In the beginning large American corporations sent good-paying, value-added jobs overseas. These past 25 years, real wages for full-time male workers are basically unchanged. However, the banking system has stood by ready to expand consumer credit so that American families can at least borrow their standard of living. Unsustainable, meet unstable.
America’s “greatest generation” around 90 years old or better, has lived through two monetary resets. The first was during FDR’s first administration and the second during Nixon’s first. Both episodes were the same, only different. Both were during periods of instability and unsustainability in the monetary affairs of America and internationally. Jumping to conclusions, the current state of affairs in America and globally are within the window of another reset. Suffice it to say that there are two distinctive elements that transcend these periods. One is that the front page of a daily paper will not describe when, why or what is about to happen. Two is that whatever solution brought down from on-high will not likely be in the best interest of the American middle class.
In 1933 the Harvard endowment fund was the owner of a $5,000 New York Central Railroad bond. The issue was a gold bond paying its maturity, in 1998, as well as interest, at 3.5 percent, in gold coin. With the stroke of FDR’s pen in 1933, the endowment absorbed a 40 percent loss. This was a consequence of Roosevelt’s executive order that confiscated all gold coin of the citizenry, and then he promptly devalued the currency vs. gold. These acts reduced the gold value of the bond from 241 ounces to 143 ounces. Surprisingly, FDR wasn’t run out of town over that episode.
In August 1971, Nixon declared that the gold backing of U.S. Treasury securities held by foreign entities was to be temporarily suspended. Temporary has turned out to be a long time. The long and short of it was the beginning of an era of money without redeemable value, as well as money with few limits on its issuance. Put another way, the U.S. dollar was no longer a store of value while remaining the world’s medium of exchange. Meaning over time, a unit of money buys less capital, labor and material. The reflection of this is higher prices - without change of value - other things equal. Although reportedly not for this infraction, Nixon was run out of town.
And so this summer, things are arguably unstable and highly unsustainable, more so than previous periods by orders of magnitude. Some source material for the current conditions is below. 1) With Roosevelt’s “crime of 1933,” the risk-free asset shifted from gold, with no counterparty risk, to U.S. Treasury securities, henceforth, from an unencumbered equity to an encumbered debt. 2) Cash in the system is a liability of the Federal Reserve Bank. The Fed’s asset side is U.S. Treasury securities, a liability of the American people. We are left to assume this makes sense to someone. Today the risk-free asset concept is perhaps sufficient for regulated balance sheets. However, for the rest of us, U.S. public debt is repaid via issuing more of the same, and in the currency being debased by policy. A side note, a current saver (or pension) cannot live off of the interest on $2 million at current interest rates.
Just how a likely reset would play out is impossible to judge at this point. In biblical days there would be a debt jubilee. On the other hand, the old adage he who owns the gold makes the rules comes to mind. With America being the largest issuer of sovereign debt, it is a likely bet America doesn’t make the rules this time. If history is any guide, plans are in place merely awaiting a trigger event, generally involving wars of trade and the other kind. In as much as the two above resets were fixed to gold, the likely outcome will involve gold as it is the ultimate extinguisher of debt.
Andy Wahrenbrock is an independent investment adviser from Bakersfield. He can be reached at firstname.lastname@example.org.