Brodsky On "Gold Monetization And The Big Reset"

"Macroeconomic Problems

1) The global banking system is functionally insolvent and will fail without exogenous policy action*

• There is one, interconnected global banking system linked by global financial markets and coordination among currency boards and central banks
• In the current banking system model, debts due tomorrow are serviced by newly-incurred debts today (which create deposits)
• Stagnant or declining nominal global asset prices since 2008 have stressed bank balance sheets
  • Loan book marks remain at substantial premiums to:
    • The present value of their cash flows in real terms
    • Liquidation prices at current or higher interest rates
• Central bank easing and asset purchases to date have only tempered the rate of asset price declines
• Current adversity among European banks directly impacts global commerce and finance

*Bank balance sheets can deleverage either via nominal write-downs of assets, (leading to outright failure/insolvency as tangible equity is extinguished), or through nominal increases in system reserves via base money inflation (provided by central banks as they expand their own balance sheets)

2) Governments and private parties are heavily-indebted and this indebtedness is growing exponentially

• In the aggregate, the public and private sectors have “borrowed money into existence” for decades, as fractionally-reserved banks have created unreserved deposits and extended unreserved credit
• In the net, private sector borrowing has stagnated and is prone to contraction
• In response, public sector borrowings have been increased measurably to fill this gap
  • Public sector debts and deficits are increasing
  • The global economy is rapidly approaching the point where neither the public sector nor the private sector can service debts to the degree required to maintain asset prices, which, in turn, removes incentives to borrow further
  • The temporary benefit of growing debt obligations supporting ever-increasing nominal assets prices is now prone to reversal
  • Should global bank balance sheets thus contract, so would the global pool of bank deposits
  • Contracting bank deposits implies contracting money supplies and attendant deflationary pressures

3) The global economy is threatened because, in real terms, it continues to misallocate capital

• The global relative price spectrum does not reflect true value and therefore is contributing to the general economic and financial malaise
  • Wealth and income concentration stemming from the asymmetric rise of asset prices tends to be self-reinforcing, and thus suffocates purchasing power for most economic participants (“the 99%”)
  • The more one pays for productive assets, the less one can pay for labor or other productive inputs
• The extension of unreserved bank credit has fed the feedback loop of nominal asset price inflation (i.e. bubbles and subsequent busts)
  • Wages and basic input pricing has thus lagged, in relative terms, the robust upward trend of asset pricing
• Over-priced assets have led to capital over-investment in many industries/projects
  • Unsupportable by labor inputs or unaffordable at current wage levels
• Most developed economies have morphed into financial economies, which over time have become fragilely dependent on net imports to sustain living standards
• The current propensity of both public and private sectors to channel ever more income towards debt service is threatening the debt-for-debt feedback loop that has maintained the appearance of stability since 2008
  • European sovereign issues
  • global real estate setbacks
  • declining public participation in equity and other leveraged asset markets

The Expedient Solution: Policy-Administered Asset Monetization

1) Re-monetize gold as the asset against which newly-created central bank liabilities (base money) are created

• Gold purchases would serve to promote deleveraging in two manners:
  • 1) via base money (bank reserve) creation and,
  • 2) by providing the currency proceeds to fiscal agents to retire existing debts
• The threat of waning confidence in the currency unit in response to expanding central bank balance sheets would be arrested by a gold price peg in the aftermath of the base money expansion
• Any future operations to expand the base money stock would require additional purchases of gold at, most likely, higher and higher nominal prices or exchange rates
• A gold peg would thus act both as a deleveraging agent today and a fiscal/monetary policy discipline looking forward..."

at http://www.zerohedge.com/news/brodsky-gold-monetization-and-big-reset