As we mentioned in this previous article (China and the introduction of paper money), in November we attended a conference in Canberra Australia hosted by the Gold Standard Institute. The main speaker was Professor Antal Fekete. Professor Fekete is an author, mathematician, monetary scientist and educator. Below we paraphrase the Professors lecture on the final day of the conference, where he gives his thoughts as to why the Chinese Government is urging its people to buy gold and silver. He also gives a few ideas as to what else China should do to strengthen their financial position.
Hopefully we’ve recalled the gist of the Professors argument accurately enough. We’ve also added a few thoughts of our own in italics.
What should China do? A 7 point manifesto:
- It was far sighted of China to legalise and in fact encourage the purchase of precious metals. In fact an incredible move for a government. But he would urge China to make it a constitutional right of the people to save in the form of gold and silver. [Gold and silver can now be readily bought across China including at many banks. It was only a few years ago that ownership of precious metals was illegal for the Chinese].
- What should China do with her 2 Trillion plus of US dollars of fiat currency? This is far too big an amount to just buy US property. And if the bonds were sold in significant amounts it would destroy the US bond market and so obviously be very bad for China’s remaining holdings. So therefore the obvious choice is to simply hedge it with Gold. Buy gold on weakness and then tell the world you will continue to accumulate gold and set an example to other countries. Therefore the gold price will keep steadily going up protecting Chinas existing gold holdings. And when a substantial part of the Chinese treasury hoard is spent on gold it simply won’t matter what happens to the rest. [We would also add that China would then likely end up with the largest gold reserves on the planet, just as the US did after WWII].
- Open the Chinese Mint to Gold and Silver. Create an unconditional right for the people of China to convert bullion into coins free of seigniorage (as the US Constitution says) i.e. There would be no charge to mint bullion into coins. This would result in tremendous demand as gold in coin form is worth more than in bullion form as it is more readily exchangeable. So people would actually take their gold to China to effectively get something for nothing. The cost to China would be made up for by the massive amounts of gold coming into their financial system.
- Establish the world’s first Gold Bank. There has been no gold based bank since the Bank of International Settlement (BIS) abolished having its “books” in gold units in 2002. The idea being that people will have some trust little by little and release some gold from their hoard that will make it into circulation. Once the Chinese Mint is open to gold worldwide, more and more gold will be attracted to China as a safe place to save.
- Establish the worlds first Gold Life Insurance Company. This would grant Annuities and Life cover to anyone who would pay the premiums in gold. The policies would also be paid out in gold. This would give the policy holders a fair return on their premiums paid. Unlike life cover currently where you pay premiums for many years in today’s dollars to receive a pay out in the future in depreciated dollars. Whereby the policy holders lose in the long run. This would also prove very attractive.
- Start “Real Bill” circulation in the world. “Real Bills” are commercial paper that matures into gold in 90 days or less. Basically a short term bond that matures into Gold and is bought at a discount. London used to be the clearing house centre for Real Bills prior to WWI when Real Bills were still in place. World trade could effectively be financed by Real Bills. [For more on Real Bills see this interview with Professor Fekete. Basically the Professor states that without Real Bills as part of a gold standard it is doomed to failure, as they provide the elasticity in the system during the changing “seasons” when demand for different products alters. The interview is well worth a read as it covers many other subjects too including China currently being the biggest hoarder of silver.]
- Proletarians of the world unite in Gold! “You have nothing to lose but your chains!” The professors 7 Point Manifesto is a title borrowed with tongue firmly in cheek from Karl Marx’s communist manifesto. But the Professor did say Marx “wasn’t a complete idiot” as he did say Money is Gold and Gold is money. The World is waiting for someone to break the ice. [We would add that China certainly seems to be holding the ice pick!]
At the conclusion of the Professor Fekete’s lecture, there was some discussion about China’s poor human rights record and why would they want to give people even more freedom given it remains a communist nation. However Darryl Schoon who we featured in the previous article on the Gold Standard Institute Seminar, answered the most adroitly in that “It is far easier to rule a happy and prosperous people”. Food for thought indeed and we reckon the western rulers may be setting themselves up for even tougher times in the not too distant future.