Jim Sinclair’s Commentary

The madness will not stop. The situation is over the edge.

It is not a question of what going forward. The damage is done. Hyperinflation is assured.

The new reserve currency will be a virtual currency (average of all major currencies). It will be tied to gold via a worldwide M3 type liquidity. It will not be convertible.

All situations like now resolve themselves via a commodity currency. That is the entire story.

Stop The Madness: Make The Dollar As Good As Gold
Mar. 30 2011 – 1:04 pm

Unstable money creates anxiety.  By now, the dollar has been unstable enough, for long enough, that this anxiety is popping out everywhere.  TV commercials are urging people to buy gold, sales of “survivalist” books are rising, and consumer confidence is plunging.  And, on March 22, “money” featured more prominently than tax cuts at a “Supply Side” conference in New York City, at which luminaries such as Robert Mundell, Steve Forbes, Arthur Laffer and Larry Kudlow offered their views.

Many of the participants in this conference called for “a return to the gold standard.” However, it is important to recognize that there are at least four distinct types of gold standards, and that some will work and some will not.

The most “fundamentalist” type of gold standard could be called the “Specie Standard” system. Under this system, the dollar is defined as a fixed weight of fine gold, and the monetary base consists of gold coins.  Paper money is allowed, but only as warehouse receipts for gold coins.  The size of the monetary base is determined by the amount of gold that is presented to the Treasury (or private banks) to be minted into gold coins.  There is no central bank, and no attempt by government to influence interest rates.  Fractional reserve banking is not allowed.

Proposals for setting the gold value of the dollar under a Specie Standard range from $20.67/oz (the gold price in 1930), to $14,300/oz, which is the gold price required to make it possible to replace all of M1 (currently about $1.9 trillion) with coins minted from half of the U.S. government’s gold holdings (which currently total about 261 million ounces).

A Specie Standard would not work.  Gold cannot be used as money — there isn’t enough of it. Setting the gold price high enough (more than $14,000/oz) to make it possible to replace all of the dollars of M1 with gold coins would produce explosive inflation (as the rest of the world gleefully sold us gold and bought up our assets), followed by a steady, grinding deflation.

If it were possible to get past the “start up” issue, a Specie Standard would be operationally stable — it would not be prone to sudden, acute financial panics.  However, it would yield a chronic deflation that would produce high unemployment and would likely make long-term debt financing too risky (for both lender and borrower) to be undertaken.

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