Printing fiat currency cannot restore health to sick loans and government bonds. But there is a reset button that would restore balance to the system: a gold standard.
Each nation could choose to peg its local currency to gold at a price that allows for enough growth in bank reserves to greatly reduce the burden of public and private sector debts.
Re-pegging US dollar to gold at the current price has its pitfalls. Most notably, it would not deleverage an overleveraged banking system. But re-pegging the dollar to something like $10,000 an ounce might do the trick.
The Fed would purchase Treasury’s gold at a large and specified premium to its current spot valuation. The higher the price, the more base money would be created and the more public debt would be extinguished. An 8-to-10-fold increase in the gold price via this mechanism would fully reserve all existing US dollar-denominated bank deposits (a full deleveraging of the banking system).
This path would weaken the economy-sapping effects of debt and transform a debt-based currency into an asset-backed currency. Right now, the dollar is backed by Treasuries held on the Fed’s balance sheet, which are in turn backed by dollars, which are in turn backed by faith in fiat money — i.e., nothing.
This scenario would impose losses on certain parties as the reset button is hit, but it seems to solve more problems than it creates. A gold standard, after a one-time debt monetization, would make for a more balanced, efficient global economy less prone to violent booms and busts.
We can hope the central bankers of the world stumble their way to a solution like this before they inflict even more damage to the foundation of the global economy. Unfortunately, conditions may have to get much worse in financial markets, banking systems and economies before such ‘outside the box’ ideas are considered. A defensive portfolio with exposure to gold and other real assets seems like the right mix in today’s environment.
To read Dan Amoss article: The Path to $10,000-An-Ounce-Gold
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