Friday, 8 April 2022 — Albert Park

By Brian Chu Editor, The Daily Reckoning Australia

[7 min read]

• Russia’s financial nuclear bomb — a gold-backed ruble
• Debt drowns the fiat currency system in the quicksand of inflation

Dear Reader,

In a physical war, the key to defeating your enemy is to force them into a disadvantaged position.

It’s the same when nations fight a financial war.

For more than five decades, Western central banks dominated the financial system with their fiat currencies backed by the petrodollar.

The US dollar was the frontman in this system, acting as the reserve currency as nations agreed to trade the greenback for crude oil.

Gold took the backseat in the financial system, tied up and held as a ‘barbarous relic’. Bankers, financiers, and academics declared gold’s role as money a thing of the past, relegating it to just another currency.

The modern financial system was going to be glorious. Countries no longer needed to worry about monitoring their budget spending. Deficits could continue as long as the country finds a lender or taxpayers to foot the bill. And if you can’t, just sell some assets or take a loan from the International Monetary Fund (IMF). Or invade another country if you’re powerful enough.

You don’t need to worry too much about your gold reserves. Let it sit there and shimmer.

Everyone knows there’s a drastic price to pay for not playing along with this game. Take a look at what happened to Iraq and Libya, two countries that tried to sell their crude oil for another currency or gold.

Now, as the system celebrates its jubilee, the cracks arising from burgeoning debt, rising prices, and countries quietly sidestepping the system threaten its existence...

Russia’s financial nuclear bomb — a gold-backed ruble

Russia apparently holds the largest nuclear arsenal in the world. Many fear that in a hot war, Russia will adopt a ‘mutually assured destruction’ strategy and blow the Earth out of existence with its nuclear devices.

But there’s no need to worry about that, apparently.

Russia has a better plan and they acted on it by detonating a nuclear device against the fiat currency system last week.

On 28 March, the Russian central bank pegged the ruble to gold by declaring that a gram of gold would cost 5,000 rubles. This equated to around US$1,400 an ounce at the time the central bank made the announcement when the gold price was trading around US$1,940 an ounce.

It seemed strange at the time, since the Russian central bank was offering to buy gold from Russian local banks at a discount to the market price. Why would a local bank be willing to sell gold under that arrangement?

The difference is that the Russian central bank gets to set the currency’s value or interest rate. Therefore, what the Russian central bank actually achieved in this move was to reflate the Russian ruble, which had suffered a massive 35% drop after President Putin sent forces into Ukraine for a special military operation.

This benefits the Russian banks too, as it strengthens their trade position.

Have a look at the figure below showing the value of the ruble against the US dollar:

The chart shows that the Russian central bank accomplished its mission.

As to whether Russia can hold this peg will depend on whether the world wants to use rubles for international trade.

President Putin thought this one through by signing a decree last Friday to impose a deadline for countries to open an account with a Russian bank if they wish to buy oil and gas. It’s a very risky play because it could backfire badly on Russia if many countries choose to buy oil and gas elsewhere.

Or it could end up in Russia’s favour.

Should this move succeed, it could drive a stake through the heart of the fiat currency system.

Especially given what the global economy is like right now.

Debt drowns the fiat currency system in the quicksand of inflation

Debt is a double-edged sword.

The central banks had tried to master debt for many decades. They seemed to have succeeded when they discovered inflation targeting whereby they would set the interest rate to keep inflation at a manageable level.

Over time, it began to spin out of control. Government deficits ballooned, corporations and households made the wrong investment decisions, and the markets tanked as bubbles burst. The central banks came to the rescue with more currency creation (via debt) to reflate the markets.

However, rising prices may not always be a good thing for the fiat currency system. This is because inflation causes the purchasing power to fall.

As much as central banks say they fear deflation, that’s not true. Their fiat currency has a greater purchasing power and hence regains its relevance. That’s why central banks raise rates to bring the markets back under control. They’re resetting the fiat currency.

But it’s a delicate process, raise the rates too much or too fast and markets come tumbling down.

Bit by bit, investors are realising this game and seek to cut loose from the system by holding other assets to preserve their wealth. This creates more inflation on the fiat currency, as there’s more fiat currency relative to these assets.

Think of gold, commodities, equity, property, and crypto.

Here are some charts showing how gold, the S&P 500 Index [SPX], and the Bloomberg Commodities Accumulation Index [BCOM] have performed against the US Dollar Index [DXY] since 2015:

Recently, the US Dollar Index has been rising as the Federal Reserve has begun the tightening cycle. However, notice how gold, equities, and commodities are all rising?

The Federal Reserve is aware of this. It knows it is well behind the inflation curve. It’s stuck in the debt and inflation it created.

Therefore, it’s signalling its intention to raise rates at a more aggressive pace going forward.

But what’s different this time is that the Russian ruble is pegged to gold and may be a formidable candidate to be an alternative currency for oil/gas transactions.

So should the Federal Reserve botch the aggressive rate hikes and crash the markets, other countries may run to the gold-backed ruble or simply peg their currency to gold.

What does this all mean?

The fiat currency system appears to be stuck in hostile terrain while its enemy is watching it from a position of advantage.

What I foresee is potential pandemonium in the markets.

Amidst this chaos, gold is clearly the safe refuge. Russia has made a brilliant move in this financial war.

And you have a choice to be a winner or be slaughtered like the fiat currency system.

God bless,

Brian Chu,
Editor, The Daily Reckoning Australia

By Bill Bonner Editor, The Daily Reckoning Australia

Dear Reader,

‘Them that has, gits.’

And so, it came to pass in the Year of Our Lord, 2008, the Fed panicked. In its hysteria, it bestowed on the rich such gifts as the world had never seen. The US stock market rose five-times higher. Or people with capital assets have added about US$84 trillion to their wealth since 2007.

Many times over the past 14 years, we’ve bemoaned the unfairness of it. The Fed had no wealth to give. Its generosity towards those in the wealthiest zip codes had to be exercised at the expense of others, namely, those in the others.

This was accomplished via what is known as ‘inflation tax’. The Fed and other central banks ‘printed’ some US$25 trillion in new money, which was funnelled into the financial markets by buying bonds (owned mostly by the rich)…and then used to buy stocks and other financial assets (also owned mostly by the rich).

The rich got richer as their assets increased in value.

Money printing and bond buying had other effects too. They queered the financial system, added US$50 trillion to the US’s trash pile of debt, accustomed the economy to below-zero (adjusted for inflation) interest rates, and caused consumer prices to rise at the fastest rate in 40 years.

But our theme today is only this: there’s always more to the story. And it’s usually the part that few want to hear. For whatever virtuous, practical, and high-minded thing the Fed thought it was doing, it was actually shifting wealth from those who earned it to those with brokerage accounts.

Unintended consequences? Perhaps.

More gittin’

Meanwhile, the COVID story has disappeared from the headlines. Thank God…we were getting tired of it. Now we have a new crisis…a new bete noire — Russia. This time, ‘them that has’ — the influencers…the deciders — have put us on the side of the angels to do battle against the devilish Russkies.

But there’s more to that story too…and more gittin’ to be gotten by those who already have.

Two full years have passed since COVID-19 first made landfall in the US. As more of the story comes out, we see that it too was largely a transfer from the poor to the rich.

For instance, wasn’t it strange that some countries — even those with very low standards of public health…in Asia and Africa, for example…had very low rates of COVID? Why? About a year ago came this report from CNN:

‘The risk of death from Covid-19 is about 10 times higher in countries where most of the population is overweight, according to a report released Wednesday by the World Obesity Federation.

‘Researchers found that by the end of 2020, global Covid-19 death rates were more than 10 times higher in countries where more than half the adults are overweight, compared to countries where fewer than half are overweight.

‘The team examined mortality data from Johns Hopkins University (JHU) and the World Health Organization (WHO) and found that of 2.5 million Covid-19 deaths reported by the end of February, 2.2 million were in countries where more than half the population is overweight.

‘In an analysis of data and studies from more than 160 countries, the researchers found that Covid-19 mortality rates increased along with countries' prevalence of obesity. They note that the link persisted even after adjusting for age and national wealth.’

In the US, the average person consumes 3,800 calories per day. And the US suffered one of the highest death tolls from COVID in the world — nearly 3,000 million. In Bangladesh, where ‘plus-size’ clothes are missing from the fashion racks, the disease was barely noticed, with only 175 million.

But while shutting down the world economy in 2020 may or may not have reduced the death toll for well-fed people, it almost certainly increased the number of poor people who died of starvation.

We have no figures and no proof. But nine million people die from malnutrition and hunger-related diseases each year. All it would take would be an 11% increase…and a million more people would die.

And now, here’s more bad news for hungry people. Fox News:

‘Goya Foods CEO Bob Unanue warned on “Fox & Friends Weekend” Sunday that the war between Russia and Ukraine is having a “devastating effect” on food supply as shortages are expected to contribute to higher inflation.

‘President Biden said last month that a food shortage is “gonna be real” following the sanctions that were placed on Russia by the U.S. government as a result of Russian President Vladimir Putin’s invasion into Ukraine.

‘“With regard to food shortage, yes we did talk about food shortages, and it's gonna be real,” Biden said during a press conference at a NATO summit in Brussels, Belgium, following a meeting with other world leaders.

‘“The price of the sanctions is not just imposed upon Russia,” he added. “It’s imposed upon an awful lot of countries as well, including European countries and our country as well.”’

Unintended consequences

The price of wheat has shot up from US$7.50 a bushel in January to more than US$10 today. A poor person in Bangladesh may have been able to afford 1,500 calories per day last year…and stayed alive, barely. With the cost/calorie up by a third…his daily allotment may now fall to only 1,000 calories per day, not enough to survive.

In Iraq, before the US invasion, an estimated 500,000 children were said to have died because of US sanctions. Then-Secretary of State, Madeleine Albright, thought that was a fair price to pay for the benefits of the sanctions, whatever they were. A half a million deaths were ‘worth it’, she told 60 Minutes in 1996.

And now, the fat countries congratulate themselves on their tough sanctions against Russia. Foreign policy ‘experts’ explain what a great and glorious war it is. The US’s defence industry jefes look for lavish vacation homes in Aspen or North Carolina’s Outer Banks. Politicians look forward to more campaign contributions.

And skinny people tighten their belts.

Regards,

Bill Bonner,
For The Daily Reckoning Australia