Gold Versus Co2 Bancor, Why Are Gold Bugs Scared?
Commodities / Gold and Silver 2010 Jan 29, 2010 - 09:20 AM GMTBy: Andrew_McKillop
Threats to gold's supposed 'natural role' as a strong, solid and reliable money standard always rise
when gold prices are at, or near record highs. Generating fear in the minds of gold buyers and
speculators, downsider sentiment is driven not only by the latest one-liner from George Soros,
but also by the market action of vested interests stretching from equity asset managers, to
central bankers and politicians. All rally to the task of 'saving the money', and other paper stores
of value by acting to push down gold prices, whose current faltering levels near all time highs in
nominal dollars could or might fall by 50%.
As a recent 'Daily Bell' (thedailybell.com) commentary put it, in response to a CNN editorial on why gold prices should or could fall to under one-half their present level:
Gold is not a stock, not a commodity, it is a money metal - and there are factors that influence it that go far beyond supply and demand. By lumping gold in with other so-called bubbles, the (CNN) article in our opinion does investors no service. In fact, it may confuse investors about what gold is and why it is "different" from the fiat-based money instruments like stocks and bonds.
Defenders of Sound Money, like the 'Daily Bell' are now also confronted by a new and unexpected risk to restoring gold-based money. This would be a new 'fiat' world money, forced into circulation by the IMF, World Bank, national governments and market traders, and basically linked to the spiralling and opaque world of carbon finance, emissions credits and financial support to all and any non-fossil energy source development. Adding another turn to the possible and potential reasons why the December 2009 Copenhagen climate conference was given such bulldozer media and political support, by leaderships of most OECD countries and the IMF, but not emerging China and India, the promise or threat of an entirely new 'carbon money' has to be included.
The maximum extension of 'climate conscious' and 'low carbon' economic strategies, and the financing of a massive emergency program to shift away from fossil fuels, starting with oil, could include a new "CO2 Bancor". Previous articles by myself have referred to this not-so-bizarre threat to both gold and oil, as the prime stores of value in the globalized economy, with predictable impacts on world inflation, economic activity, trade and geopolitical relations.
BANCOR
Sources of support to Keynes ideas for a centrally managed global reserve currency, that he called Bancor, now include climate change crusaders. Seeing the massive growth of carbon finance and emissions tradings, estimated by the World Bank as attaining a dollar-value of about USD 125 bn in 2008-2009, the extension and growth of this appeals to the 'Keynesian minded' leaders of nearly all G20 countries. Lacking nothing in the way of audacity, and the will to make national debts disappear overnight, the little-publicised idea of "CO2 Bancor" has gained ground. Making a radical shift away from the 'underlying security', of CO2 and hot air credits in carbon finance, to simple fiat money based on energy fundamentals, the new energy-related Bancor would firstly take the stress off a wilting US dollar as the de facto world reserve currency.
Support to creating a new fiat world money has not only come from the IMF, World Bank and more discreetly from political leaders in several G20 nations, but also from central bankers. These include Zhou Xiachuan, governor of the People's Bank of China in a March 2009 speech. Unexpected to some, Chinese support for Bancor could be traced, by many, to Chinese worries about the future buying power of their endlessly mounting trade surplus and 75%-majority US dollar currency reserves. As we know, at the G20's 'global green summit' in London, 2009, the assembled heads of state approved the idea that the IMF should issue money-equivalent instruments with a US dollar value up to about USD 250 billion. At the time, this proposal was linked by commentators to a possible "CO2 Bancor". Logically, given the power of 'climate catastrophe' speeches by some OECD leaders, at least until the farcical failure of the December 2009 Copenhagen climate summit, and continuing oil fear among politicians and bankers and the need to find new, energy lean ways to create jobs this IMF currency creation initiative could be the start of launching effort for a new "CO2 Bancor".
Keynes failed in his attempt to persuade leaders at the 1948 Bretton Woods meeting to create a Bancor. They preferred to accept the Keynes idea of an IMF, but its 'near money Bancor' was, and still is Special Drawing Rights almost equivalent to US dollars, for many years. The US dollar, tied to gold, was itself a Bancor - that is a world reserve go-anywhere currency. The IMF created a poor man's Bancor, the SDRs, for countries in debt and facing trade deficit crises, or other economic crises. As we know, this system fell apart more than 38 years ago, as the US dollar ceased to have any fixed and formal relation to physical gold. As recently as 2005, the IMF had so little business as lender of last resort to poor countries in financial crisis, it had difficulty covering its annual operating expenses - but this has radically changed with the 2008-2009 crisis.
WHY CREATE A BANCOR NOW ?
Poor countries with unmanageable debt piles, forced to accept IMF and World Bank austerity cures to qualify for borrowing against their slender country allocation of SDRs, was a long-term trend for global economy, North-South relations through about 1985-2000. This has fallen apart as much, and with the same finality, as the US dollar ceased to be the world's de facto Bancor, by decision of Richard Nixon, August 15, 1971. China and India, and the capital surplus oil exporter countries were remote specks in the rearview mirror for global money managers and economic deciders, at the time. National debt, both in large and midsize OECD countries was tiny, but since 2008 has grown by vast amounts, and has been added to already tottering accumulated debt piles in many countries, built up since the late 1970s and early 1980s.
Debt forgiveness for poor countries was, and still is a favoured slogan for altermondialists, but the world's central bankers now have to think about debt forgiveness for countries such as USA, UK, Spain, Ukraine, Portugal, Greece, Ireland - and a long list of others, notably Japan. Creating a Bancor in 2010 or 2011 would be a handy way to also compress these debt piles, through operating 'generous discounts' on the future value of remaining debt in Bancor. Capital surplus countries, led by China, would of course resist this, in the haggling on what conversion rate would be used for various money aggregates, from M0 through M3, M3c, M5, and the future Bancor value of derivatives, swaps and other finance instruments. However, the current situation where the USD serves as world reserve currency, but has no physical backing and is managed by US political deciders who have every rational reason to devalue is unsustainable and highly fragile.
We could easily fear that quick introduction of CO2 Bancor would be massively deflationary, followed by massively inflationary, nither of which would tend to restore economic growth, and could generate global economic collapse and armed conflict under easily built scenarios. More simply, we first have to ask if a CO2 Bancor is credible, and can argue that it is only a little less impossible than a fully functional, global gold-backed money.
Dollar devaluation or depreciation, as well as the Keynesian doctrine of spend now and tax (or devalue and inflate) later are all targeted to raising economic activity. For this reason, defenders of Sound Money, notably the Austrian School, equate keynesianism with devaluation, inflation and debt avoidance. One major problem with keynesian deficit spending economic recovery programs is they do tend work, at least in lower income countries, but often not the way intended. The drivers include economic psychology drivers, and the net results are complex.
Devaluing paper money has interesting impacts even on gold production, as well as oil, other minerals, and bioresource production strategies. This extends to 'rearranged' mineral and bioresources, called manufactured products, for example Chinese or Indian value added exports.
Due to dollars being the overriding currency utilised for trading anything, a currency context of declining dollar value, relative to US debt and relative to other currencies, and the rising dollar price of gold, oil or any other traded resource or product tends to push industrial producers, like China to raise production. In an inflationary context, disguised as dollar depreciation rather than rising prices inside an economy, industrial players will build stocks of the raw materials they need for future production. In an inflationary context, the borrower is king, enabling industrial players to launch massive investments. Central bankers other than American, rather than selling their gold stocks to other central bankers in a laborious and comical attempt to create gold selling sentiment, can watch their national money appreciating against the dollar.
For all non-American players this limits inflation, tends to increase production, facilitates trade, and other growth-positive results allowing central bankers outside the US to signal to media and politicians that "all is well". Inside the US, inflation can be disguised by a large variety of statistical tricks and astucious selection of data, as used to mask the real level of unemployment.
WHY CO2 BANCOR ?
As we noted above, the US dollar is already Bancor, in the fiat money sense that its creation and circulation has no need at all to relate to fundamentals. Not for nothing, 'Time' magazine in 1999 named Keynes as one of the 20th century's most influential persons, writing: "His radical idea that governments should spend money they don't have may have saved capitalism".
With a CO2 Bancor, capitalism can create virtual money and survive the final energy crisis, when the after-peak oil fall in global energy supply begins to be really serious, well before 2020. Other natural resource stress points and strangleholds can be added. These affect everything from iron ore and coal transort and supply, to water and soil resources. All need massive remedial investment spending to avert serious and permanent shortage, making it very desirable to have a new world reserve money, with a tendency to fewer zero's after the spending need estimates.
The supposed objective of CO2 Bancor as distilled to the world press and media since early 2009 is to organize and facilitate weaning the world economy off oil, coal and gas, managing world currency instability, and preventing the present recession to tilt into sharp deflation, or explode into hyperinflation. The long and difficult adjustment process away from fossil energy will be so costly that stress to the US dollar would likely be fatal. Finally, proponents of CO2 Bancor also hope or believe their new monetary plything would restore confidence - the basic ingredient for launching any new money. This sticking point is the most difficult for Sound Money defenders, who point out that "Carbon Currency" is a revolutionary threat not only to all existing moneys, but also to the economic system.
CO2 Bancor would in fact be a BTU Bancor, related to the energy intensity and energy impact of any raw material, manufactured product or commercial service. Nothing, including gold mining and recycling, is outside the scope of energy fundamentals. Extracting gold from deep mined gold operations where mine depths are an average of close to 4000 metres below ground, and ore body 'richness' is around 4 grams per ton winched to the surface, obviously needs quite a lot of energy - around 500 kWh direct, per ounce. As we know, the energy cost of producing gold, like any depleting non-renewable resource will rise as the resource base shrinks, and will explode at certain predictable thresholds, when a locally rich deposit gives way to the much lower crustal abundance of that mineral or metal ore.
GLOBAL GOLD CURRENCY UNDER THREAT
The ultimate indicator of mineral wealth or the lack of it, is crustal abundance, which is determined as far as we know by entropy linked astrophysical and nucleosynthesis parameters and processes. Crustal abundance tells us why gold costs more than uranium, copper or iron - showing why a money based on aluminium coins and pulp-based, recycled paper notes is more feasible, and of course more exposed to inflation and counterfeiting than a money based on rare or very rare energy intense metals and minerals. Gold, with a crustal abundance of around 1 part per billion (ppb) is obviously better placed to resist these threats than iron or aluminium with a clarke or crustal abundance of around 50 million or 82 million parts per billion.
By exactly the same reasoning, we can also see why gold can never become a 'world money', despite claims to the contrary, but can remain a prized token for bartering and exchange of needed good and services. History since the 18thC, when paper money seriously started, shows that anything proposed or suggested as a physical substitute for paper money that is sufficiently rare, will be insufficiently ubiquitous.
Taking an approximate figure for the total above-ground world gold stock, placed at around 140 k to 200 k tons by most authorities, and by the World Gold Council at around 150 000 tons , or 150 billion grams, this equates to not more than 20 grams per person worldwide. Much less than 50% could under any scenario be mobilized, and distributed by an imaginary IMF Global Gold facility imbued with a universalist save-the-planet, gold-backed money policy directive, allocating about 10 to 12 grams to each person currently living on the planet. This would be their entire "real money" holding, for keeping a self sustaining, non inflationary economy in existence and operation, or simply buying their beans-and-rice for a couple months ahead.
Another reality limit on a global gold-backed currency is to compare the potential stock of physical gold that could in theory be mobilized and distributed, with total money in circulation.
Taking an estimate for world M1 + M2 aggregates, growing at double digit rates in several countries, at a 2009 total equivalent to about 40 000 billion USD, each of these notes and nearmoney instruments, both electronic and paper would have a very tiny fraction of 1 gram of physical gold backing it. Consequently, any potentially manageable gold-based world money would need or would force a massive contraction of money in circulation - obviously with extreme deflationary impacts, lethal to the global economy as we know it. Response to this massive deflation, as noted above, would likely be the emission of vast new amounts of other, local, paper currencies generating hyperinflation.
To be sure, the sound money interval would be short. During the deflationary interval there would be a series of rather predictable revolts, revolutions, civil wars, and international wars. Following these, perhaps preceding them, currency reflation - printing paper money - would be sure and certain.
BEATING THE ENERGY CRISIS WITH BTU BANCOR
BTU Bancor's defenders claim they can avoid this predictable sequence. Their new money, essentially energy chits or coupons, would be tightly linked with world energy production and consumption, while also aiding financial effort for transiting to renewable energy, and away from polluting, depleting fossil fuels.
Keynesian logic would then generate a happy spiral of economic multipliers, with the fun logic extending to central bankers having no further need to ward off speculative attacks on their national monies, which would be progressively or rapidly removed from circulation. Launching ever larger renewable energy and energy saving programs to stave off 'climate catastrophe by 2099', leaders could believe that global economic growth would tend to recover rates as high as those of the Petro Keynesian Growth interval (2004-2007), but without the stressful fall in the world value of the US dollar, nor endless rise of oil prices.
To be sure, other and real world drivers for CO2 Bancor exist. The debt overhang built up since 2008-2009 political leaders in most OECD countries, to operate 'Keynesian inspired' deficit financed economic recovery programs, is a real and growing menace. Total amounts could be above USD 11 000 bn, and national debt in many countries has reached exotic and unsustainable highs. With or without economic recovery attaining better than about 2% a growth in the OECD countries, inflation must return. With stronger economic recovery, inflation could explode, again underlining the interest, in OECD countries, for a 'clean slate' new world money.
Replacing all national moneys with a go-anywhere single world money would massively aid the writing off, and hiding of past errors, debt and delusions, both Keynesian and neoliberal. Debt forgiveness would be truly democratized and vastly extended upward from a periodic gift to the world's poorest countries. Using stealth in the run-up to introducing BTU Bancor, like any other process of forcing out old moneys (like the Euro's introduction in 2002), the surprise effect could prevent gold bugs bidding up he yellow metal's price to real extremes - and oil or other fossil fuel prices would likely stay reasonable due to the betting on sharp deflation following the arrival of BTU Bancor.
Forced introduction of the extremely overvalued Euro, firstly causing deflation and a mini recession in the initial 12 Eurozone countries, could well be another factor favoring the bold imagination and audacity of BTU Bancor fans. Timing is all, making the right moment for steamrolling the new global single money into place the moment when inflation starts seriously rising, and resists all the tricks used to hide its reporting. Timing may have been derailed or slowed by the Dec 2009 COP 15 farce ending with no serious agreement, but standoff between the emerging countries, and the OECD group, but a few weeks is a long time in politics - meaning this loss of face will fade, as Springtime warmth returns and 'global warming catastrophe' is easier to say with straight face.
The key question as to energy transition being aided, or not by a global energy-linked single money may have several answers. The potential for either intense deflation, or extreme inflation both exist. Plunging the global economy into long-term near zero economic growth would surely exercise a powerful modifying impact on oil prices, to put it mildly. Also buying time for transition, the new deflationary single money would achieve its energy targets. Extreme inflation would surely be the gravest risk, leading to results easily including international war, and economic collapse after a short interval. This again would buy time for energy transition, but through a rather different process !
By Andrew McKillop
Project Director, GSO Consulting Associates
Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights
© 2010 Copyright Andrew McKillop
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