil War, it took 14 years because it was important to the bankers
at the time that we return to the right price.
You probably could set the price easily between, let's say,
$5,000 and $8,000 per ounce of gold, and have the reserves
necessary to make the system work today at the Treasury. People
could go exchange dollars for gold as much as they wanted, and have
confidence in the system at that price. You could do it right
now.
TGR:
What would be the catalysts to spark the move to return to
the gold standard?
PS:
I think the catalysts will be the destruction of the dollar
and the ongoing inflation. Look at corn prices. When people around
the world can't afford food because the U.S. dollar has lost its
purchasing power, it leads to revolutions, unrest, violence, people
abandoning the dollar, failures of banks, collapsing markets and
all these volatilities that we see. In my mind, returning to the
gold standard is inevitable because nothing in human nature has
changed in 4,000 years. As long as there is paper currency, it will
be debased, and it will cause problems. Sooner or later, people
will tire of it and return to gold. I think we're in the middle of
that transition as we speak.
TGR:
If we're in the middle of it, when do you suppose we'll
actually have a plan to go back to a gold standard? Steve Forbes
says it'll happen within the next five years.
PS:
I think it'll happen during the next Administration. At some
point, to get people back to work, to get the country moving in the
right direction, we'll have to make a big economic readjustment.
We're going to have to get rid of the large overhead costs of
government, return to lower taxes, and return to sound money.
TGR:
Do you really think anything like that can happen,
considering the recent debacle over the debt ceiling in
Congress?
PS:
I personally think we're going to have an enormous dollar
crisis, and that we're only in the very beginning of it. The dollar
has lost 20% of its value since 2008. I think it will lose another
20% over the next 12 months, and the population in America will get
really tired of that very quickly. I expect a big political change
in this country when people are fed up and say, "We've had
enough-enough bank bailouts, enough of the money printing, enough
of our wages being stolen by inflation. We want a system that
doesn't depend upon the good graces of politicians for its value.
We want to use gold as money so that our savings are
protected."
TGR:
So the people rather than the politicians will provide the
political will needed to return to the gold standard?
PS:
Absolutely. Politicians are never leaders in political
thought. They follow the polls.
TGR:
You've made it pretty clear that had we been on the gold
standard we wouldn't be struggling with this economic crisis. You
mentioned people's wages being stolen by inflation. Millions of
Americans aren't even making wages these days because they've lost
their jobs. And we still have that tremendous debt load hanging
over us.
PS:
There's no doubt at all that if we had been on a gold
standard we would have never seen a credit bubble the size of the
one we have now. It would have been very difficult for us to have
the kind of economic problems we're having.
As for the debt, there's 400% of debt-to-GDP in the U.S. right
now-not future liabilities, not Medicare out to 100 years from now.
We can't get people back to work and jumpstart our economy because
we cannot afford to pay these debts. These debts are also the
reason why we have to keep printing more money. We're absolutely
drowning in debt, and the only way out is to paper those debts over
by printing enormous amounts of money that will devalue people's
wages through inflation and also, of course, diminish their net
worth by lowering the value of everything they own.
The total debt in our country right now is $56 trillion, and the
Fed has monetized roughly only $3 trillion of it through
quantitative easing (QE) so far. We haven't even begun to see this
happen yet. We're going to see QE3, then QE4, and on and on. And,
in general, each level will be larger than the previous, so the
numbers will get bigger and bigger as the Fed races against the
market to devalue these debts.
TGR:
Then how do we get back on the gold standard?
PS:
Sooner or later people will say, "Enough!" I can't tell you
when that day will arrive, but I'd be surprised if the next
Administration comes and goes without a return to gold.
TGR:
This has been a pretty compelling conversation, Porter, and a
lot of our readers will want to watch your video/read your essay
that goes beyond what we've talked about today.
But before we let you go, you've said that unless investors are
willing to speculate and start shorting equities, they probably
should stay out of the equity market because you're looking at a
long, serious bear market. You advise these people to put 50% of
their money into short-term Treasuries and 50% into gold. What's
the logic of the Treasuries if you expect the dollar to be
devalued?
PS:
One-year Treasury bills offer some protection from inflation
because they have such a short-term duration. You won't lose a lot
to inflation with such instruments. They pay you something to hold
them, too-although not very much.
The reason for holding these instruments is to reduce the
volatility of the gold holdings. If you're not going to hold other
securities, all you want is to keep the value of your account
stable. Taking half of the uptick in gold over the last year-a gain
of maybe 20% and there's no way that price inflation has been 20%
in the last year-you've made a net gain in real terms.
If people are simply able to retain the purchasing power of
their savings in the midst of this massive global monetary crisis,
they'll have done a great job. The thing to do now is not to lose,
and the safest way not to lose is to go half gold, half cash.
On the other hand, investors who are in a position to be able to
speculate can look at my newsletter's portfolio and see that we're
long certain stocks that are positioned to profit from these
problems and we're short the stocks that are positioned to suffer
from them.
After serving a stint as the first American editor of the
Fleet Street Letter, the oldest English-language financial
newsletter,
Porter Stansberry
began Stansberry & Associates Investment Research, a
private publishing company, 11 years ago. S&A has subscribers
in more than 130 countries and employs some 60 research analysts,
investment experts and assistants at its headquarters in
Baltimore, Maryland, as well as satellite offices in Florida,
Oregon and California. They've come to S&A from positions as
stockbrokers, professional traders, mutual fund executives, hedge
fund managers and equity analysts at some of the most influential
money-management and financial firms in the world. Porter and his
team do exhaustive amounts of real world, independent research
and cover the gamut from value investing to insider trading to
short selling. Porter's monthly newsletter Porter Stansberry's
Investment Advisory, deals with safe value investments poised to
give subscribers years of exceptional returns. You can learn more
about Porter and his ideas by
clicking here
.
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DISCLOSURE:
1) Karen Roche of The Gold Report conducted this interview. She
personally and/or her family own shares of the following companies
mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors
of The Gold Report: None.
3) Porter Stansberry: I personally own shares of the following
companies mentioned in this interview: None. I personally and/or my
family am paid by the following companies mentioned in this
interview: None.
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