The Dollar Cancer and the Gold Cure

The dollar is failing. Millions of people can see at least some of the major signs, such as the collapse of interest rates, record high number of people not counted in the workforce, and debt rising from already-unpayable levels at an accelerating rate.

I am going to share a little bit about myself and my personal motivation. I want to help fix this problem. The alternative, if it’s not fixed, will be a repeat not of 2008 or the inflation of the 1970’s or 1929. It will be a repeat of 476AD, the collapse of Rome and the known world.

If it weren’t for this, I would have started another software company. I had a successful exit, a world class team that was ready to jump into the next gig with me, great advisors, and access to capital. And this was the career for which I had trained, and which I was pretty good at.

Instead, I studied monetary economics and started Monetary Metals.

We are on a mission. It is not simply to sell people on gold. When Rome collapsed, I suppose people who had gold may have had a better chance to escape, than those who didn’t. But where would they go, and how would they survive in a world gone mad? Some problems, gold does not solve.

It is not simply to preach that we need the gold standard. If Mises did not persuade people, then I don’t expect to be successful at the same task.

I think often about that (in)famous quote from archenemy John Maynard Keynes about debauching the currency to overthrow the capitalist order. And the key sentence is:

“The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

He was right. He understood the system and how to destroy it better than everyone else. He was a genius—evil, but a genius. Except he overestimated the number of people who could diagnose the monetary disease.

So the key is to engage the hidden forces of economics, though not for destruction but salvation. The key is to make it profitable to invest in the gold standard.

In this talk at the Harvard Club in New York, I discuss more openly than I ever have before what is Monetary Metals doing, and why are we doing it? What is our vision, and how does it work?

We are in Keynes’ “long run”. We have achieved his goal of euthanizing the rentier (killing the saver) with near-zero interest rates. If his evil plan is not reversed, we are dead.

Monetary Metals is trying to reverse it.

Transcript

[00:00:10.580]
Well, good evening, everybody. Thank you all for coming. I know the weather may have been adverse for some folks, and we had a bunch of people call at the last minute to cancel, unfortunately. I’m Keith Weiner. I’m the CEO of Monetary Metals. I’ve got a pretty crazy idea that I’ve written a lot about. I assume everybody here has read at least some of my writings, but I haven’t really talked too much about the why and the mechanics of what we’re trying to do. Tonight, my talk is called The dollar cancer and the gold cure. Let me just jump right into it. What if the problem was that the quantity of money increases, because the Fed is printing, and a quantity of money increase, as we all are taught in economics 101, causes prices to rise. The Fed has a target, this is their official government policy, is to cause prices to increase at 2% per year. What if that were the problem? I think this is facile. I think this is not it. But what if that was the problem? Well, first of all, it’s been going on for 100 years. It could go on for another 100 years. Another thousand years, right?

[00:01:21.790]
There’s no particular terminal point to this. Secondly, the solution would be pretty simple. Buy a real asset, perhaps such as gold, perhaps real estate in the city like New York. Just buy something and then you’d be immune from the ravages of inflation, so-called. The problem is that’s not the problem. That is not the problem at all. That is based on a set of assumptions that our monetary masters would like us to believe. I’m a big fan of a quote by Geyser who says, There are none so hopelessly enslaved as those who falsely believe that they are free. We all think, okay, this is really simple. We got it. We got this under control. We know what we need to do. We just buy gold. Then the people who buy gold, I was just talking to Daniel earlier, become cranky and upset because gold doesn’t go up as they suppose that it should, even though the quantity of money is going up as the Fed reports and so it isn’t working in quite that way. In fact, if you take a look at the prices of certain commodities, what you see is falling prices, not rising prices, such as wheat, for example.

[00:02:29.420]
The first part of the title of my talk is the dollar cancer. What do you think of when you hear the word cancer? I don’t give anybody in the audience a chance. Well, but before death, what happens? What’s the cause? What’s the mechanism? Growth. Growth out of control. You have something that is important to the body, for instance, a thyroid, and then it begins to grow and grow without bounds until it eventually starves the body of nutrients, consumes the body, chokes off, it could literally choke off your windpipe if it grew unchecked, and then eventually results in death. We have something that is growing in our monetary system today, and I don’t mean quantity of money, I referred to debt. If you just take a look at government debt, not even taking a look at total credit market debt outstanding, which exhibits basically the same behavior, what we see in government debt is an exponential growth curve. By the way, this is only part of the government debt. Most folks here, I seem, have a business background if I talk about accrual basis versus cash basis. Everybody familiar with that? The government uses a modified cash basis, which would be illegal for any business of $5 million revenue or more, and half the businesses of less than 5 million use accrual basis anyway.

[00:03:52.720]
We do. The government uses this cash basis, and so the cash basis doesn’t account for the so-called unfunded liabilities, which are much, much, much bigger in terms of numbers, and therefore they didn’t want to keep them off the books. According to just that portion of the debt that they acknowledge, currently, what is it? 21 trillion? A lot of people are freaking out now that the Treasury played some games and there was a debt ceiling and the debt ceiling was finally resolved and then suddenly the debt is exploding while it was shuffled some things around. The point being that even just that portion of the debt that they acknowledge is growing exponentially. If you take a look at it, post 1971, which is when Nixon altered the monetary system, it doubles approximately every eight years. This is a doubling function. This is not a linear rise, it is an exponential function. This is the cancer. The debt is growing exponentially out of control. Of course, this is a problem because number one, how can ever be able to be repaid? Number two, even servicing it is a problem. The way they service it, part of their cheating, is you put your thumb on the scale, you’re buying some meat at the butcher, it’s not as heavy, or I guess in this case, you’re pushing up on it, whatever.

[00:05:13.130]
But they’re pushing down on the interest rate scale. The lower the interest rate, the cheaper it is to service. You get these political partisan hacks, masquerading as economists, such as Paul Krugman, who would say, What’s the problem? The ratio of the cost of interest divided by the GDP is low. Well, yeah, that’s just because you’ve been pushing the interest rate down since 1981. That’s why. The dollar has two fatal flaws that necessarily cause a terminal end to the entire system. It’s not prices keep rising at two % a year. If that’s all it was, we’d be in great shape. Buy gold. Thank you very much. Enjoy the wine in the back. There’s two fatal flaws that cannot be fixed that are intrinsic to the nature of the dollar and necessarily will cause the end of the system. The first is that the dollar is irredeemable. So a redeemable currency would be, suppose I borrow, let’s just not even talk in money terms now, I borrow sugar from my next door neighbor. It’s snowing. I want to bake a cake. I can’t get to the grocery store. Dickson is my next door neighbor over here.

[00:06:23.120]
I literally walk across my backyard to his backyard, knock on his kitchen window, and I borrow a pound of sugar, and we sign on his kitchen that I owe him a pound of sugar the next time I go to the grocery store. The next day the roads are clear, I go on, I buy the sugar, I return it to him. What do we do? We take that napkin, we tear it up. Not only did I repay him, the debt goes out of existence. That’s the thing with a commodity redeemable currency or commodity redeemable debt, is the debt goes away when it’s repaid. But in the case of the dollar, if I owe $100 to the Harvard Club for putting on the spread of food and wine, I take out $100 bill and I hand it to them. I’m out of the debt loop, but the debt doesn’t go out of existence. I’ve handed over a bill, and bill is a word for credit. Now, the bill doesn’t say bill on it. It says note, and note is a word for credit. Now the Federal Reserve owes the Harvard Club something. It’s not exactly defined what it is, but they owe them $100 of whatever it is.

[00:07:30.770]
The Harvard Club then tomorrow presumably will hire an armed carrier to bring this to the bank and deposit it. Now the bank owes the Harvard Club and the Fed owes the bank. Then what is the bank going to do? Well, the bank is going to buy a bond per regulation and per business model, that’s what banks do. Now the treasury owes the bank the money and the bank owes Harvard and so forth. But we have this circular system where the dollar is just a small slice of the government’s debt and it’s backed by the bond. But what is the bond? It’s irredeemable, but it’s payable only in dollars. The bond is payable in dollars and the dollar is backed by the bond. It is entirely self-referential. Now, aside from whatever you think of the morality of this, I’m just pointing out that mechanically there is no way to actually repay a debt. All we can do is we can push the lump under the rug from here to here and so forth, but the debt necessarily grows. It must grow every year by at least the accrued interest or more if you want what passes for growth nowadays.

[00:08:39.320]
I say what passes for growth because if you borrow $100 in order to spend it, that adds to GDP, but is that really a growth in anything real? Well, then the debt lingers, and meanwhile, the shot of consumption is one time and it’s gone. This is a fatal flaw because if you keep borrowing to spend and you can’t repay it, eventually the debt must necessarily get to the point where it causes a catastrophic problem. I write a lot about this, so I’m not going to dwell on this point. The other fatal problem with our monetary system, and this is one of those things that in retrospect, this should be obvious, and yet nobody’s really talking about it, and that is the rate of interest is completely unhinged. The rate of interest, as we know, because it happened historically, most of the people in this room were alive to remember it, the rate of interest began to rise after World War II, peaking in 1981, and depending on which measure of interest that you look at, you’re looking at 14% or 17% or 20% completely without any precedent historically. Yet this happened. In 1981, everybody says, Well, Volker and Reagan got inflation under control and blah, blah, blah, blah, blah, and everything was wonderful, and the interest rate began to fall and fall and fall and fall and fall and fall and fall and fall and fall and fall and fall and three over three and a half decades later, it’s still falling.

[00:10:08.210]
Now, the Fed at the moment thinks they’re going to make it rise. I disagree. I’ve written my theory of interest in prices as to why I’m not going to dwell on that tonight. But we’ve had 36, 37 years of falling interest rates. Even if you take a look at a long-term graph, there are corrections along the way as the trend is heading down. This is one of those corrections. It’s not even really a particularly big correction. If you take a zoom out and look at a four or five-decade span of what the interest rate looks like, it’s just down and down and down and down. Now, one of the reasons for this is that it makes the debt serviceable. Nobody repays the debt. In fact, it’s not even mechanically possible for the debt on net to be repaid. However, it must always be serviced. When I was a kid playing in the woods, the mothers used to say, Boys, it’s all fun and games until somebody puts out an eye. Well, to modify or to adapt that expression to this context, it’s all fun and games until somebody misses a payment. It has to be serviced.

[00:11:14.580]
Well, if you push down the interest rate, you can service more, and that’s how they continue the game. If the interest rate were to really rise and rise durably, then the defaults begin and the defaults will cascade through the entire system like dominoes, and the whole system will be taken out because the debt levels are far too high. If companies today are struggling and they’re paying 4 or 5 % or whatever, depending on their credit, and that would have doubled to 10 %, how many businesses would still be viable? 10% on a B credit? Not many. The interest rate has to fall down, but there’s a zero bound. What happens when interest goes negative? Which it has in Switzerland, Germany, Scandinavia, Japan. I’ve even read in, I want to say Denmark, and I want to say the Netherlands, and certainly Switzerland, corporate bonds, not just government, corporate bonds being sold with a negative yield. Now, what does this mean? Think about this for a minute. Obviously, to the investor, this is a lousy deal, obviously. But what does this mean economically? Suppose you run a business, which is a bad business, in fact, it destroys your investors’ capital at the rate of -1% per year.

[00:12:29.820]
That’s a really bad business. In any normal universe, you should be put out of business and your human resources and whatever capital you have left should be redeployed to something that doesn’t destroy wealth. But what if you could actually borrow at minus 2% and you’re only destroying at minus 1%, you actually have a net profit. If the interest rate goes certainly below zero, you now have wealth-destroying enterprises that are being given credit. In fact, I’d almost say force-fed credit, like fatting a goose for a foie gra or something. It’s a very unnatural, very artificial thing with a pressure being pumped by a central bank. This is not a product of a market here. But if this happens, this guarantees what I call the heat death of the economic universe. This necessarily must come to an end because there’s a capital destruction incentivized by the system. Larry was earlier asking about my talk at AIER, and I was talking a lot about falling interest rates and perverse incentives. I talk about… What was the name of that? Schubert, the guy who came up with this game of auctioning off the dollar bill. I’ve used this in a couple of my talks.

[00:13:51.430]
But anyways, there’s this perverse incentive where you take this dollar bill and you auction it off. It helps if you have a lot of people and some of them are drunk. Because you change… It’s an option with one rule difference, and that is whoever is the number two bidder has to pay whatever he bid, but doesn’t get anything. Whoever wins it obviously wins it. As long as you get two people suckered in, then it’s guaranteed to be very destructive. Because let’s say somebody starts at five cents and ten cents and whatever, it gets up to 95 cents, and that’s the moment we’ll call it the oh, shit moment, because the person who’s bid 90, next guy outbids 95, he goes, Okay, I’ll bid a dollar. At least I’m even. But the guy who has bid 95 says, you know what? I’ll bid a dollar five. I’d rather win it for a dollar five. I’m only out five cents. But now the guy who’s bid a dollar goes to a dollar ten and it keeps going. And so there’s a perverse incentive designed into this game. This was designed by a bunch of game theory guys, including Nash, who was the one that wrote the movie about a beautiful mind.

[00:14:56.650]
This is this particular thing, and I use this as an example because our Fed-driven system has these perverse incentives to destroy. They’ve made it profitable to destroy. And so there’s a quote I think about a lot. It’s John Maynard Keynes sighting Vladimir Lenin. Some of you may be familiar with the quote, and the quote is, There’s no sure way to destroy the capital or overthrow the capitalist order than by debauching the currency. He talks about this and then the other thing, but the quote basically concludes that by engaging all the hidden forces of economics in favor of destruction, and you bring about the end of the system, and not one person in a million can diagnose what’s going on. Reading this and reading some of the other things that Keynes said as he talks about the euthanasia of the rentier. The person who is a saver, who earns interest in Kenynes’ direct stated opinion is a functionless parasite that he wants to kill. I don’t think he was entirely kidding with the term euthanasia. He proposes this, but he understands the head and forces of economics far better than I think all the people who followed after him.

[00:16:09.450]
Because he understood something that I think should be obvious. Everybody here, I assume understands that if you buy a bond and the interest rate falls, do you have a loss or a gain? Everybody understands that, right? The rising bond price is simply the inverse of the falling interest rate. Here Keynes is talking about this destructive process, and he proposes driving the interest rate to zero, and very explicitly so. We’re not reading into his implied meaning, drive it to zero, near zero. What do you have is a rising bond price that rises, in theory, to potentially infinity if it’s a perpetuity. If it’s only a 10-year bond, it wouldn’t rise to infinity. But you’re talking about a rising bond price. Here’s a guy talking about the hidden forces of economics, and not one in a million can diagnose it. Arbitrarily enriching some, but generally impoverishing society. Those impoverished become very resentful of their fellow bourgeois. He’s quoting Lenin. All of this stuff, and you can see it as the bond price rises in what is called a bull market. Nobody is angry with this. Nobody is saying, That evil bastard Keynes, look at what he is causing us to do.

[00:17:24.550]
They’re saying, Bull market. Who could be against a bull market? People get very angry at me for saying, with friends like you, capitalism doesn’t need enemies. I’m like, This isn’t capitalism. This is this destructive system. Of course, if the bond price is rising to infinity, what is that going to do to stock prices, real estate prices, 1955 Ferrari, Picasso’s 1981 Chateau de Rothschild Wine, and so forth. The price of every asset is being tagged and pulled along with the bond price. This is this destructive dynamic that is causing the end of our system. One of the mechanisms of capital destruction was falling interest rates, and interest rates must keep falling in order to make the debt serviceable because the debt is growing exponentially. By the way, to make one final, and to put a sharp point on this whole thing, with each drop in the interest rate. Let’s say the interest rate is 10%, and that effectively constitutes an offer to everybody in this room. Say, would you like to borrow a 10 %? You may say, 10 %, I’m not really that interested. But tomorrow the market comes back and says, How about nine?

[00:18:33.920]
Well, no, not that nine. How about eight? How about seven? We’ll get to five. At some point, people start to say yes. Four and three and two and one and a half and so four and three and two and one and a half and so forth. With each drop, it is offering a more tempting offer than it did the day before. Not only is the interest rate falling, which is causing destruction, it is luring more people into debt. There’s many, many different destructive mechanisms that feed into this. This is the nature of our dollar system today. The dollar system, I will now use the term irredeemable, just like the currency itself was irredeemable. In this sense of irredeemable, in this sense of irredeemable meaning it can’t be saved. It contains the seeds of its own destruction, which I assume Milton Friedman had to have understood when he whispered in Nixon’s ear, starting in the late 1960s, default. Even Samuelson, when this crisis was happening, had penned some op-ed or something for the Washington Post, predicting that it was going to come out after Nixon had made his decision that Nixon devalued the dollar and raised the gold price.

[00:19:44.660]
Nobody but Friedmann predicted, or I think even wanted, just default altogether. But once he defaulted, then this system was launched. I have to assume Friedman understood it. Very few other people do since then. This is the system we’re in today. This is my setup. This is part one, the cancer. I’ve written, I don’t know, a few hundred thousand words at least, talking about all the various cellular pathologies that go into this and why the interest rate is falling and what the mechanics of that are and so forth. But really what I want to focus tonight is something I haven’t talked a lot about, which is how you get… The system is broken in this fundamental way, and there tends to be this leap of faith. I don’t know, use the analogy. Is everybody familiar with South Park? It’s this perverse. This is an older crowd, not necessarily fans of South Park. I’m not. But there’s a really great South Park episode where one of the kids is always losing his underwear. He says to the parents are like, What’s happening to your underwear? The gnomes are stealing it. Yeah, right, whatever. Anyway, that night he goes to sleep and you can see the g nomes are coming up out of this infernal, netherworld.

[00:20:56.660]
They’re coming up the stairway and the whole thing. They literally go to his dresser, open the drawer and they steal the underwear and then they sneak back down and then they get back to their thing. One of the gnomes has a flip chart and he’s like, step one, steal the underwear. Step two, question mark. Step three, profits. This has become quite an analogy. There’s actually a Wikipedia page on this. You can google the underwear business model. Venture capitalists and early stage investors always talk about this as when you’ve got that step two is the question mark, you’ve got a problem. Step one, the dollar is failing. Step two, question mark. Step three, we’re all going to move to gold or Bitcoin or whatever it may be. Well, what’s step two? To segue into that, how many of you have ever been in a discussion and read online or whatever, where if you’re talking about gold or the gold standard, there’s always got to be some Keynesian with no historical perspective, no knowledge of anything, but just this nihilist who likes to stick and spoke the wheels. He always says, There’s not enough gold in the world.

[00:22:05.570]
Have you heard that? What’s the standard gold answer to this? Well, it’s just a matter of price. But there’s a fallacy with that. Now I want to take a historical step back and take a look at what gold really represents economically, which is unique. There needs to be explanations for these things, which I’ve offered. If anybody has any competing theories, they need to address this. The first fact about gold is that virtually all of the gold ever mined in human history is still in human hands. If gold has a falling margin of utility, it surely falls really, really slowly because no matter how much we accumulate, there’s no such thing as a glut. Or if there is, we haven’t achieved it yet after 5,000 years. A friend of mine wrote a book called The Dawn of Gold. This is Philip Barton. He argues that they were collecting gold out of the… The Neanderthals were collecting gold nuggets out of the stream beds in Europe 13,000 years ago. I don’t know if that’s true or not. All we know is there’s an awful lot of it. It’s been accumulated without any particular limit. There is still a profit to the gold miners.

[00:23:07.460]
There’s still not a glut today by that measure, and yet it doesn’t circulate. It didn’t circulate 20-odd years ago when the price was 200 or 260 an ounce. It didn’t circulate when it hit just about $2,000 in 2011. It won’t circulate if it hits $10,000 an ounce. At Freedomfest last summer, there was one guy standing up in front of the lectern predicting $65,000 an ounce. It’s not a function of price. What happens when the price goes up? People think great capital gains, until they think about selling it and then they realize that the IRS is going to tax the crap out of it. If anything, the higher the price goes, the less likely to circulate because the more losses you take due to the capital gains. There is no mechanism connecting price to circulation. We’ve got plenty of this material. I’ve researched this to take a look at what it was historically. How much gold was there in London in the late 1890s at the peak of the gold standard when London ran the world’s monetary and trade systems? Anybody looked into this at all? 150 tons. 150 tons. That’s it. How much gold is produced mined in Nevada annually today?

[00:24:27.720]
160 tons. The state of Nevada produces more gold every year than existed in London during the peak of the standard. Whatever it is that made gold circulate in the 1890s, it’s not that we don’t have enough gold, and even if the price rises, nothing to do with that. It has to do with something else. I want to get back to, I want to tie one other thing into this, and then I’ll start to pull this together. That is in the gold world, probably… Would you say, Dan, this is the biggest story right now? The China futures market and how that is going to cause an end to the so-called petrodollar. March 26th, by the way, folks, the dollar is going to come to an end. According to all these various I don’t know if Alex Jones is promoting this stuff or what sites. Zerohedge certainly traffic’s in it, all the gold sites. March 26th, the dollar is going to come to an end. What is the calamity that is going to occur? Nobody can predict this, except for the privileged few who understand this. What is the mechanism by which this is going to come out?

[00:25:38.450]
Well, was it last year or the year before? It must have been the year before. The Shanghai Exchange launched a gold futures contract, which is denominated in Yuan, and you can buy and sell gold futures in Taiwan. On March 26, they’re going to begin trading an oil futures contract. The logic is, well, now using the Chinese market, anybody who produces oil can sell the oil as a feature and then buy a gold future an equal amount, and they can sell the oil for gold. This is revelatory. This is going to change the game. This is going to end the dollar. Now, aside from the fact that you could have done this in New York starting in 1975, I think is when Comex started trading gold futures, maybe ’76. For over 40 years, you could have done this trade in New York. There’s nothing actually about this in China. That’s the first problem with this theory. But that aside, there’s an obvious fact that is in want of an explanation. The obvious fact is all the oil producers in the world who have access to sell oil futures to sell their production into the market are not choosing to buy the gold future.

[00:26:53.430]
For some odd reason, everybody from Exxon to little producers that you’ve never heard of unless you’re an investor in that space, are selling the oil for dollars and not for gold. That’s a fact that’s in want of an explanation. The answer is, well, they don’t want gold. We can talk about why, but that is the dollar system that we’re all wired into today. I took a picture on one floor below us here in the Harvard Club, and I’ll pass this around. This is a gold bond of the New York Central and Hudson River Railroad. This is a gold bond. Is this $5,000, right, Edison? Yeah, $5,000. Which $5,000, of course, meant 250 ounces of gold. These bonds existed, I’ll just start and pass it around here, these bonds existed in this country historically. Of course, this is the segue into how we talk about the cure and what Monetary Metals is doing and why we’re doing it and why we’re so excited to be doing what we’re doing. That is a yield on gold. The Fed has created their perverse incentives. Keynes talks about engaging all the hidden forces of economics in favor of destruction.

[00:28:07.680]
I think about what if you could engage those same hidden forces of economics, but not in favor of destruction, but in favor of moving forward towards something like honest money. What are those hidden forces of economics? Well, today the word would be incentives. That wasn’t the word that Keynes was using at that time, but it’s incentives. What’s the incentive? How do you make it profitable to move to the gold standard? Because today it’s very profitable to speculate in the Fed’s casino asset markets. The Fed has taken away yield. What’s the proxy? What’s the surrogate? If you can’t get yield, what’s the thing that people go for as the second best? Anybody want to guess? Well, okay, what assets are they tending to prefer? Liquidity. If you can’t get yield, it’s liquidity. Bitcoin is the perfect example. It’s a complete nothingness. It’s a void that is incredibly liquid. In fact, that’s the only asset I can think of that trades 24 by seven, probably even trades on Christmas Day and New Year’s Day. Other asset markets trade 24 by five. Gold shuts down on Friday afternoon. Bitcoin is even more liquid, at least in that sense.

[00:29:17.870]
People will go for liquidity and they’re trading and churning and it’s profitable because the more people are borrowing to buy assets, it’s bidding up the price of assets. Everybody who owns an asset feels to be wealthier and wealthier, and that’s the perverse system. But I think interest is the driving force of civilization. It’s what makes possible the deal between the entrepreneur who wants to create a new business, a new product or a new good or a new service, and the person who has money and wants to get a return on it, interest is how they come together. If I say, I want to borrow your gold and I’ll pay you 0%, not only are you going to say no, most likely you’re going to say, I don’t even have any gold. There’s denial that gold even exists. But if I say 1%, 2%, we’re going to find a point. Whoever has that gold bond, what was the interest rate on that? Three and a half %. There’s a quote from J. P. Morgan, which isn’t nearly as famous as his testimony before Congress. Before Congress, he said money is gold and nothing else. There’s another quote, which is a lot less famous, but it should be famous.

[00:30:25.240]
Somebody came to him during one of the banking panics and said, Mr. Morgan, Mr. Morgan, there’s a crisis in New York. What are we going to do? There’s a shortage of gold. He said, Raise the interest rate. 4%, he said, now this is a 3.5% bond. 4%, he said, we’ll draw it off the continent. I think in 1902, how time-consuming, and risky, and expensive it would be to send gold from Europe to here. The 4%, he said would be enough to pull it in from Europe. 5%, he said, we’ll pull it down off the moon. Pure hyperbole, obviously, could not have imagined 60 years later that they’d be flying to the moon. He understood something, and his audience would have understood something at that time that’s been lost, and that is interest will pull gold into the market if it’s sufficient, and if the interest rate is too low, the gold will flee out of the market down to thousand little nooks and crannies, never to be seen again because people will be hoarding it. It’s only interest. If the interest rate is greater than your time preference, you’ll take your gold out and put it in the bank.

[00:31:31.780]
If the interest is below, no, thank you, sir. I’m all done. It was an elegant mechanism. Now, getting back to the oil producer, why is the oil producer—and this also gets to the question—why does the dollar have value? What’s the standard gold person response to why the dollar still has value today despite all the abuses of the Fed and the debt of the government? Why does the dollar have value? Well, that’s not standard answer. Standard answer is faith. It’s a giant confidence game. But in this view, it’s just simply awaiting one discovery of one truth, which will be the pin that pricks the entire bubble and the whole illusion will be dispelled and then the dollar will collapse and it will be a crisis of confidence. That’s that view. As John was alluding to my view is that what holds the dollar up is the struggles of the debtors. Suppose you’re a farmer and you owe a million dollars, you’re in debt up to your eyeballs. What’s the one thing we can count on Farmer Brown to do if he’s in debt up to his eyeballs?

[00:32:46.320]
What do we know he’s going to do? He is going to work his butt off to grow as much wheat as he possibly can, which he will dump onto the bid price in the market to desperately raise the capital or the cash revenue to service his debt. Because if he doesn’t service his debt, the bank will come and repossess, and he’s out of business and out of the house and out of his farm, and he’s lost a farm that’s been in the family for five generations, whatever. Every hamburger shack, every five-star restaurant, every Las Vegas casino hotel, every airline, everything that’s productive in the economy is loaded up with debt with very few exceptions. I mean, maybe Apple Computer doesn’t have any net debt, but most corporations extant have lots and lots and lots of debt and most consumers. They have no choice. They must produce whatever it is that they do, whether it’s labor, whether it’s wheat, whether it’s hamburgers, whether it’s jet airplanes, and produce them as much as they can in order to sell them, in order to raise revenue to service the debt. That is what is driving our world today.

[00:33:57.220]
That isn’t going to end. It’s not susceptible to pinprick. Everybody is financing themselves in dollars. That’s why they’re not particularly interested in gold. If you’re buying your product and you add some value and then you mark it up and you sell your product over here and your net margin at the end of the day is, let’s say, 4%, you can’t. Let’s say you sell your product for $100, you couldn’t sell that for gold. Gold could move 4% in a day, and that’s your entire net margin. You must have dollars as income because your debt has to be serviced in dollars, plus your rent, your insurance, your utilities, your payroll, everything is a dollar expense. While it’s nice to think that the oil producers or anybody else would want gold or bitcoin, nobody is set up in terms of the balance sheet to be able to do that. I propose this crazy idea that if you finance a business in gold, now that business wants for a gold income, not a dollar income. They made me a member, they invited me to become a member, and the Arizona House of Representatives formed an ad-hoc committee on gold bonds and ultimately ratified my gold bond proposal.

[00:35:19.710]
This was 2016, I want to say. I was talking about how to use gold bonds. There’s a video of this on the Arizona House website for anybody who’s interested in it. I came to realize that I thought Arizona had gold production because historically there was a lot of gold mining in Arizona, and there certainly were an awful lot of closed minds around the state of Arizona. I thought there was still ongoing gold production. It turns out there isn’t. That it’s de minimis. I rethought the idea of how Arizona would be able to sell a gold bond. What Arizona does have is a lot of copper mining. I believe Arizona is the biggest copper-producing state. My proposal was, okay, you have a copper income. You can use that to back a gold bond by selling the copper forward in the futures market and buying a gold future. Now that gold future locks in that you can pay your bondholders, you can pay your creditors in gold. This does two things. This gives the state of Arizona a way to sell a gold bond, which is in itself a virtue because now it’s giving investors a proper gold income, an interest rate of hopefully three and a half % or more.

[00:36:42.050]
It gives the state a reduced risk because copper is less volatile when priced in gold than it is when priced in dollars. Anybody can do the math on that and see the graph is simply less volatile. The prices of both metals tend to go in similar directions a lot of the time. It begins the process of selling commodities for gold. You’re pulling the copper out of the ground, you’re using the futures market, but you’re selling a copper future and simultaneously buying a gold future, you’ve effectively sold the copper for gold. The same thing that would work for the state of Arizona, which gets a two and a half % mining severance tax, would also work for the copper mining companies themselves. There’s actually a lot of opportunities in this world for both governments and corporate producers to raise capital using gold bonds, pay interest in gold to investors, and now investors have a gold income—I’ll get back to that in a moment—and begin this process of moving to the gold standard. Now, why would they do this? We’ve changed the incentive. Now it’s profitable. It’s profitable for the investor to move to the gold standard.

[00:38:00.670]
The investor is getting interest. The interest rate in gold is not susceptible to the Fed pushing it to zero and beyond. We’re paying right now 3% interest in gold. You can get interest in gold that’s not suppressable. At the same time, companies are financing themselves in gold and in so doing getting a fiscal advantage as well. The way we see this is if something is profitable to do it, people will do it. I like to frame it in these terms. It’s not just simply what a business is doing. There’s a famous anecdote, I don’t know whether this is urban legend or if it’s true, that Steve Jobs was in some marketing meeting at Apple in the mid-1980s, and they had a new Mac computer coming out and all the marketing people were doing the standard for that day, computer stuff about megahertz and kilobytes of memory and how big the hard drive was. He said, No, no, no, no, no, no. At Apple here, we’re not going to talk about bits and bytes. We’re going to talk about values. We’re going to talk about our why. Why are we doing this? And that was the thing that always made Apple different from Microsoft and from IBM.

[00:39:18.880]
I said, Why are we doing this? Well, Monetary Metals is not just trying to be a player making a financial product to sell through financial product channels, although it is a financial product, just as Apple was a computer, we have a why. The why is we’re trying to move to the gold standard. We want to move to the gold standard by making it profitable first to investors to invest in that transition to the gold standard, and make it profitable for the companies that are going to pay that interest to finance themselves in gold. By financing themselves in gold, suddenly they have a reason to care about having a gold income. We think of it as every time, let’s say in the case of gold being transformed from here to there, there’s a gold income when value is added to gold. That’s just the nature of gold. That gold income has been papered over with like a dollar wrapping paper, which is just so incredibly perverse. We think of ourselves essentially unwrapping, get rid of the dollar and say there’s a gold income here. We want to offer that gold income to ultimately to the world, excuse me, and in so doing, make it profitable for investors, make it profitable for ourselves, make it profitable for companies, and finally bringing gold income to investors.

[00:40:42.680]
Now, why is it gold income? Why does that matter? There’s a number of companies now doing gold cryptocurrencies and other forms of gold, monetary, money service business type companies. There’s a lot of them and they’re proliferating, and a few of them have existed for decades. None of them have actually gotten gold to circulate. The first observation here is that whatever it is, that is the reason why gold is circulating today is not for lack of an efficient internet-based gold payments processing system. Also, it should be observed that 100 and something years ago, when gold did circulate, it didn’t have an efficient internet-based platform for that circulation. It circulated the old-fashioned way. We don’t think that an efficient internet platform is really the gating factor. What we think is that nobody has a gold income. What would it mean today? Everybody in this room, I presume, has a dollar income. What would it mean to spend gold? Well, what you’d have to do is you’d have to first take your dollar income and buy gold, and then you lose to the bid-ask spread. You pass it over to, let’s say, this oil producer. The oil producer has dollar expenses, so the oil producer would have to sell the gold.

[00:42:05.500]
There’s a buy and a sell, and both parties, this party has dollars, this party needs dollars, and they’re going through gold as a conduit, which is a lossy conduit because there’s a bid-ask spread. Why would anybody do this? And so to cut to the chase and give my answer to this, I was at a talk a couple of years ago by this woman who was the head of Bitcoin acceptance at Expedia.com, the travel service company. She said that utilization of Bitcoin to buy travel services correlated with the rising Bitcoin price. And when Bitcoin is rising, more and more people were using Bitcoin to buy their travel services. When Bitcoin was not rising, volume dried up. Now what’s behind this? Why would this be so? Anybody here to take a guess to this? The answer is, when Bitcoin is rising, it’s a free money machine. If I need to take a $1,000 trip from Phoenix to New York, here’s how it works. I put $500 into Bitcoin. I wait a month or two, my 500 becomes a thousand. I buy my $1,000 trip. I only had to pay $500. As long as Bitcoin is rising, it’s generating free money.

[00:43:20.890]
This is just another form of capital consumption. It’s the capital of the next person who’s buying into the Bitcoin, but we won’t talk about that. The same thing for using gold to buy your groceries. If the gold price were rising at a nice constant linear rate every day of whatever, one quarter of a %, actually that would be exponential, one quarter of one % per day or whatever it may be, if the price were rising, then it would be a phenomenal trade. Okay, take all my dollars, immediately drain my dollar count, put it in, buy gold with it. Gold is going up. Every day I pay my credit card bill on the 10th, and I pay my rent on the 15th, and I’m getting free money out of it. People will use gold only to the extent that it works just like any other chip in the Fed’s casino. Just the gold chip. Some people prefer the real estate chip. Some people prefer the Bitcoin chip. Some people prefer the Facebook stock. Actually, not in the last couple of days, Facebook’s having a little scandal, but Netflix stock or Apple stock or whatever their favorite chip is, some people prefer the gold chip.

[00:44:22.510]
But as long as it’s going up in dollar terms, it’s a free money machine. Is this fixing any economic problem? In fact, it’s the same symptom of the same economic problem as every other asset price rising. Nobody is going to want to actually spend gold until they have an income in gold. If you have an income in gold, so for instance, we had an investor call-up, and he said, How much gold would I need to invest to earn a kilo of interest every year? I said, I don’t know whether you’re going to become a client or not, but you just made my day. Thank you. I said, Well, you’d need, right now the rate is around 3 %, you’d need about 1,000 ounces. We actually ended up in a bit of an argument because he was talking grams and kilos, and I was talking ounces. I said, I’d love to have this argument, metric versus imperial units. We’re not talking ounces versus dollars. I thought it was a great conversation. But if somebody has a kilo of gold interest per year, now he has a kilo that he can spend, because that’s interest, not principal.

[00:45:28.190]
He’s not spending his capital. Gold is capital today. It generates no income. There’s no such thing as a gold income today. What the world needs is a gold income. That is what Monetary Metals, not only is trying to do, we’re actually offering it right now. This is a product.

Additional Resources for Earning Interest in Gold

If you’d like to learn more about how to earn interest on gold with Monetary Metals, check out the following resources:

The New Way to Hold Gold

In this paper, we look at how conventional gold holdings stack up to Monetary Metals Investments, which offer a Yield on Gold, Paid in Gold®. We compare retail coins, vault storage, the popular ETF – GLD, and mining stocks against Monetary Metals’ True Gold Leases.

The Case for Gold Yield in Investment Portfolios

Adding gold to a diversified portfolio of assets reduces volatility and increases returns. But how much and what about the ongoing costs? What changes when gold pays a yield? This paper answers those questions using data going back to 1972.