STEPHEN LEEB DISCUSSES THE POTENTIAL MAJOR CATALYST FOR A NEW MONETARY SYSTEM

On March 6, 2021 at 4:44 am,
cfs (A valued listener) says:

I think about the Weimar Republic, inflation and the price of precious metals. At the time of German hyper-inflation, the Reaichmark was not a reserve currency.

IT SEEMS TO ME THAT IN ORDER FOR GOLD TO BE A RESERVOIR OF WEALTH, IT CANNOT HAVE ITS PRICE DETERMINED BY THE RESERVE CURRENCY.

i.e. In order for gold to preserve purchasing power for Americans, the U.S. HAS TO LOSE STATUS as a reserve currency. Now, it is possible that eventually some form of SDRs might be primary reserves. It is certainly true, however, at this point in time, neither the Euro nor the Renminbi is capable of becoming a reserve currency.

Dr. Leeb responds to the comment by our listener CFS below:

Dr. Stephen Leeb:

I argue in my latest book that the major catalyst for a new monetary system will be growing resource scarcities. This means a central problem for the world over the foreseeable future will be the proper allocation of resources among countries. Keep in mind that in the first generation of this century gold climbed five-fold far outperforming all financial assets. E.g., the S&P 500 with dividends reinvested climbed about 3-fold. Copper, silver, and iron also outperformed the S&P. In other words, hard assets, largely not acknowledged by Wall Street, have begun to outperform financial assets. Gold’s stunning performance in this environment is at least consistent with this notion of scarcity and in some ways a strong suggestion that we must replace the dollar, or the U.S. would have overwhelming control of the distribution of scarce goods. In the end all – including the U.S. – would suffer tremendously.

What I suggest in my book is that the new worldwide reserve currency will be a digital collection of major currencies, which is backed by gold. Worth noting is that when we went off the gold standard in 1971 it unleashed an economy (ours) that could print as much money as it liked. The result was a shift in focus from long-term projects such as the interstate highway and the development of the transistor to short-term get rich schemes such as you see in the financial sector, which, not coincidentally emerged as a primary sector of the economy in current era of nearly unlimited money.

Even a sovereign currency backed by gold would not be a good idea. Foremost we have to recognize we are not facing a crisis that will just affect some nations but one that will affect the entire world, and whose solution will require cooperation among all countries. The gold standard, I talk about, will not involve a fixed price for gold but rather one that will reflect nominal worldwide economic activity and therefore will have to rise over time. Moreover, gold’s price will likely have to be reset to many multiples of where it is today. The final stages of this process will have to be carefully phased in. (We are not going to wake up one morning to find that the price of gold multiplied 10-fold overnight. The initial phases, however, are already under way – big time.

China, for all its faults, seems to be most aware of these challenges. Currently they have the most liquid physical markets for many major commodities including gold, copper, and iron ore. (To let leveraged speculators have a major role in determining the price of ever scarcer critical commodities is madness.) Moreover, any trading of critical physical commodities in China is de facto backed by gold.

You are right that the yuan – even a yuan formally backed by gold could not be a reserve currency. But a digital basket of currencies could and will, in the not-too-distant future, serve that role. China has recently been aggressively testing a digital-yuan, which I believe is another step on the way to a new monetary system. Again, my most recent book spells out many of these points in much greater detail.

One final comment on the Weimar Republic. The hyperinflation experienced in Germany in the early 20’s, largely the result of the disastrous Treaty of Versailles, came to an abrupt end sometime in the mid-20’s. What marked the end was when the Germans decided to back up their currency with their land. From the mid-20’s until the market crash in 1929 Germany’s economy hummed along with relatively low inflation and moderate growth. What brought down Germany and led to the rise of Hitler were the speculators in America who overleveraged their stock purchases, creating possibly the most damaging bubble in the history of capitalism. It was not until the end of WWII that the world’s economy led by America and a gold backed dollar was able to get back on its feet. America during the generation or so after the War was, in my opinion, the greatest economy the world has ever seen. We are going to have to work long and hard and have some technological luck to get back to those days. I am hopeful but feel a long road lies ahead and that gold must play a vital role.

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