Adrian Ash: Gold An Insurance Policy More Than Safe Haven

October 26, 2011

 

HAI: What’s the biggest influence on gold right now?

Ash: Short term it’s the euro and what that means by definition for the dollar. We are in very strong deflationary risk now. Monetary confidence is being shaken worldwide, and the euro is the pinch point for that right now. It’s difficult to think of a more deflationary event than loss of confidence in the monetary system.

HAI: Do you think at all about the worst-case scenario, where the EU is not going to be able to implement these plans because the populace says “no?” We are seeing some of that in Greece.

Ash: I think you’re bang on the money there. If you look historically at situations like this, the one that seems most analogous would be the early 1930s. The last currency to really fall apart in this way was the sterling gold standard. Britain was effectively forced to abandon gold in 1931. The very imminent cause for that were reports of a mutiny by naval sailors in Scotland over unpaid wages. It’s been characterized historically — particularly by Marxist and Socialist historians — as capitalists putting the squeeze on the British government, forcing it to impose austerity measures, such as reducing dole payments to the unemployed, reducing welfare payments. And this was a very nascent welfare state, of course, 80 years ago.

But basically, the government said we can’t bear this, the populace will not bear this. And therefore the gold standard couldn’t be defended.

Now, the big problem that we have today is that the creditors happen to be the taxpayer. If the banks default, then the banks will have to default on taxpayer deposits.

This is why we had the bank recapitalization in 2008, 2009. This was the driving force behind the Asian crisis resolution that the IMF implemented back in the 1990s. This was done to keep the bank creditors — the middle-class savers — whole. You could then destroy them with inflation, that’s fine. But imminently right now, today, you’ve got to make sure that their bank deposits do not vanish.

The problem that you have now is that the taxpayer is both the debtor and the creditor. We’ve managed to get to a situation where we owe ourselves money. We’ve built huge excess capacity. And you can see this happening in China right now. A credit boom means that you are building tomorrow’s capacity today. What are you going to build tomorrow?

You can do the Japanese route, which is you cover the country in concrete and you build roads and bridges to nowhere, which is literally a Keynesian response.

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