Good as gold

Written By: - Date published: 3:44 pm, February 22nd, 2025 - 19 comments
Categories: Debt, debt / deficit, defence, Disarmament, education, Financial markets, health, Judith Collins, monetary policy, Peace, Russia, Ukraine, wages, war - Tags:

A fascinating expose from Michael Hudson on the causes and implications of the recent rise in the price of gold. When Nixon took the US dollar off the standard in 1971 you could get an ounce for $35. Not now; Hudson explains why.

There are a couple of places you can read or watch his exposition. I’ll try to summarise the argument, but both are well worth watching or reading.

Nixon took the US dollar off the gold standard in 1971 because expenditure on the Vietnam war meant their overseas debt was skyrocketing. Dollars spent in Europe, the Eurodollar, were backed up by gold, and the old fox de Gaulle demanded that France’s dollars be able to buy US gold. At $35 that wasn’t going to last long so the standard was dropped, and as the US dollar was determined to be “hard” currency, it was seen as able to keep its value.

Fast forward to now and the US is once again spending big on another losing war. Its overseas debt overhang is enormous, and as the US tries to use the dollar as a weapon via the SWIFT exchange, other countries are looking for alternatives to settle their overseas debts. Many of them including China and Russia are also buying gold which has always been a traditional hedge of value.

The mystery was why the price of gold did not rise with this increased demand. Hudson explains that the US Fed was responding to demand for gold by issuing leases, which could be traded but were returnable. But at some stage someone would want to see the actual gold. In fact, Donald Trump now does and Elon Musk has been sent off to Fort Knox to see if it’s there – shades of Scrooge McDuck!

So the US economy is in trouble because of its enormous overseas superdebt. This is a separate issue from the financialised derivative debt overhang that nobody knows the size of, or who all the counterparties are. Domestic debt is not a problem because it can always print more dollars, as it is.

Hudson’s theory is that Trump knows he has to cut back US government expenditure, not to benefit the population at at large but to safeguard the income of the billionaires. Hence no more money for Ukraine, and the call to cut the defence budget.

The further consequence is that the people who will suffer from this retrenchment are the same people who voted for Trump. Hudson goes into this too in his interview with Nima. That’s for another post. I used to give seminars to Engineers Union delegates of the effect of the petrodollar on their jobs and incomes.

For this one, the lesson is that as the US pulls back its bloated defence budget, we should not be gulled into thinking we have to increase ours and cut social services. Even more so if it is on the “lethal” weaponry that Judith Collins wants.

19 comments on “Good as gold ”

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  1. tWig 1
    22 February 2025 at 4:01 pm

    Trump is sending Elon in to ‘check the gold at Fort Knox', because of a conspiracy theory that the gold is not there. Germany, the Netherlands and Italy store 30-50% of their gold reserves in the US. Possibly a good time to bring it out, in case Trump gets confused about who owns /controls it, or decides to sanction them.

  2. Ad 2
    22 February 2025 at 4:16 pm

    The US defence budget might not feel so bloated this week with a fleet of Chinese ships in the Tasman doing live firing and QANTAS and AirNZ avoiding it, the Cooks now signing defence up with China, Kiribati signed up with China, our NZ Realm essentially dissolved, and our own defence and MFAT capacity clearly able to do nothing about it.

    China's strategy to sever NZ abd Australia has worked.

    • SPC 2.1
      22 February 2025 at 5:05 pm

      Given USAID cuts it is what the USA wanted.

      • Ad 2.1.1
        22 February 2025 at 5:11 pm

        US defence strategy isn't intelligible to themselves right now let alone PMs Luxon or Albanese.

        We need a renewed formal defence Treaty with Australia to even start a response.

        Weirdly with ex-MFAT heads at DPMC for multiple governments, we just haven't seen solid strategic thinking emerge for a long time.

        What exactly does it take to wake MFAT, Defence, and DPMC up?

        • Scud 2.1.1.1
          22 February 2025 at 6:28 pm

          Mate,

          Didn't you know-

          We live in a Benign Strategic Environment so it's good as Gold

          As Tax Cuts will fix everything apparently from No Boats Nicky🤔

          So there is no need too worry 😁

    • mikesh 2.2
      23 February 2025 at 9:25 pm

      NZ recently sent a military vessel into the South China Sea. Perhaps the Chinese are playing tit-for-tat, and warning us to keep our ships out of their back yard.

      • mpledger 2.2.1
        24 February 2025 at 10:38 am

        China have been pissed with Australia about supporting the "COVID-19 escaped the lab" scenario. So it might be more about them then us.

  3. Mike the Lefty 3
    22 February 2025 at 7:09 pm

    Reminds me of one of the last scenes from The Hitch Hiker's Guide to the Galaxy. On the newly constituted Earth (the Vogons had destroyed the previous Earth due to a bureaucratic bungle) the marketing experts fixed the unit of currency as the leaf. Only afterwards did they realise that hyperinflation would take place as the whole world was covered with trees.

  4. Populuxe 4
    23 February 2025 at 12:59 pm

    I don't really see the argument. No country uses the gold standard today. The value of currency is largely determined by GDP, economic stability and some foreign cash reserves in USD and EUR. Britain dropped the gold standard in 1931, and the US started abandoning it in 1933 and actually parts of the system were still in place until 1973. Gold is largely irrelevant outside of commodities.

    The Fort Knox thing is just another weird Trusk sideshow distraction.

    The "US superdebt" is almost entirely hypothetical given that (1) the USD is backed by enormous private capital, production, services, and the world's highest GDP, and (2) even if Trump did manage to completely tank the US economy, who is going to foreclose? On that scale it's a meaningless concept. And (3) the Yuan is far from stable and the Ruble ain't worth sh*t and never has been.

    It's also worth noting that China's foreign currency reserves are still mainly USD and US bonds.

    • SPC 4.1
      23 February 2025 at 5:31 pm

      The increase in gold ounce value over 4 years, 1600 to 2000, is not much increase given COVID inflation.

      https://gogold.co.nz/pricing/

      Then last year, a further rise – the adjustment from the fall in interest rates, some of the money moving into gold assets, rather than into stocks.

      The recent rise this year is related to uncertainty about stocks – trade wars.

      Gold is a store of value, to account for inflation across time – and also interim storage of value as per bond and stock transfers (uncertainty).

      Governments also operate a gold asset storage of value. Whether they develop a form of digital currency, alternative to private individual use of bitcoin, is an unknown.

  5. tWig 5
    23 February 2025 at 1:21 pm

    If gold reserves are meaningless, why do countries retain gold reserves?

    • Populuxe 5.1
      23 February 2025 at 5:21 pm

      Contingency, but they're nowhere near the size they were.

    • Obtrectator 5.2
      23 February 2025 at 5:42 pm

      Blowed if I know. Gold looks nice and doesn't tarnish, but aside from certain electronic components you can't build anything useful with it. It's only "valuable" because everyone's decided to agree that it is. Rather like that “stone money” they have on some Pacific islands.

      • SPC 5.2.1
        23 February 2025 at 6:14 pm

        Paper money is the same. A means of recognised value to enable diverse economic activity between multiple individuals and nations.

    • Dennis Frank 5.3
      23 February 2025 at 8:16 pm

      Your question prompted another. I asked Google "what is the geopolitical relevance of gold in 2025?" Google's AI overview: "In 2025, gold remains highly geopolitically relevant as a safe-haven asset, meaning that during times of global uncertainty, political instability, or economic turmoil, investors tend to flock to gold as a reliable store of value, driving its price up and further solidifying its position as a hedge against geopolitical risks; this is particularly important in situations like ongoing conflicts, trade wars, or currency fluctuations between major powers."

      So it's using an `investors are sheeple' metaphor because they `flock'. Gold performs the same psychological security function as `safety in numbers'. Algorithm does anchoring in ecological niche. Gold's influence as top traditional store of value makes it a prime attractor in the capitalist system, but also because the amount is constrained by market forces. Constraint is a vital metaphysical concept – it determines mass & personal behaviour in many contexts, not to mention natural limits to growth.

      Also worth mentioning is the symbolic role of gold (glamour, mystique) plus somewhat diminishing relevance as strategic state asset…

  6. Maurice 6
    24 February 2025 at 12:43 pm

    Anyone ever tried to pay their local Super Market with gold? ….. or the IRD for that matter?