Raiding the Vaults

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As part of the recent G7 jamboree, there was the nauseating display of a sackcloth-and-ashes session where, to the accompaniment of yet another well-meaning, but economically untutored bromide by Rock’s very own St. Francis — U2 frontman, Bono — much hypocritical wailing was expended on the problems of the world’s poor.

[And this as if the twin evils of the West's meddlesome foreign policy and its unyielding economic mercantilism were totally innocent of any role in helping successive swarms of tinpot militarists, local warlords, and tribal banditti from battening on the lifeblood of the Third World's downtrodden producers and would-be property-holders!]

So, the issue of forgiving some or all of the obligations owed by the most indebted pauper nations, either to sovereign governments directly or to their supranational arm, the IMF, arose once more, amid much high sounding self-congratulation.

Incidentally, much less "forgiveness," no self-respecting libertarian would cavil at a free people wholly repudiating any debts contracted in their name by the members of their former political elites, especially where this was done with the less-than-disinterested connivance of alien powers, themselves pursuing either cynical Realpolitik or "Open Door" corporatist vote-buying (most likely, both).

This is because that same libertarian’s profound respect for the sanctity of private contracts, voluntarily entered into, does not extend to the case of one temporary office-grubber forcibly pledging his subjects’ inviolable liberties to another, often over the time span of generations.

In any case, at this summit, the upshot was to forgive much of this debt and then to replace the value of the written-down assets on the IMF’s balance sheet either with the proceeds of actual physical gold sales, or simply by means of a revaluation of what is said to lie presently in its vaults.

UK Chancellor Brown was typically vocal in letting it be known that he favoured the first option (no doubt, to replicate his fabulous investment success in selling the Bank of England’s gold at multi-decade lows), largely on the grounds that a simple revaluation would smack too much of “creative accounting” — this from a man who has up to 100 billion in off-balance sheet liabilities hanging over the British tax-payer in his Mussolini-style “public-private partnership” deals!!!

[Of course, too, the practice of carrying the existing debt — unlikely, by implication, ever to be repaid in full — on the books at face value, is somehow NOT creative accounting. Such is the twisted world of international politics.]

Whatever the intrigues, we must ask ourselves, if the gold is actually sold, should it affect investment policy in any way? Certainly, this may represent a short-term negative for the market to the extent that:

  1. the gold has not already been lent on and used to cover forward sales by miners or speculators
  2. the idea has not already been discounted
  3. any sales are conducted in a disruptive fashion — so hurting the prospects of several of the countries who are supposed to benefit from the debt write-off
  4. sales, rather than revaluations actually DO take place, and
  5. people would not now rather not swap paper dollars for hard metal, to a degree they would not 2—3 years ago when this was first mooted

We can see, then, that no malign effects are at all guaranteed to come to pass, though neither should their prospect be too lightly dismissed.

As for any longer term impact, well, gold has effectively been fully officially demonetized for some time past, so an IMF clearance would have no import either for policy or psychology on that score, however much the Goldbugs might gnash their teeth about it.

What also must be recognized is that any such release would come at a time when mine supply itself may be in some jeopardy as soaring energy and materials costs and a weaker dollar hurt a wide range of producers, especially where these have been “high-grading” their exploitation of reserves (concentrating on the easier pickings) throughout the long years of a depressed gold price.

Then, again, we know that both the Chinese and Russian central banks have recently given speeches in favour of the metal — so one ironic possibility is that these two heavyweights might happily undertake (or encourage others in their country to undertake) a convenient exchange of their overlarge holdings of USD for the IMF’s swag.

Furthermore, our petrodollar-soaked, confiscation-wary Arab friends might not be averse to such a deal either (though both these suggestions must remain highly conjectural).

Finally, as commodities are slowly coming to enjoy a long overdue vogue among the traditional investment community, our very own pension funds and insurers may take up the slack, even if the world’s export surplus nations do not.

All in all, then, this sort of action may help moderate any underlying trend in the appetite for hard assets vs. paper currencies, but it is unlikely to reverse it entirely.

Now, how about mandating a complete debt forgiveness; liquidating the then-insolvent IMF and distributing any remaining gold, pro rata, to its owners — the Western taxpayers; enacting a complete abolition of all trade tariffs, subsides, and quotas; then, as a quid pro quo, announcing an immediate cessation of all foreign aid?

This would instantly encourage Third World entrepreneurship and stimulate mutually-beneficial global commerce (and so help dissipate international hatreds).

Simultaneously, it would mean we desist from the practice of propping up "friendly" despots and that we no longer subsidize the no-less debilitating, if more outwardly humane, socialist boondoggles which such monies invariably underwrite in the hallowed "democracies" of the poor?

That would be a surefire way of unlocking more wealth than is contained in all the world’s hoards of gold, whether in or out of the IMF’s vaults.

Maybe we could even get Bono to write a song about it…

Sean Corrigan [send him mail] is an investment analyst in Switzerland.

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