Weiner is president of the Gold Standard Institute USA in Phoenix, AZ, and CEO of precious metals fund manager Monetary Metals. He created DiamondWare, a technology company that he sold to Nortel Networks in 2008. He writes about money, credit, and gold.
Visit his links.
The Gold Standard Institute www.goldstandardinstitute.org
Monetary Metals www.monetary-metals.com
Keith's personal blog www.keithweinereconomics.com
(Guillermo Barba, GB) Keith, thanks for accepting this interview.
(Keith Weiner, KW) Thanks for the opportunity! I am glad to do it.
- (GB) In your opinion, what’s the root of the current financial and economic mess in the world?
(KW) The short answer is: rising debt. It’s not only rising, but rising exponentially—the debt doubles about every 8 years.
The medium answer is: In 1971, President Nixon defaulted on the US government’s gold obligations. This plunged us into a worldwide regime of irredeemable paper currency. Gold was banished from the monetary system, no longer allowed to fulfill its function as extinguisher of debt. The dollar was turned into a mere IOU. You cannot pay off your debt by issuing IOUs, as you cannot get out of a hole by digging deeper. You can only service the debt. This is why the debt must grow faster and faster.
At the same time, the interest rate was unhinged. It was free to shoot the moon, as it did until 1981. It was equally free to fall into the black hole of zero, which it has been doing since 1981. Falling interest causes massive, but mostly hidden, capital destruction.
The longer answer is: we have central planning. Before I address the economic failings of it, I need to make a moral point. Central planning means: commanding people’s lives, forcing them to do what you want. It is a prominent feature of every kind of totalitarianism, from communism to fascism. Karl Marx included a central bank as one of his 10 planks, it was that important. None other than Benito Mussolini (fascist dictator of Italy during WWII) praised one of Keynes’ books as a good introduction to the economics of fascism.
And the historical record of central planning is always and everywhere, abysmal failure. Why? Mises wrote about this. Ayn Rand wrote about this. Hayek wrote about this. And many others. Even if you concede that the central planners are really smart, wise, and incorruptibly honest, they have no idea what they are doing!
Without people buying apples, and not buying pears, without a market bidding up the price of credit and selling off the price of houses, how is the central planner to know what we need more of, and what is already in a glut? He cannot. Based on this principle, Mises was able to predict the collapse of the Soviet Union, which he did in 1922 in his book Socialism: An Economic and Sociological Analysis.
Most people realize, at least after the USSR collapses, that central planning of corn does not work. Corn is simple, with an annual cycle. It amazes me that they still have faith in central planning of the most complex thing of all: credit. It has cycles of years or decades.
- (GB) Could the gold standard help us to solve these problems? How could we have a 21st-century gold standard?
(KW) Yes. :)
OK, on a more serious note, gold solves both of the problems I described above. Debts can be paid off, which is important. Otherwise they accumulate until they bury us alive. Also, under gold, the interest rate is set in the free market, and it’s a simple process. If savers feel the rate is too low, they withdraw their gold coin and take it home. Or if entrepreneurs find the rate too high, they stop borrowing. The rate of interest is stable, within these lower and upper bounds, respectively. You cannot have zero interest (much less negative, as in Switzerland) or 15.7% on the 10-year Treasury as occurred in 1981. In fact, if you look at the historical interest rate data it was extraordinarily stable by our modern standards. All this without central planning!
I am for a free market in money and credit. You never had to force people to accept gold or silver in payment. Quite the opposite. Let people be free to choose what to use and accept for payment, and more importantly what to lend and borrow. They will choose gold. They always have, for thousands of years.
In the 21st century, people will not wear sackcloth robes. They will not cinch their waists with rope belts. They will not have leather purses, jingling with gold and silver coins. The gold standard does not mean going back to the 17th century.
In day to day practice, I don’t think it would look much different to the average person. Already, the trend is away from carrying any coins or even paper bills, towards using plastic. It certainly lets you have a slim and light wallet. People will spend and earn, mostly not having to touch actual gold metal.
The key is that they have this right. I think most people would have a little gold, and some silver, at home. Gold is the truly risk-free asset (the government bond is not risk-free, just ask citizens of Cyprus, Greece, or Iceland). Having the right to redeem credit in gold keeps the debtors honest (and also provides a mechanism for retiring debt at the end of its useful life). Few will redeem, unless a debtor is getting into trouble. Then the redemptions will occur in rising amounts. Just knowing that it can happen will provide important incentives to banks and other financial intermediaries.
And of course long-term planning becomes possible again. With a stable currency and interest rate, long-term contracts are feasible. Think of leases and insurance. Think of pension funds.
Finally, we would get back to real economic growth and rising prosperity for all, including the unskilled and low-skilled workers.
- (GB) Let’s talk about the precious metals markets. Why do gold and silver prices keep falling in a context of world-wide money printing? Supply and demand issues or market manipulation?
(KW) First, let me address manipulation. It is natural to develop a theory to explain what one observes. We do observe both financial distress (to put it mildly) and enormous increases in the quantity of dollars, euros, etc. At first glance, it is reasonable to expect the price of gold to go up. But it is not going up, and indeed it’s falling for a few years.
One popular explanation is that the price is manipulated. However, when you try to study the mechanics of how this manipulation is supposed to work, it falls apart. The manipulators are supposed to sell paper gold—i.e. futures contracts. They can’t be selling metal, at least not in silver. And the silver price has dropped far more as a percentage. So it must be futures.
OK, well, if this is so, how would it work? It would drive the price of a futures contract way below the price of real metal. There would be a total divorce of these two prices. I study the spread between spot and futures gold, and I can tell you that it just isn’t so.
The data we see in the market does not fit the theory. I have written many articles about this, and showed my data.
So we need a new theory.
I propose that, to start, one should look at gold as money and the dollar as failing credit. You cannot measure money in terms of the dollar. This would be like measuring a steel meter stick using rubber bands. How long is the meter stick today? 3.8 bands long. And tomorrow it is 3.9 bands long. Why did it get longer? :)
You have to measure the dollar in gold. Very few people do this. When I give a talk, usually the audience is very interested in gold. I ask them to raise their hands if they know the current gold price. Every hand goes up. I say OK, gold is money right? Yes. Raise your hand if you know the price of the dollar, measured in gold. This time, no hands go up (it’s currently 28.6mg gold).
When the Federal Reserve was created, the dollar was over 1500mg. In 2011, it made a low for the move of around 16mg. Its long-term price target is 0mg.
This is a paradigm shift, to stop thinking of gold in dollar terms and start thinking of the dollar in gold terms. As with all good paradigm shifts, things get sharper and clearer.
Now we can ask, why is the dollar going up? Isn’t that an easier question? I think the answer is that debtors are squeezed by the weight of their debts. And of course, speculators are wildly bullish on the dollar. I have to emphasize here that I do not refer to the price of the dollar as measured in euros or pounds. I mean in terms of gold. This is simply the same phenomenon of the mainstream dismissing gold as a “pet rock” (as one Wall Street Journal reporter did recently). These folks are telling you to go all-in on the dollar.
That’s self-serving advice, at best. However, while it holds sway, people buy the dollar (i.e. sell gold) who would not otherwise.
I have developed a model to calculate the fundamental price of gold. This model shows this sentiment, and it is saying that the gold price should be around $1,200.
I think something is going to change, something in the world of credit. A major default could occur almost anywhere, from shale oil junk bonds to a larger sovereign debtor, to a major bank. If governments cannot or will not bail out depositors, and they take real losses, sentiment will turn. People could begin to realize that, unlike a dollar or euro or yuan, gold has no counterparty. It’s a lump of metal, and it cannot default.
When that happens, I suspect the price of the dollar will rapidly move towards its former low of 16mg and there’s no reason why it couldn’t plunge right through and make new lows.
There is one other benefit to seeing gold as money, and the dollar as credit priced in gold. You don’t cheer a falling dollar. You realize that it is a horrible and destructive process that will hurt (and eventually kill) people. This is nothing to cheer. And you also realize that there is no profit to be had in owning gold. You simply avoid the losses of holding dollars. One can make capital gains by holding silver at the right times (this is the basis of the fund I manage), when silver is rising in gold terms. But gold itself is unmoving.
- (GB) Could you please explain why gold and silver are in backwardation and what it means?
(KW) I hinted at backwardation earlier, without defining it. It is when the price of the metal in the futures market is below the price in the spot market. In an ordinary commodity, like wheat, it means scarcity. However, it should never occur in gold or silver (I discuss this often on my company’s blog at http://monetary-metals.com). It is a sign that the monetary system is in decay, failing.
Another benefit to thinking of gold as money comes up here. Whenever there is stress or crisis, it always the bid that is withdrawn. There is no lack of offers to sell, but suddenly no bid.
Since 2008, we have had intermittent temporary backwardations. This is my term for the small backwardations that occur as each contract approaches expiration. By small, I mean around a dollar an ounce in gold, or a few pennies in silver.
We are witnessing the process of the withdrawal of the gold bid on the dollar. Here is a link to one of the most important papers I have written, discussing the consequences when backwardation becomes permanent.
As I write this, there is backwardation in the October and December gold contracts, about 0.45% and 0.2% annualized. The February 2016 contract is close, but not in backwardation.
While this is not (yet) alarming in our post-2008 new normal, it is a sign of a growing shortage of gold metal. I believe the shortage will dissipate when the price rises, and that has been the pattern every time so far.
In silver, there is backwardation in the September contract. But December is not even close. The silver market is not loose, but it’s hardly tight either.
- (GB) Do you think that the worst is still to come in terms of financial and economic crises?
Even if we ignore the debt, which is far, far past the point where we could ever hope to repay it, the interest rate is both signaling and causing enormous destruction. What does it mean that the interest rate in Switzerland and other countries is negative? Well the obvious meaning is that you pay the government to lend your francs or euros. But what does that mean?
There are no creditworthy borrowers willing to pay a decent rate. Why not? It’s like a failing farm, with crop yields falling every year. Except there’s nothing wrong with the soil. The failure is across the whole economy. If businesses had opportunities to grow profitably, they would be bidding up the price of credit at these absurdly low rates. Yet the fact is, they are not. With few exceptions, they borrow only for financial engineering such as share buybacks and acquisitions.
Meanwhile, wage earners cannot save for retirement. They used to depend on compounded interest. And retirees cannot live on the interest. Ultimately, interest is paid out of corporate productivity. Now, without interest, retirees are forced to consume their capital. It’s like selling off bits of the farm to buy groceries, rather than using the farm to grow food. That cannot last forever.
And what of the 1%? They think they are getting rich. If pressed, they assume the wealth comes from the poor and middle class. There’s just one flaw in this theory. The poor don’t have any wealth in the first place, so whatever it is the rich are getting it is not the poor’s wealth. It could be the middle class, except the middle class is doing the same things as the rich—borrowing to buy assets. And getting the same results.
The rich aren’t getting richer. They are getting rising asset prices, which is not the same thing. This makes them think they are richer, so they can spend more. They are consuming their capital. This is a very insidious process, of hollowing out the very capital on which our civilization depends. And as the price of capital assets keeps rising, they consume the capital via borrowing against assets.
Suppose you own a house free and clear. But you notice that the market price keeps rising, and of course all your friends are living like they are rich. So you start by borrowing $100,000 secured against your home. And you spend it. That was fun, but it’s quickly gone. So you borrow another $200,000. And so on. It lasts as long as prices keep rising.
What is borrowing? It is consuming today what you would otherwise consume tomorrow. What if you consume more than you can ever hope to repay? What if an entire society does it?
At some point, defaults begin to occur. Creditors are leveraged, so the default of a debtor can force the creditor to default. This process could keep cascading.
What most people think of as money is really credit. It is someone else’s liability. What happens to your money when that counterparty defaults? Poof!
- (GB) What can people do to protect themselves against that coming economic collapse?
(KW) It is, of course, better to own gold than not when living through a collapse. However, that does not provide any guarantees.
I think everyone should become familiar with the collapse of Rome. We are not headed to another 1929, but more like 476AD.
If they have land, and can really be motivated to farm without diesel power, without insecticides, without fertilizers, and without purchased seeds, they can prepare to be subsistence farmers.
Personally, I would rather put my effort into working to avert this disaster, than to plan how I could eke out a substance living after it occurs.
- (GB) What should governments and central banks do? Stimulate the economy? Do we need more, or less intervention in the markets?
(KW) First, stop taking more of the poison that has sickened us to this point! Stop borrowing to consume, borrowing to spend. Stop trying to centrally plan.
Governments should focus on three problems. One, how to repay the debts in nominal terms (repayment in real terms is hopeless). Two, ensure the solvency of the financial system. It’s not just banks, but pension funds, insurers, annuities, and employers. Three, get gold and silver to begin to circulate.
I just wrote an open letter to Greek PM Alexis Tsipras, outlining my proposal for how Greece could do this. They should begin issuing gold bonds. These are not gold collateral for a regular paper bond, but denominated in gold, paying coupons on gold, and principal in gold.
To bid on these gold bonds, the buyer does not say how many dollars he wants to pay. Nor ounces of gold. He says how much outstanding paper bonds he will redeem. Everyone assumes that governments can pay off their debts with inflation.
This is the mechanism by which debtor governments can leverage the falling value of their currencies to actually get out of debt. By remonetizing gold. Otherwise, they are simply borrowing more to make payments, but that is not the same thing at all.
- (GB) Is the status of the dollar as the global reserve currency in danger?
(KW) There is no paper currency that can replace it. All of the paper currencies are actually dollar derivatives.
There is something that can and will replace the dollar. It’s not the IOU of Brussels, London, or Beijing.
- (GB) Do you think that China and the yuan will overtake the US?
Not too long ago, Mike Shedlock posted to his blog some statistics on trading volumes. The yuan was just ahead of the Mexican peso.
The yuan has capital controls. Until these are lifted, I don’t see why anyone would even discuss it.
And, as is beginning to become clear, China has committed such massive abuse of its credit that it staggers the mind. All of those empty cities, and unnecessary capacity in everything from smelting to shipping, was built on credit. These unproductive assets cannot generate the cash flow to service the debt.
I don’t know the precise timing, but I think the yuan peg to the dollar will break, perhaps snapping violently. China today (Aug 11) devalued the yuan by 1.8%. Its value could go a lot lower.
Thanks for this interview, Keith.