Eric Hale has written a detailed discussion of our deck chat about gold at Leen’s Lodge, which was conducted under the Chatham House Rule, with two exceptions — Eric Hale and me. A 10-minute read, Eric’s missive includes graphics. Eric accurately summarizes over an hour of very specific deck-chat data points that reflect what was discussed in the Chatham House Rule session. Participants in that deck chat are kept anonymous under the Chatham House Rule unless they decide to publicize their own perspectives. I will note that the total assets represented in that chat group were about a half trillion dollars.
Many thanks to Eric for undertaking this effort to memorialize the deck chat. Here’s a link to this must-read:
“Do You Have Enough Gold?” | OptionsANIMAL
Other deck-chat participants may also write about their own views. Mine follows, prefaced by a brief account of the historical context.
It took a century to get from a metal (gold) standard to a fiat currency standard. The USA migrated from a 40% physical gold-backed dollar currency when the Federal Reserve was created in 1913. Gold then was $20 an ounce. The 40% test was statutory when the central bank of the United States was created. The Fed’s initial job was to execute policy targeted at maintenance of the 40% hard-metallic reserve requirement.
The official gold price rose to $35 under President Franklin Roosevelt as the Hoover Administration was rebuffed by American voters following the Great Depression. The post-WW2 era forged the Bretton Woods agreement, which established that the US would be the clearing center for payments. The US dollar currency was the key item and the reserve currency of the world. The US government promised that it would redeem dollars for gold at the $35 per ounce price.
Currency exchange rates were fixed by agreement until Bretton Woods collapsed in the early 1970s. I remember being in Stuttgart, Germany, in the late 1960s when the deutsche mark (DM) was rapidly strengthening against the dollar while the Bretton Woods agreement was unraveling.
Germany’s post-war economic recovery was a successful boom. In 1961, the exchange rate was 4.2 DM to $1. Germany revalued and revalued. By the time of the 1971–1973 Nixon shock period and the US repudiation of Bretton Woods, the DM was 2.65 to $1. By 1979, when the European Monetary System (EMS) was created, the DM was 1.83 to $1.
President Nixon’s announcement was specifically issued as a “temporary suspension.” That was over 50 years ago. A suggested reading is “The Lesson of 1971 Was Never About Gold,” from The Daily Economy.
Kotok’s View
As I see it, what China has created is a modern form of Bretton Woods. It is a system where the actual transactions are in domestic Chinese currency under the supervision of the Peoples Bank of China, (PBOC). The Chinese manage the currency-exchange ratio with the US dollar. That is their political decision.
The payments system clears in yuan and allows worldwide usage through a Chinese-affiliated enterprise. That enterprise is growing rapidly and involves many financial agents throughout the world. In Europe, Deutsche Bank announced on August 10th a historic first as it was appointed the European clearing agent for the Chinese currency.
The Chinese system has a private communications method, the Cross-Border Interbank Payment System (CIPS), for users who do not want to be observed. And China also uses SWIFT for communications. Notice how this system provides some financial agents a means to arbitrage between two systems without surveillance. And the system has a physical gold option with a market-based price denominated in Chinese currency and transparently traded in the form of a warrant. The warrant is directly tied to a physical gold metal tranche held in a vault.
Note that the US could immediately replicate such a system and maintain its hegemony. Even today, estimates are that about 90% of the world’s payments settle in US dollars on at least one side of the transaction.
I do not expect that to happen, however, as American politics are now so toxic and dysfunctional as to be continually harmful. The eurozone could also replicate a competing system if the consensus emerged.
To sum this up. China has a growing and competing payments system and is using gold in a version I call Bretton Woods 2.0. The US and the eurozone could alter their mechanics and remain competitive or wait until erosion forces them to do so. American politics is a toxic, debilitating force that is harming the United States. It is getting worse.
I have appended a suggested reading list below. Also, I have prepared a detailed report on the Chinese system and how it compares with the dollar-based system. Email me if you want to read this more technical report.
Additional Suggested Reading
First, we offer, with permission, this excerpt from an August 10 report from Andrew Lees and the MacroStrategy Partnership team, titled “The US’s Exorbitant Privilege”:
The US net national savings rate — (household savings rate + government deficit) — has averaged minus 3.13% of GDP since January 2021, deteriorating now to minus 3.7% of GDP.
Compounding the data over time, the cumulative net national savings rate since 1968 peaked in Q4 2003, plateauing until 2009, before falling 18.5%, with most of that fall happening since COVID. As a result, the U.S. net international liabilities increased to 67.4% of GDP as of the end of last year.
While imports are subtracted from the GDP calculation the associated capital flows need to be serviced and eventually repaid. Adjusting for this, 60% of all US GDP growth since Q2 2008 has been borrowed or purchased from abroad, and just over 100% since the end of 2020. US domestically owned GDP has started to fall.
The deteriorating net national savings rate is despite a similarly large drop in the net domestic investment rate. Rather than the current account deficit funding US investment, as it had in the past, it is increasingly funding consumption, making it less sustainable.
How long can the foreigner continue to finance this, and at what cost, both in terms of US cost of capital, but also in terms of the foreigners’ own GDP growth?
Readers may view the entire report, a 10-page PDF with charts, here:
Special thanks to Michael Wilson of MacroStrategy for providing this resource for readers of the Kotok Report.
See also
“55 Years After Bretton Wood’s End, Chandler Expects Dollar Dominance to Keep Ebbing” | Kathleen Hays Presents: Central Bank Central
“Deutsche Bank appointed as RMB Clearing Bank for Europe” | Deutsche Bank Media Release
“THE CLOCKS ON ONE BUILDING: The institutional calendars inside Meta’s repeated AI-infrastructure financing architecture” | Shanaka Anslem Perera
From Vicentius Liong:
“UAE UNLOCKS BILLIONS IN FROZEN IRANIAN TREASURE — INCLUDING 2 TONS OF PURE GOLD!” | LinkedIn
“China, instead of dumping its $780 billion in US Treasury bonds on the open market, quietly settled these bonds in RMB through third-party countries.” | LinkedIn (excerpt from thread)
“Trump Is About To Sign A Deal That Proves Iran Won.” | LinkedIn
(Excerpt: “Iran has already begun requiring tankers from friendly countries to pay Hormuz transit fees in Yuan rather than Dollars, directly contesting the Dollar’s exclusive role in oil trade for the first time in fifty years.”)
“BREAKING: The U.S. national debt is on the verge of crossing $40 trillion.” | LinkedIn (The debt, interest payments, and bonds are addressed.)
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