The Paper Chase

Today I find myself in a rare position – exactly what should I be blogging about?

There are so many issues, policy statements and frustrations that to focus on any one of them would seem counterproductive. We could discuss the threats to free speech, the forthcoming visit from Geert Wilders, national debt, cost of living, decline of the family, the bias of the ABC and the hypocrisy of the left. They are a continuing feast of red meat for the conservative observer as demonstrated by the hundreds of emails I receive from regular Australians every week.

But this week we need to talk about money. Most Australians would think they don’t have enough of it but the problem is that too many governments don’t have enough of it either. They are borrowing to the limit and then printing more of it just to pay the bills. In many instances, the bills are interest payments on the debt and soft welfare payments designed to appease a struggling citizenry. Both practices ultimately have disastrous long-term social and economic consequences for everyone involved.

Naturally, there are some who think you can continue this government-level Ponzi scheme indefinitely – or at least long enough for them to stay in power before leaving someone else to pick up the pieces. In the past, it has been the preserve of the working class to deal with the consequences as the ‘ruling elite’ seem strangely immune from austerity measures.

But austerity is clearly coming to the global economy. Ultimately, inflation or taxation will rob ordinary people who live within their means of their hard-earned savings. That won’t affect governments, many of whom are desperate to inflate their debts away. Japan, the United States, China and Europe are all in this category. They are debasing their currencies (or keeping them artificially low) to keep their exports competitive and their economies alive.

But it does concern some nations and I believe their message has significant implications for us all.

The most telling tale is the decision by Germany to repatriate its gold reserves from foreign into domestic storage. There is talk that this policy will also be adopted by the Netherlands and Azerbaijan. Effectively these nations are saying that the thin air and political promises backing many currencies is not sufficient and that gold is real money.

Other nations are stocking up on gold too. China is steadily increasing its gold holdings by swapping their paper currency reserves for something that has represented wealth across millennia. Russia is a big buyer, as is India. All are expressing a lack of confidence in the future of fiat currency.

It was French President Charles de Gaulle who first demanded the United States honour its commitment to a gold backed currency – exchanging French-held dollar reserves for the precious metal. France remains one of the world’s largest holders of gold with nearly 2700 tonnes. Ultimately this decision by de Gaulle led to the USA removing the direct convertibility standard in 1971, a decision which helped to fuel the massive dollar debt binge which has so compromised the world economy.

Gold has been characterised as a ‘barbarous relic’ and legendary investor Warren Buffett isn’t a fan, preferring to instead invest in productive assets. However, the purpose of gold isn’t to make money as much as to preserve the purchasing power of wealth. An ounce of gold 100 years ago might have bought you a good suit. It will still buy you that today. The same cannot be said of any singular denomination of paper currency.

However, Buffett agreed with the gold bugs on one point when he said:
“…they’re right to be afraid of paper money. Their basic premise that paper money around the world is going to be worth less and less over time is absolutely correct. They have the correct basic premise. They should run from paper money.”

Given what is happening to paper currencies all around the world, it appears we should all be running very fast indeed.

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