America's various Debt and Deficit Commissions, 2012 Executive and Congressional Budget Proposals all sustain a $24 Trillion U.S. National Debt in the year 2021, despite proposed austerity measures.Carrying a 4% interest rate, this principal would require a $960 billion debt interest payment. This is the brain trust resolution, consensus, after the expenditure of trillions of taxpayer dollars for bailouts, stimulus packages, warehousing of toxic assets --- derivatives, credit default swaps, bad mortgages, quantitative easing 1 & 2 --- and annual Federal government operating deficits in excess of $1 trillion. Meanwhile, the budget is to be balanced on the backs of America's middle and working classes, elderly, children, and the poor. Obviously, the country is mired in low expectations, instead of launching a complete breakout from the encirclement of past, present, and future liabilities.
Obama Memo#8 presents not just a $32 Trillion breakout but a complete reversal of the nation's fortune. It is on the overlooked real asset side of America's balance sheet that the mastery of our affairs lies. Specifically, the monetization or securitization of 8,133 tons of U.S. gold, without a gold standard, and of 700 million acres of public land with mineral estate.
Obama Memo#8
May 2, 2011
To: President Barack Obama
From: Sioan Stephen Bethel
Subject: A $32 Trillion Proposition
America’s real assets, 8133 ton gold reserve and 700 million acres of public land [with mineral estate], have largely been ignored in addressing the nation’s financial and economic problem. The monetization or securitization of gold, without a gold standard, and of public land, affords 32 trillion inconvertible gold and public land notes, kept separate and apart from Federal Reserve Notes in general circulation. Though these notes are irredeemable, for gold or public land, they are convertible, debt free, and at a premium, to Federal Reserve notes. This money, in turn, would be utilized to amortize or repurchase any portion of the U.S. National Debt. In the case of repurchase, debt interest payments become disposable income, abetting tax reduction and any other fiscal policies. The introduction of $32 trillion, today, positively alters the vector of inter-generational economics, particularly offsetting or preempting the growth of unfunded liabilities. Note, this asset-based intervention requires no borrowing or additional taxation; therefore perfectly suited to the temperament of the American body politic.
History
Gold
There are plenty of arguments against the re-instatement of an American gold standard. Some are proffered by the Chairman of the Federal Reserve Bank, Bernard Bernanke.
"It did deliver price stability over long periods of time, but over shorter periods of time it caused wide swings in prices related to changes in demand or supply of gold," he told the Senate Banking Committee. "So I don't think it's a panacea." Bernanke also said that gold couldn't return as the world standard because there's not enough gold in the world to effectively support the U.S. money supply.
Federal Reserve Chairman Ben Bernanke dismissing the notion of the gold standard returning to the U.S. before a U.S. Senate Banking Panel, March 1, 2011.
Mr. Bernanke may be right concerning the inadvisability of a return to a gold standard; with the caveat that gold has appreciated 700% over the past dozen years. But what is the value of the U.S. gold reserve as a stand-alone asset, un-tethered to a standard? From 1933-71, all Federal Reserve notes in general circulation, were supported by the U.S. gold reserve, with a 25% cover ratio. In the present fiat money era, the cover ratio for gold can be a nominal 10%, particularly in the absence of a gold standard.
Contra-lateral proof of concept is provided by the Gold Banks, such as J.P. Morgan, Citibank, Goldman Sachs, which presently lease a portion of U.S. gold reserves at 1%, then securitize the gold on a cover ratio basis; creating a multi-trillion, annual gold note market. The premise and practice is sound for the American public to follow suit. Additionally, since the gold remains in U.S. vaults, there would appear to be no insurmountable problem or contradiction for the owner of record, the public, to continue leasing gold for trading.
The Weimar Republic of Germany provides an additional setting and precedent for new, restricted U.S. Gold Notes , the 1922-1923 “stable valued” currencies, price indexed to gold or silver, by the German issuing bodies: Rheinland-Main-Donau, Neckar, Suddeustche Festvertband Stuttgart, Schleswig-Holsteinische Elektrizit, Baver Grosskraftwerk, State of Hamburg (Silver) and the City of Lubek (Swedish Crown) [Attachment]. Chapter 10: The rentenmark miracle and German stabilization. (Internet)
Public Land
The monetization or securitization of public land enjoys three, rich historical precedents; Colonial Pennsylvania currency (1729); the French Assignat (1793) and the German Rentenmark (1924). Benjamin Franklin championed land backed money, finding it preferable to precious metal based currency.
“Second, Franklin notes that land is a more certain and steady asset with which to back paper money. For a given Colony, its supply will not fluctuate with trade as much as gold and silver do, nor will its supply be subject to long-run expansion as New World gold and silver had been. Finally, and most important, land cannot be exported from the province as gold and silver can. He then points out that Pennsylvania’s paper money will be backed by land; that is, it will be issued by the legislature through a loan office, and subjects will pledge their lands as collateral for loans of paper money.” Benjamin Franklin and the Birth of a Paper Money Economy, Farley Grubb, Professor of Economics, University of Delaware and National Bureau of Economic Research.
France
In 1790, the nascent French regime inherited a public debt dilemma similar to America’s today. France’s public debt totaled 2.4 billion French pounds. In response, Church lands were expropriated throughout France (1/3 of all land) and paper currency (assignats), not based on gold or silver, but on the security of Church land, was issued. Domestic and international creditors accepted the new currency as legitimate payment. The new currency was initially used to successfully retire a significant portion of the public debt. Afterwards, the country succumbed to moral hazard. For, though Church lands in France were appraised at 1 billion livres, the government serially issued assignats, 10 billion French livres, leading to hyperinflation and depreciation.
In his famous essay “Fiat Money Inflation in France” (1913), Andrew Dickson White, economist, diplomat, and founder of Cornell University, commented on the French assignat experiment.
“The first result of this issue was apparently all that the most sanguine could desire: the treasury was at once greatly relieved; a portion of the public debt was paid; creditors were encouraged; credit revived; ordinary expenses were met, and, a considerable part of this paper money having thus been passed from the government into the hands of the people, trade increased and all difficulties seemed to vanish. The anxieties of Necker, the prophecies of Maury and Cazalès seemed proven utterly futile. And, indeed, it is quite possible that, if the national authorities had stopped with this issue, few of the financial evils which afterwards arose would have been severely felt; the four hundred millions of paper money then issued would have simply discharged the function of a similar amount of specie. But soon there came another result: times grew less easy; by the end of September, within five months after the issue of the four hundred millions in assignats, the government had spent them and was again in distress.”
Germany
In 1924, several representatives of Germany’s major agriculture, commercial and industrial interests became subscribers to a new bank of issue, the Rentenbank. The subscription was made in paper marks (papiermarks). The participation of each group of subscribers in the new bank was proportional to their respective wealth or property and a mortgage on this wealth served as a guaranty against the failure of the new institution. The Rentenmark was originally to be indexed to the commodity of rye like several previous types of private and semi-official, commodity backed currencies utilized successfully during the period of hyperinflation [Attachment]. After a Cabinet change, however, the Rentenmark was indexed to gold, which was adjudged to be a superior price index. The Rentenmark also had a fixed parity with the dollar. The advance of dollarization was significant because it meant that the fix of the exchange rate ceased hyperinflation instantaneously.
In the words of one critical observer, the German forensic economist, Robert Rene Kuczynski, “the most important and the most characteristic element to German stabilization was the Rentenmark miracle, a monetary innovation without parallel in monetary history.”
Course of Action
Gold
It is advisable to study the intended and unintended consequences of monetizing or securitizing the 8,133 ton U.S. gold reserve. Pro/con teams of forensic economists and monetarists should be employed for this undertaking, as well as the relevant stochastic models.
The action itself can be launched by executive order. To wit, the U.S. possesses an 8,133 ton gold reserve with a commodity value of $400 billion at $1,500 per ounce. If monetized, with a 10% cover ratio, the gold reserve is convertible to 4 trillion inconvertible gold notes, kept separate and apart from Federal Reserve Notes in general circulation. At $2,000 per ounce the gold stock yields 5.2 trillion notes. Though these notes are irredeemable, for gold or public land, they are convertible, debt free, and at a premium, to Federal Reserve notes. These gold notes, un-tethered to a standard, though framed with a standard metric (cover ratio), constitute an overlooked liquid asset with which to amortize or repurchase the bulk of foreign creditor U.S. debt holdings ($4 trillion). In the case of re-purchase of foreign creditor debt, debt interest payments become disposable income; perhaps $2 trillion per decade with a rise in interest rates. This reparative action reflexively increases the store of value and unit of account function of Federal Reserve notes; making good on a promise to pay debt, with payment. This action requires no borrowing or additional taxation, and thus is perfectly suited to the temperament of the American body politic. Thus, the minimum cost-benefit ratio is $0:4 trillion gold notes.
Public Land
Appraise the value of American public land, approximately 700 million acres (1/8 continental United States) with attendant mineral and other natural resources i.e. oil, natural gas, coal etc. U.S. natural gas fields alone warrant a multi-trillion dollar valuation, with the 54,000 square-mile Marcellus Shale heading the list at a $1 trillion value. An appraisal of $10,000 per acre yields $7 trillion at a 100% cover ratio; $14 trillion with a 50% cover ratio; and $28 trillion with a 25% cover ratio. These monies would be kept separate and apart from Federal Reserve notes in general circulation, avoiding contamination of the one with the other.
Assessment
It is common knowledge that the Federal Government’s balance sheet is in the red and projected to be so for the next 10 years. The various debt and deficit commissions, congressional and executive branch budget proposals proposed thus far, anticipate a $23 trillion national debt by 2021.* No projections have been made concerning interest rates for that year, but debt interest payments on the principal will be considerable; a 4% interest rate, assuming a $23 trillion debt, requires an annual $920 billion debt interest payment. The introduction of 32 trillion gold and public land notes, effectively $32 trillion, and subsequent amortization or repurchase of the U.S. National Debt, certainly countermands this gloomy fiscal predicament.
The current practice of leasing, for a paltry 1%, portions of America’s gold reserves to the bullion banks that in turn securitize the gold, to support a multi-trillion dollar annual market, represents a strategic under-utilization of resources. The gold bank practice, however, provides a contra-lateral proof of means and method for the peoples’ representative, the federal government, to create 4 trillion inconvertible gold notes. Like gold, the leasing of public land by the private sector for a pittance is insupportable in the absence of monetizing the land and mineral estate to the sum of $28 trillion. It is important to note that leasing gold and public land to the private sector is not at odds with the monetization or securitization of said assets by the owner of record, the public. An accommodation is plausible in this regard to enable both practices.
Suggestions have been made recently by Niall Ferguson, author of “The Ascent of Money” and Edward Truman, former assistant secretary U.S. Treasury, to sell U.S. public land and gold reserves. This would be a grave error, netting pennies. The notion does underscore, however, that these assets are saleable, are currently leasable, and therefore suitable for monetization or securitization.
In the final analysis, the $32 trillion proposition compels, at the very least, serious study. This is a lot of money to leave unrealized, given the unsteady state of the Union.
*U.S. Congressional Budget Office (CBO)
Epilogue
Obama Memo#8 is a condensation and illumination of Obama Memos 1-3, published by "The Daily Reckoning," December, 2009. The objective, of course is to get a formal hearing and study,particularly from their namesake, to which they were addressed. To date, to my knowledge, this has not occurred; hope springs eternal.The memos did evoke exchanges with the U.S. Debt and Deficit Commission, chaired by Erskine Bowles and Senator Alan Simpson, obviously in light of their recommendations, to no avail.
Two articles did appear, roughly a year after Obama Memos 1-3 advocating the sale of the U.S. gold reserve and U.S. public land in order to pay down the National Debt. Former assistant secretary of the U.S. Treasury, Edward M. Truman wrote in the Financial Times, October, 2010,, that the sale of U.S. Gold was a plausible and advisable way to amortize U.S. debt. Niall Ferguson, author of the bestselling "Ascent of Money, and Professor of History at Harvard University, wrote in Newsweek, January 2011, that U.S. public land should be sold to pare down U.S. debt..
As we have seen, the fire sale or nominal sale of America's real assets yields a negligible amount in comparison to their monetization or securitiization to the tune of $32 trillion. Besides, this latter approach keeps the assets all in the Family.
Meanwhile in the words of Edward M. Truman, "But after the recent economic and financial crisis and with the prospect of misery for several more years, how much more rain must pour before the US acts?"
Obama Memos 1-3 Links
12/21/09 DR Exclusive: The Obama Memos (3 of 3)
12/21/09 DR Exclusive: The Obama Memos (2 of 3)
12/21/09 DR Exclusive: The Obama Memos (1 of 3)
Read more: Sioan Bethel | Daily Reckoning http://dailyreckoning.com/author/sioanbethel/#ixzz1Nxg06MJD
