Goldman on the Dollar

The inestimable David P. Goldman presents his take on the current global financial situation:
US bank trouble heralds end of dollar reserve system – Asia Times

“America buys more goods than it sells, and sells assets (stocks, bonds, real estate, and so on) to foreigners to make up the difference. America now owes a net $18 trillion to foreigners, roughly equal to the cumulative sum of these deficits over 30 years. The trouble is that the foreigners who own US assets receive cash flows in dollars, but need to spend money in their own currencies.”

Goldman presents a rather thought-provoking comparison between the price of gold and inflation-indexed US Treasury securities (“TIPS”), which had a correlation of about 90% between 2007 and 2021. Now it seems to be indicating declining confidence in the Dollar. It seems that, this time, it might really be different.



Goldman notes,

One failsafe gauge of global systemic risk is the price of gold, and especially the price of gold relative to alternative hedges against unexpected inflation. Between 2007 and 2021, the price of gold tracked inflation-indexed US Treasury securities (“TIPS”) with a correlation of about 90%.

One of the reasons for the breakdown in this long-standing correlation between TIPS and gold is demonstrated by the following chart.

Through the 1990s and until 2008, central banks around the world were net sellers of gold, dumping the asset Keynes called a “barbarous relic” in favour of interest-bearing reserves in currencies such as the U.S. dollar. The financial collapse of 2008 represented a phase transition in the behaviour of central banks. In every year since then, central banks have been net purchasers of gold, with most of the buying coming from “emerging economies” such as Russia, China, the Turkey, and India. Here are central bank purchases from 1999 through 2021. (These are self-reported figures, and some believe that China may have added substantially more to its reserves from domestic production and off the books purchases.)

Based upon official reports, Russia dropped out of the buying binge in 2022, while China bought another 60 tonnes.

However, note that of the total 1136 tonnes bought in 2022, 741 tonnes—65%—were “unreported”: nobody knows who’s buying.

It seems to me that what’s happening is a general and growing mistrust of all fiat currencies. Here is the price of gold in many of the major trading currencies—note the similarity. (These charts cover available data, and hence the time axis differs among them; the U.S. dollar chart covers 1935 to the present, while the Chinese yuan chart only goes back to 2011.)


Details vary, but what is obvious is that all of these currencies, regardless of their fluctuations against one another, have been depreciating against gold. If you were a central banker, which would you want to hold? (Well, that’s a bad way to phrase it, because if you were a central banker, you’d be an idiot, tool of your political masters, and evil as well, so you probably wouldn’t draw the obvious conclusion.)

James Rickards, author of Currency Wars and The Death of Money, has described the U.S. dollar’s dominance in international trade and central bank currency reserves as in part a historical legacy from the postwar Bretton Woods system and the dollar’s being “the best horse in the glue factory”. As the aftermath of the 2008 financial crisis continues to percolate through the system (in particular, the financial repression that drove interest rates in most major currencies to near zero for more than a decade, destroying the advantage of holding these fiat currencies as reserves), central bankers may be increasingly looking outside the glue factory for alternatives.


Perhaps not so much mistrust as an unavoidable consequence of the near-universal temptation for global Political Classes to print & inflate their currencies. It permits those Political Classes to spend above their means, while simultaneously providing a disguised tax on their peons.

The concept I struggle with is the interaction between the productive Real Economy which supplies the goods & services we need or desire and the overhead Financial Economy, which seems to have become the tail wagging the dog, certainly in the crumbling West.

A money economy is clearly much more efficient than a barter economy. But then we inevitably try to make money a store of value in addition to a means of exchange. However, a real store of value is something productive – an orchard, or a factory, or a well-trained flexible workforce. Financial reserves are not necessarily stores of value – and unfortunately gold is the ultimate non-productive asset. The immediate benefit of a gold-based system is that it might constrain the prodigal habits of Political Classes – provided trade is ultimately settled by physical transfer of gold. But then we would have lost some of the efficiency of a financial economy.

One of my favorite tales was a side-note in Stephan Zweig’s “The World of Yesterday”, in which he touched on the great inflation in Austria post-World War I. One genteel old lady survived quite comfortably slowly bartering away her late husband’s extensive collection of fine cigars in exchange for necessary real goods, such as food – useful real goods being traded for other useful real goods.


If there’s one lesson we should have learned from the last several centuries, it’s that the last way you get efficiency (or even competence) is by setting up a monopoly with the power to enforce its monopoly and suppress competition. When that monopoly is coupled to the power of a coercive state, things only get worse, as the state can use the monopoly to reinforce its power and that power to protect its monopoly.

We wouldn’t expect progress in any field of technology if government had the monopoly of developing and delivering it. Even without the power of a state, compare the rate of innovation and performance/price in telecommunications during the century AT&T had essentially a monopoly versus the decades after it was broken up and opened to competition.

Why then, should we expect any better when the state is given a monopoly on the creation and distribution of money? Forty centuries of history demonstrate that whenever a state obtains a monopoly over creation of money within a territory, the inevitable consequence is that money being used as an means of looting those forced to use it, enrich the rulers, and maintain their control.

People were well aware of this when the Federal Reserve was pitched to control money in the U.S. They took care to make it look like it was not a top-down government monopoly, but rather composed of regional branches responsible to banks in their territory. Of course, this was a fraud, and starting immediately in 1913 the dollar began to depreciate.

The question isn’t what to use as monopoly money or who should control the monopoly but how to get rid of the monopoly entirely and allow free people to choose whatever they wish to use for the basic functions of money (store of value, medium of exchange, and unit of account), not necessarily using a single item for all functions. Before widespread government monopolies, people used all kinds of things for money and, when they interacted through trade, figured out how to exchange among them. This introduced friction in the system, but today it need be any more complicated than using a credit card denominated in one currency to order a product from another country to be shipped to you from a factory in a third.

Instead of allowing different monies to compete in a free market, central bank money monopolists are moving rapidly to reinforce their monopoly position and lock people into their funny money. Starting in July 2023, the Federal Reserve in the U.S. will begin to roll out “FedNow”, a system for electronic clearance of transactions between individuals and businesses. This will use their “dollars” and thus not be a central bank digital currency, but will have exactly the same consequences for privacy and civil liberties. All of your transactions can be monitored, assessed for taxation, and, if you offend the powers that be, then literally “your money is no good here”.

This is why people who see what’s coming are getting to the exits before they’re locked. What will be the best solution to replace the current corrupt and (literally) bankrupt system? Who knows? Who cares? Let the contenders fight it out in a free market, just as more than eight thousand exchange traded funds compete for investors’ money worldwide. Which is best? That depends upon the priorities of the investor. So it should be with money—there’s no more need for a single currency than a single government-run fund for all investors.


In comment #2 I wrote:

At the time, I wanted to expand upon the most egregious example of dumping gold in the era, but I didn’t have time to look up sources. Here 'tis….

Between 1999 and 2002 the United Kingdom’s treasury, under the stewardship of Chancellor of the Exchequer Gordon Brown (Labour Party, later to be Prime Minister from 2007 through 2010), sold around half of the UK’s gold reserves, a total of 395 tonnes of the yellow metal, for an average price of US$ 275 per troy ounce, for a total of around US$ 3.5 billion. The reason given for the sale was to diversify the country’s reserves away from gold, which was said to be “too volatile”, and replace it with bonds in a variety of currencies which would generate interest income.

Almost at the moment the sales were concluded, the price of gold began to rise, reaching a peak in 2011–2012, then declining into the doldrums for several years, and recently touching the US$ 2000/troy ounce level during the present spot of bother with over-leveraged banks. If the UK had held on to its gold, the gold it sold for US$ 3.5 billion around the start of the century would now be worth more than US$ 25 billion. And those US$ 3.5 billion they got for selling out before 2002? Well, adjusting by the U.S. consumer price index, that’s now worth around US$ 2 billion in BidenBucks.

The trough in the gold price during the period from 1999 to 2002 while the UK was selling its gold is now referred to as the “Brown bottom”.

Brown bottom, indeed.


How well did they do from the bond interest?


My intuition is that when regional banks/credit unions fail, you’ll be paid with FEDNow dollars. And to go from FedNow “dollar” to Gold, BTC or any other “non essential item”, there will be a “special fee” to be paid to, you guessed it, Uncle Sam!


I’ve called the USD the MS-DOS of currencies because while the IBM-PC opened up both its BIOS (so there could be competition for that) and its extension card bus (so there could be competition among motherboard and peripheral suppliers), Gates saw that the OS was the literal City Gate for Moore’s Law where he could collect a toll.

There was an open marketplace for OS’s. There are many different currencies. The Problem is in how to deal with force beyond impotent moral admonishments like “No initiation of force.” Civilization is largely powered by its positive network externalities. Permitting those externalities to centralize in the hands of guys like Bill Gates is The Problem because eventually they end up initiating force.


All pretense of an open market for operating systems ended with the bundling deals Microsoft negotiated (i.e. forced down the throats) of the major PC vendors that emerged in the late 1980s such as Dell, Gateway, HP/Compaq, etc. and the collapse of IBM’s OS/2 as an alternative. They could obtain Windows at a deep discount only if they agreed to include it with every system they sold. If they offered a “bare metal” system or an alternative operating system, they or their users who wished to install Windows would have to buy individual Windows licenses at a cost that priced them out of the market.

With intense price competition in the mass home and business PC market, vendors had no choice but to pre-load Windows (often later with some kind of Office bundle) and charge their customers a “Microsoft tax” on every system even if they never used the software. Customers were obviously inclined to use the software which was already there when they turned on the machine right out of the box.

This is the kind of shenanigans that IBM used to reinforce its market position in mainframes for decades until fear of antitrust actions forced them to give in on plug-compatible peripherals and mainframes in the 1970s. I’m not sure why Microsoft was so successful in sailing under the radar—perhaps because they argued the market remained competitive with home computers competing with the PC.


An just where did Gates get his force? This is my point about the impotence of moral admonitions regarding “initiation of force”, and is why I focus on the foundation of that force in military aged men upon whom the power of civilization’s positive network externalities should fall, thereby replacing the public sector with market competition.

I’m only too aware of the practical problems this entails and in my own defense all I can offer is the comparison with the practical problems of the alternatives – among which are the practical problems of the collapse of civilization.