Like the meme I created? This is the West, at this moment, when being told to pay in gold.
I wanted a short(er) follow up to my piece yesterday which has over 100,000 hits. I added a Q&A section to the end because the responses were overwhelming, and with that, responding to complex topics in 140 chars isn’t my thing.
So the big thing I’m seeing in responses – “they will not pay in gold, or rubles”.
At issue here is the buyer wants to set the terms. Here’s the problem. One of the major buyers in this case based their energy policy on Greta. And with this, I remember reading an article 6 months ago that said they planned to import electric from France’s nuclear capability and gas from Russia. Over the last year, my country’s administration gutted our production to look “green” and then turned around and tried to strong arm OPEC into giving us more oil, cheaper. OPEC was like, “pound sand, dude”.
What we are seeing in front of us is the end of globalization, as we know it. In my first MBA classes in 2001 at Villanova University, we learned about “just in time” delivery and how this had implications with logistics. Having been an IT undergrad and working in IT, my mind raced to then picture the bar coding, databases, automation, etc.
If it costs you $.15 to produce a widget in Wyoming with union labor or costs you $.07 to produce that widget in SE Asia, companies over 40 years here found efficiency after efficiency after efficiency with globalization. World Trade was roaring! The lowest bidder won a lot of this work. Yes, this is deflationary, in a sense. But bigger picture is in Wyoming, that union guy put out of a job works in another company, or new industry. If we only thought about lost work, you can see the deflation – but what this does is allow for more productivity for the world.
But this comes at a cost. All of this depends on everyone playing fair, respecting borders, respecting contracts, and allowing free trade. Or relatively free trade.
What has been exposed, and rapidly, this past month or so is how dependent we are on each other for things. Energy being one of the biggest.
Up until recently, people held dollars because they may need that for global trade. PetroDollar stuff. And very recently, Russia was kicked out of SWIFT and the West started to shun Putin. The idea, I believe, has been to use financial “weapons” to have Putin pull out, or perhaps target the wealthiest Russian oligarchs with sanctions and have them remove Putin for the West. In response, Putin then said, essentially (I’m paraphrasing) – “You guys want my oil and gas yet, but you do not allow me to transact on your global system. Give us rubles. Hey, you won’t pay with rubles? Fine. Give us your gold”. Furthermore, it then became apparent to nations with lukewarm ties to our country that if they don’t get on board, perhaps they face sanctions and taking their wealth. This could lead to dumping of a lot of dollars for gold inside of their own borders and shunning the SWIFT system – mostly – at some future time.
Now if you are Germany and were paying in dollars, and Russia demands gold, you have two choices.
- Refuse. Hope you get LNG or people can do without. Factories need nat gas. Smelters need it to make metals. Plants need it to make fertilizers for food production. It is essential to the economy, and doing without it will tank your economy and possibly lead to starvation.
- Accept. Take the dollars you were to buy oil, and use those dollars to buy gold. Take that gold and exchange it for oil/gas. Or take the gold you have in vaults.
The balking at this demand has me puzzled.
They said they CANNOT STOP accepting Russian gas. Now, it seems, the West is having problems resolving a problem THEY CAUSED. It seems very logical for Germany or France or Italy to pay in gold.
Heck, Germany can keep the dollars and just go in their piggy bank of gold and pay.
What’s the problem?
Ben Bernanke says central banks hold thousands of tons of this substance for “tradition“. Warren Buffett calls it a “pet rock”. In fact, if you just bought gold in 1971 and held it for the last 51 years it would have outperformed all stock markets. Guess the Oracle of Omaha missed that one. Jerome Powell recently called it an “asset”.
IF it is worthless….A Pet Rock….Useless. Why not do what Canada and England did and get rid of it?
It obviously has value to the Russians, right? Seems like a fair trade. Something you do not value for something you do value?
So if it is your box of beads, why not trade it for Manhattan? This is the problem I’m seeing with the logic above. Is it capitulation? Germany talks about this would be breach of contracts. They have no problem TAKING the gas, but they have a problem EXCHANGING THINGS OF VALUE FOR THE GAS. They cannot pay in USD. Russia is now only taking gold for “non-friendly” states.
So what is the problem?
Notice how we are seeing derivatives fail recently (nickel)? Think the quickly rising 5% interest rates for housing the US is not going to take down real estate? How are bonds going to work with $30T in debt and 5% interest? They aren’t.
The problem is, the entire Western financial complex is a financialized piece of over-leveraged dog shit and when you take a Jenga piece from the bottom of the stack, it’s only a matter of time before all of your quadrillion dollars in derivatives crash.
Meaning, gold might be more important than they are letting on? If you were in Weimar in 1920, would you not gladly take the trade of gold for your Marks? That’s sort of like what is going on here. Russia appears willing to take that Weimar trade all day long – in a sense.
You see, if no one needs USD to do trade anymore, why would other countries hold substantial reserves? Why would you not then convert those USD to gold? IF you are a BRICS+16 country, why would you not start to also follow suit?
My thinking here is the US was caught offsides on this, and the refusal to pay in gold is two faced…
- Gold is worth very little, a historic relic, so there’s no point in keeping it when we can trade it for valuable energy to fuel our economies
- Gold is EXTREMELY valuable and the sticker price isn’t reflecting its actual value and there’s no fucking way you are getting my gold.
Which is it? Pick one.
To me, the exchange of Germany refusing to pay in gold speaks volumes about gold’s actual value. It appears to me that they do not want to signal that it is indeed money or currency. Admission of this could set off a chain reaction.
And I believe this chain of events is about to unleash that true value soon. Can I be wrong? Sure. But why wouldn’t the Germans just hand over useless gold? Why wouldn’t they take the USD they were going to pay Russia and buy gold to give to them?
I don’t have the right answer for these questions, but these are the questions people smarter than me should be asking their governments and leadership.
I think the West was caught offsides by this. In my 4 years of an MBA, there was never a mention of “gold” anywhere. I believe that many of the smart bastards working in governments now with fancy degrees know anything about gold. Furthermore, I’m not entirely sure the US has nearly a fraction of what we claim, and if indeed it is significantly less, well…shit.
The moves being presented by Russia appear to be in a scripted procession. And, they are the sellers in a seller’s market. There’s 3.5b people in the BRICS+16 or so that would buy their energy for rubles or gold. I believe the danger here now for the West is many other countries start to mimic this. They need to treat it almost like, “we will not negotiate with terrorists” because if they admit gold is money, then they are kinda screwed. The issue is Germany’s energy policy put them in this situation, and the choice above is pretty clear. They need to push one red button. If they push the wrong button, some energy analysts like Steve St. Angelo feels without Russian gas they could enter a depression. Maybe? Maybe not?
The world is watching.