Our current financial environment with massive, growing debt and an irredeemable currency has many investors asking if that debt can ever be paid off. Is it even possible to close this chapter and move on to an honest monetary system?
In this week’s episode of The Gold Exchange, John Flaherty & CEO Keith Weiner discuss the factors involved, plus a mechanism for debtors that could get us out of this mess. Along the way you’ll learn:
- The role of irredeemable currency in financial Armageddon
- A crucial question economists must answer when creating a grand unified theory
- The perverse economic signal that can doom a civilization
- Why the source of an investor’s profits matter
John Flaherty: Hello, everyone, and welcome back to the Gold Exchange podcast. I’m John Flaherty. I’m here with Keith Weiner, founder and CEO of Monetary Metals. On January 6th, Monetary Metals issued a formal press release reporting the issuance of the first gold bond since 1933. In today’s podcast, we’d like to go a little deeper into the topic and understand why this is such big news, not just for the gold community, but everyday investors who are trying to figure out a way to save for retirement in a financial system basically devoid of interest.
So, Keith, you have written a lot about the nature of irredeemable currency. Why do you say irredeemable, whereas most people say fiat.
Keith Weiner: I think they’re looking at two different aspects of the dollar and of the currency. Fiat means force. The government says this is what you’re going to use and there’s force of law behind that in a variety of different ways. “Irredeemable” isn’t speaking of how the government imposes it, but of its nature itself and what the currency does.
“Irredeemable” distinguishes it from what the currency had been previously, which was redeemable. So in a redeemable currency, all bank deposits, including the deposits that support the currency notes begin as somebody bringing gold – or maybe silver – but generally gold, to the bank and then getting a piece of paper that says, OK, you’ve got one dollar worth of gold and dollar was a weight of gold at that time, not a price. You have one dollar worth of gold on deposit and you have the right to withdraw it at your leisure.
Any time you bring this piece of paper back, you slide this across the counter to the teller, and the teller will slide back a bit of gold. And today the currency is irredeemable, which means it’s an IOU. There’s some sort of credit, some sort of wealth that the bank has of yours. And you can’t ask for it back. You can trade it to somebody else. But, in a redeemable currency, getting a known amount of gold was a contractual obligation.
It wasn’t a price that was set in the market. It was, “I’m giving you a dollar worth of gold. I have the right to get a dollar worth of gold back.” And the dollar again being a weight, not not some sliding price. Today, if you want to buy gold, you go to somebody who has gold and wants to sell it and you find out what the price is going to be. There’s no way to know the terms on which you’ll be able to do that trade, no guarantee you can do it at all. And the bank has nothing to do with it. So the bank has your wealth and there’s no way to to get it back. You’re simply trading to somebody else.
John: I’m fond of the anecdote that you share. I can’t remember who you were speaking with, but it was some economics professor, somebody. You were trying to draw the distinction between currency and money. And I think you asked him the question, “So back prior to 1933, when you took a dollar bill to the teller and you slid that across to them, what do you call the thing that they slid back to you?”
Keith: Right. If the dollar is money, what is the money redeeming for? And whenever I’ve asked that question, I’ve asked that question in a lecture, in an academic context. I was invited to present a paper a couple of years in a row – and would have been this year as well, except for covid – at Juan Carlos University in Madrid. And the audience is academics, and I’ve given them that challenge. I have not yet heard anybody come back with an answer.
John: You’ve also written a lot about the problems that result from an irredeemable currency. What do you think are its fatal flaws?
Keith: So I think there’s two fatal flaws. I’m not going to go there, where most people go and say inflation. I’ll just say we’ve had rising prices for 107 years since the Fed was created. If it can go on for 107 years, it can go on for another 107 years or another thousand and seven years.
It’s not particularly urgent. A lot of people would say inflation is a tax, I would say OK, fine. It’s a tax. Right now that tax is running around 2% per year and that would make it one of the smallest taxes. I mean, sales tax in a lot of places is eight or 10 percent. Income tax, between federal and state can be well into the 30s. Inflation, so-called is not the big problem. But there are two big problems with the dollar, that I think are both fatal.
Either one of them would render it unsuitable for use as a monetary system. The irredeemable dollar. I want to be clear on that. And one is that the dollar being an IOU, if you pay a debt in an IOU……so, I owe you money and then I hand you an IOU slip. Notice the debt does not go out of existence. I’m handing you a piece of paper that says there’s there’s a debt, there’s an owing, somebody owes somebody something. I’m handing that, I’m slipping out the back door saying, “OK, here, take this piece of paper. Now somebody else owes you.”
And I can get away with that. That’s how the law is written. But it doesn’t make the debt go away. It just shifts it around. And so because the debt isn’t going away when paid, as it would under gold, then the debt has to keep growing exponentially. And boy, are we seeing that in spades in the post-2008, so-called new normal.
The other fatal flaw is that the interest rate is completely unhinged. So in a gold redeemable system, if the interest rate gets too low, then people can withdraw their gold coin.
And by going to the bank and demanding your gold back, the bank is forced to sell assets to sell bonds, which pushes the price of the bond down. And as many listeners may know, the interest rate on the bond and the price of the bond are strict inverse. They’re like a seesaw. If bond price is down, that means interest is up. And that’s a rigid, mathematical relationship. That’s not a tendency. That’s not a well, maybe that will happen. That’s just how the math works.
So by people coming and saying, I don’t like the interest rate, cash me out, give me my gold coins, I’d rather hold them under the mattress than continue to lend them to you at this ridiculous low rate. That forces the interest rate up. And so the interest rate in a free market gold standard is kind of like the price of anything in the supermarket. It’s like the price of anything anywhere.
If the price of steak is too high, you go to the supermarket and you find that sirloin is $99 a pound. What are you going to do? You’re going to not buy it. And by not buying it, then that forces the supermarket to mark it down. So now it’s on sale at $79 dollars. And maybe one person buys it because they’re desperate for steak or they didn’t pay attention to the label or something. They have to market down to a reasonable price and then that’s when the market will clear again. And it’s the same thing with interest in the free market.
But the dollar, being irredeemable, disenfranchises everybody. Now, if you don’t like the interest rate, well, you’re going to like it anyway, because tough. What are you going to do? So even if you take your dollar bills out of your bank account, and say, well, I have physical money in my hand, that’s not actually money, that’s a credit slip, that’s a piece of paper that says IOU on it. It actually says Federal Reserve note, but note is an archaic word, that means credit.
You’re still financing the Fed. And the Fed is still financing the government and the banking system. And you’re getting zero interest. So they’ve disenfranchised people. And that means that the interest rate can go anywhere, you know, even zero if negative, whatever.
John: So I’d like to rewind in history a little bit and talk for a minute about John Maynard Keynes. It’s been a few years, but you wrote an article called Keynes was a Vicious Bastard. It’s one of my favorites. I think we owe our audience probably a dedicated episode to Keynes, but I want to focus in on what he said about interest rates.
What what did he want to do with the interest rate and why?
Keith: He said drive it to zero. Or quibbles…maybe slightly near zero. There’s some managerial effort and talent, you know, to find the right thing to invest. But the capital is going to be so plentiful, he has this whole fallacious economic theory around it, drive it to zero and he specifically said to euthanize the rentier. Now, “euthanasia”, he’s saying “kill”.
So there’s a particular category of people that he wants to destroy. And the rentier is somebody who’s collecting interest on their money and particularly somebody who’s doing that as their primary source of income. So who does that? Well, that’s a retiree. That’s a pension fund, paying retirees. That’s an annuity.
When when somebody sets up a cemetery, what’s the business model there? Well, you pay X amount to buy a plot for a gravestone and a casket. That money up front, a little bit pays for the services of the funeral director and whatever. But most of that is going into an annuity that, long after the cemetery is filled, and there’s no longer new customers paying for new plots. How does that thing stay alive? How do they pay their taxes and pay somebody to cut the grass and put flowers on Memorial Day and so forth? And that’s the proceeds from the annuity that they purchased.
So by Keynes saying, “let’s euthanize that”, he’s saying let’s kill that off and nobody should be able to live in retirement. And further, he talks about overthrowing the capitalist order, destroying the sacred bond between creditor and debtor, creating reckless and wanton unfairness where some people are getting fantastically rich and most people are being impoverished. The people who are impoverished province will resent the people who are getting fantastically rich. Today we call it the one percent versus everybody else.
And he’s clever, and he says even their fellow bourgeois. He’s a socialist, so he uses that sort of lingo. The bourgeois who were getting impoverished will resent their fellow bourgeois who are getting unjustly enriched. And so he sees this as the way to completely overthrow the capitalist order and then bring about the socialist utopia that he dreamed about.
John: Let’s talk about zero or negative interest rates, aren’t those….just the whole concept of a negative interest rate? It seems like it is unnatural, like it would defy gravity, as it were.
To get interest on something is to get a return for lending it out productively. And how in the world could the person borrowing it then be entitled to even more interest for that privilege? Just don’t. It’s not computing.
Keith: You’re right. I mean, a negative interest. That means you lend somebody $1000, and then after taking that risk and locking up your money for 10 years, they give you back $990. Why would anybody do that? And the only answer is because they’re disenfranchised, because to hold the dollar is to be a creditor to the Fed.
Ultimately, this is, by the way, why they’re going to have to do away with paper currency or figure out some way to make the paper currency go down in nominal terms. Because if the interest rate is negative, then people say, fine, I’ll just withdraw my money from the bank and hold it as cash.
So they’re going to have to deprive people of that outlet. But as long as people are trapped in the system, then they have to take whatever interest rate that they’re given because there isn’t any alternative. In gold, you can take your marbles and leave the sandbox. In the dollar, even if you have paper cash, as I said earlier, you cannot.
John: The interest rate has been falling, as we all know, since the early 80s. Is there a problem with this trend?
Keith: Well, yeah, because it does two things. One, with each drop in the interest rate, it’s now fresh incentive to buy a new flat screen TV, to buy a new car. So it’s incentivizing more consumption. And if you resist it, if you say I’m going to be disciplined, I’m going to be a saver, with each drop in the interest rate, they’re taking away an incentive to save.
It’s zero percent interest effectively. Nobody can ever save enough money. It’s a treadmill that’s cranked up so fast, nobody could ever hope to get all the way to retirement and have enough money to retire on. And while they’re decreasing the incentive to save, they’re increasing the incentive to borrow in order to consume. And then every time it drops, those incentives both change again. And then there’s another drop in interest rate, another change in those incentives. So it gets worse and worse and worse and worse.
And then we blame people for being in debt. Now, people still are responsible for their own decisions. In a certain sense I don’t let anybody off the hook for poor decisions they’ve made. But why would you design a monetary system to keep ratcheting up two perverse incentives? The perverse incentive against saving and the perverse incentive in favor of borrowing to consume?
John: Is there a problem with too low of an interest rate or even a negative interest rate as opposed to just a general falling interest rate?
Keith: Yeah, that’s a good question. And I make an important distinction between falling, versus too low. I want to preface my answer about too low by saying I’m not going to propose that there is a magically right interest rate, that some central planner who is wise and is interested and all seeing and all knowing and can sit down and say in the right interest rate number is four point two percent – just to make a nod to Douglas Adams and The Hitchhiker’s Guide to the Galaxy.
But rather if the market, were to set one rate and the Fed and its dynamic ends up pushing the rate below that, then you end up with a whole variety of perverse outcomes. And so one of the problems economists have to answer if they want to have a grand unified theory of economics is how does anybody know the difference between a wealth destroying and a wealth creating activity?
And that’s a non-trivial question. It’s pretty obvious if a kid is running a lemonade stand. Because he has to buy lemons and he has to buy sugar and he has to maybe hire his friend to wash out the cups, serve more lemonade, wash out the picture every once in a while. So basically, he buys a bunch of stuff. He sells a bunch of stuff. And if the goes-outta is greater than the goes-intta, then he created value. And if he loses money, then he destroyed value. That’s very simple.
But when you start talking about long periods of time and you talk about borrowing capital from investors….suppose somebody bought a business in 1970 for $50,000, and today is retiring as an old man and sells it for $5 million. How do we know, was that a gain? Was that a loss? And obviously, with a changing value of the currency, people would have to find some way of adjusting the dollar in order to be able to make those two numbers comparable.
But that’s the question after the fact. While someone’s making decisions along the way, how do they make decisions as to what activities they should engage in and what activities they should avoid? And the answer is, it comes down to their estimate of the costs – or what I call the goes-outta – and the revenues. And they’re estimating is it going to make more money than it costs to do?
And one of the key costs in anything that’s capital intensive…So, forget lemonade stands, but now imagine buying a 200 acre property and planting lemon trees. You’re going to borrow a lot of money to do that. Land is expensive, and then you’re going to pay all the labor to plant these trees and then you’re going to have to carry that borrow for a number of years. I don’t know how long it takes from the time you plant the lemon tree until it’s actually producing lemons. But I’m going to presume it’s not instant.
So you’ll spend several years not producing anything while you wait. And the cost of borrowing – the interest rate – is a major determinant of whether this is going to be a profitable exercise or not. If the interest rate is too low, you’re destroying wealth by something that is making money. And that is the most perverse possible economic signal that you can imagine. It should be the case that if you’re making money, it means you’re creating value.
But by setting the interest rate too low, it can it can obviously be possible to make money while destroying value. And if you make it profitable to destroy value, your civilization is doomed because this is what large enterprises do. What major corporations do is they scale up to make more money. And if making more money means destroying more value and then you scale up even more, you’re going to destroy all of the accumulated capital that that civilization created since since its inception, and eventually collapse into ruin.
So that’s one of the problems of interest rates that are set too low.
John: So you see gold bonds as a way to get out of this mess. How will they help us out of this mess?
Keith: So the first observation is when you pay a debt in gold, unlike if you hand over a dollar bill that is an IOU….If you pay it debt in gold, if you hand somebody a piece of gold, the debt is extinguished. It goes out of existence.
And so a gold bond….gold is capable of not only financing something productive, which the dollar can do just fine. If I want to grow my business, I can borrow dollars and grow the business, so the dollar’s financing the business growth. But the dollar debt, once created is not extinguished. Whereas if I pay in gold, the debt goes away, the debt paper can be torn up and that total debt in the system can be reduced.
So this feature of gold being the extinguisher is one of the most important distinguishing features of gold. How do you use this to get out of the system? So I said earlier, the debt in our system is rising exponentially. We’re now approaching $30 trillion at such a breakneck speed that we’re never going to talk about 31 or 32 and a half. The next milestone after that is 40. We’re going to hit that in a surprisingly quick time period.
Obviously, this is a problem. Obviously, when partisan hacks like Paul Krugman, who cosplay economists in the paper and on TV say, “Well, it’s not a problem because we owe it to ourselves.” I think at some level, even an eight year old can see there’s something wrong with that. So we have this debt that’s growing exponentially because that’s how the monetary system is designed. It has to. If the debt doesn’t grow exponentially, everything collapses.
And by collapse, I mean the debt’s wiped out. You wake up one day and you find out that what you had thought was money in the bank is just zeroed out and your bank is insolvent or they just take away your bank account and give you some shares in the bank called a bail-in, that is what would come if the debt couldn’t continue to grow as it needs to grow in order for all the debtors to find enough dollars to service their debt.
That’s the issue. If the debt can’t expand, if they can’t borrow to keep growing it, then the debtors start defaulting. And then the defaults will cascade and then the creditors become insolvent and they default on bigger creditors and so forth.
So how do you pay off debt in a system in which the means of payment cannot extinguish a debt? That’s the problem, and I would love to see, you know, thousands of economists out there asking that question and grappling with that problem because they’re not, generally.
So my proposal is to use gold bonds. And so I propose a mechanism for debtors. That is, you owe dollars and your normal – take the U.S. government, for example – your normal modus operandi is every time a dollar debt is due, then you roll it by issuing new debt. And the new debt has to be bigger because it has to pay the interest as well as the principal. So that’s part of why the government’s debt is growing. And then also, of course, its spending. Spending in a way that to make a drunken sailor look, you know, prudent by comparison.
So you say, OK, we’re going to issue a gold bond. But here’s the twist. The gold bond is not going to be….we don’t want people to pay in dollars. If we want to raise more dollars, we’ll just sell a regular dollar bond. Nor are we asking people to pay in gold for this particular gold bond. Now at Monetary Metals, we just issued a gold bond and the investors invested in gold. But what I’m talking about here is a mechanism for getting out of debt, not financing a mining company.
So instead of paying in gold, we tell the investors in this new gold bond, we want you to pay in outstanding, we want you to tender our outstanding paper debt. So it’s a redemption exercise. How much paper debt will you bring back to us to redeem in exchange for what you’re going to get this new gold denominated debt?
So observe what this does. First of all, it’s giving the investors a choice. Suppose you had a choice of would you like to be paid back 100 ounces in 10 years in January of 2031…would you like to be paid $190,000? In January of 2031. Well, it’s pretty obvious, and when we ask even non-gold people, that choice, it’s pretty obvious which one is preferable. The Fed is working away to debase the dollar. The dollar has a lot of uncertainty in it, and gold does not. And so over long periods of time, it’s pretty clear that gold’s the better bet. So now people have a preference that they’d rather get paid in gold at the end, rather than dollars, and now they have a way of expressing that.
Would you prefer to hold the dollar bonds of the U.S. Treasury or given that the same debtor and the same credit risk, would you prefer that they pay you gold in the end? And so I think that would be a pretty strong preference, which means the exchange rate between the Treasury Bond paper version versus the Treasury Bond gold version will tilt in favor of the gold one. Which means that people will have to bring more than one hundred ounces worth of paper bonds in order to redeem….I shouldn’t say redeem….in order to exchange for the equivalent gold amount.
The net result of which is that the government can get out of debt at a discount. But more importantly, by getting rid of a debt that cannot be extinguished, only serviced, for a debt that can be extinguished, then if you keep iterating this process over and over and over again, eventually the government could actually pay off its debts.
Now, this is really important because of the entire financial system and all the financial intermediaries. That’s not just banks, it’s credit unions, it’s pension funds, it’s insurance companies, it’s annuities and many other kinds of financial intermediaries.
It’s important that they be repaid in nominal terms. If they’re not repaid in nominal terms, they’re insolvent themselves. And so you destroy the entire financial system, which is going to be horrific. We don’t want to do that. If you can pay them back in nominal terms, I say nominal terms, the value of what they’re being paid back in is lower. But on their balance sheet, they have a debt and they have a liability, which is what they owe somebody else.
And then they have an asset, which is what the government or some other debtor owes them. The balance sheet doesn’t really change if the value of the dollar is higher or lower. What matters is that they’re repaid in nominal terms so that they can repay their creditors. And so by issuing a gold bond with this twist, this mechanism that buyers of the bond have to tender outstanding paper bonds of the same issuer, it creates a mechanism by which the debt can be finally settled and repaid. We can close this chapter and move on to a more honest monetary system.
John: So if I might just restate in my own words: the gold bonds provide a way to solve the fatal flaw of fiat currency, which is make it redeemable. And then also for in terms of a benefit to savers, they now have a means of earning interest on their hard earned wealth and preparing for retirement, which is something that, you know, right now we’re we’re a nation of speculators. In the absence of interest. Do I have that, right?
Keith: That’s right. Although, I would say the fatal flaw of irredeemable currency rather than a fiat currency, per se.
John: That’s right.
Keith: Although, you know, to me those concepts are like precision and accuracy. As I say here, I have a calipers that’s highly accurate. Chances are it’s also highly precise. Nobody spends the money to achieve great accuracy and fails to achieve precision. So accuracy and precision are very related concepts and fiat and irredeemable are related but differentiated, as I said earlier.
But yeah, otherwise I agree 100 percent with what you said.
John: So final question. Why should investors consider these bonds when they’ve enjoyed such stellar returns in the stock market these many decades?
Keith: That’s a good question. And the answer that I’m not going to give is that, you know, the stock market has to crash. It’s a fake stock market. It’s fake prices. It’s fake valuation. That’s the answer I won’t give. It certainly tends to be the case that as our system is is gyrating and heading to go off the rails, they tend to be punctuated by these very sharp crashes.
But I think the bigger issue is you have to look at what stage of life you’re in and how much risk you can take of a big drawdown. So somebody who’s 21 years old, just started their career, first of all, they don’t usually have a lot of money. So if they have $5000 in savings by that point, I guess that’s pretty good. And if they want to gamble that in the stock market, OK, fine. And then if they lose it, well now they’re 21 and a half and, lesson learned and they have their whole career ahead of them to earn more.
But if you’re 70, 70 plus years old, a big drawdown, you don’t have time to wait for things to recover. But I think more broadly, the difference between earning interest on an investment versus making a capital gain on a speculation is the source of where the profits to the investor come from. In the case of earning interest, you’re financing something productive and something new, something that isn’t being produced right now. So you’re enabling something new to come to market, which is a good thing. And everybody benefits from that. And your your profit comes from part of the profit from that new production.
So something new has been created and you get a piece of the new thing that was created because you’re the one who financed it. In the case of speculation, nothing new is being created. Your profit comes from the next speculator who’s forking over a bit of his life savings to you to buy the asset and his savings come to you as income. So nobody wants to be the prodigal son, nobody wants to spend their own life savings or their own family’s legacy.
But they’re happy to spend income. And someone else’s family legacy comes to you with your income. You don’t know that. You don’t care that. And you spend it. Now, that person forked that over to you because he’s expecting the next speculator to fork over even more wealth to him. And so it’s not that the wealth is destroyed when the stock market crashes. Everybody can understand the pain when the stock market goes down by 50 percent or 80 percent. It’s that wealth is being destroyed bit by bit on the way up.
It should be obvious, again, to that precocious eight year old. Whole generations can’t possibly get rich by speculating on stock market prices. I mean, that should just be an iron law of reality that everybody is just putting money in and things are going up and up and up and up and up, that there’s not a net increase in wealth from this. That should be just just an axiom of financial markets. That, OK, you know, one person is giving up his wealth, exchanged for this asset that’s going to go up, and then someone else.
But eventually, you know, you run out of available wealth to destroy through that process. Even if the stock market doesn’t crash immediately, you’re participating in that process. I would argue people should think about these things at a principled level and then ask how much participation they want in something like that.
John: Great, Keith, this has been a great discussion today, lots of good food for thought with regards to these bonds. Thank you for joining us on The Gold Exchange.