In the immediate wake of last week’s Brexit vote trillions in paper wealth vaporized worldwide. In the days that followed many Brits who voted to leave the European Union now seem flummoxed that what they saw as a symbolic protest vote is having real and immediate consequences, with millions already signing a petition asking for a do-over. But even if the U.K. doesn’t end up actually leaving the EU, the financial damage has been done.
The calamity isn’t just the short-term impact on the global economy; the real casualty is certainty. Certainty is what businesses need in order to expand. It’s what banks need in order to lend those businesses money with a reasonable assurance they’re going to get it back. That crucial certainty is in very short supply in global markets these days; a situation that’s not going to change anytime soon.
Confidence is like a pyramid; the higher you climb, the narrower the path. One country that enjoys a great deal of confidence in the world is the United States. Other countries trust us to pay our bills and accept our currency to pay off debts. That’s why in some ways the 2013 government shutdown in the U.S. was worse for global markets than for domestic markets. It undermined global confidence that the U.S. would remain a predictable and responsible trading partner into the future.
Central Banks Out of Options
Among other functions, central banks have the job of providing certainty to commercial banks and businesses that money will be available for new equipment and new development projects. They also play a crucial role in creating global confidence in their nation’s currency
But recently central banks around the world have gotten caught up in interventionism; trying to stimulate their respective economies and also diminishing the value of their currencies to make local goods and services more attractive on world markets. The current Brexit-fueled crisis of uncertainty has come along at the exact time central banks are out of options to manage such an event. Take the U.S. Federal Reserve: With only one tiny interest rate hike to show since 2006, what maneuvering room does the Fed have today?
Blasting More Cash into the System Won’t Work
The only other tool in the central bank kit is called Quantitative Easing, a fancy term for buying corporate bonds, and a means of flooding the financial pipeline with newly-minted cash. Unfortunately, QE stopped working long ago. Companies gladly sell bonds to the Fed but, instead of using the money they get to expand, they simply stash it in countries with a reputation as tax shelters, like Ireland, and wait for the economy to improve before making any actual investments. It should be plain by now that if you give money to rich companies (or wealthy individuals) they don’t use it to create jobs, they simply stick it in the bank.
Gold: the Future of Global Trade
Such central bank follies have been going on for decades and only now are we getting to the end game. It won’t be long before the world realizes fiat currencies backed by central banks and paper wealth are simply not trustworthy, regardless of where they’re issued.
The Brexit made the problem plain; the votes were barely counted before the British pound and the euro – two currencies so trusted they have reserve status – both plummeted. A referendum won by average Joes, many of whom apparently thought their vote carried the weight of an angry Tweet, took down two of the world’s most respected fiat currencies—and that was just day one.
Going forward in an increasingly global economy, there will have to be a standard that can’t be cheated, faked or forged. If China has anything to say about it, that standard is going to be a medium of exchange based on gold.
The Chinese Get It
China is farther along the road to building a gold-based medium of exchange than any other country because the Chinese are the global grand champions of currency manipulation. They’re also smart enough to realize the same currency tricks that got them to the top of the pile won’t work to keep them there; they need to find a stronger play. So China is stocking up on gold at a fever pace.
U.S. Positioned Well
If you think the U.S. would be left out in the advent of a gold-backed medium of exchange, guess again. We hold more gold than any other country, according to official figures. China isn’t trying to wage economic war against us (yet) with a gold-backed exchange; they’re trying to catch up to us. It can’t be a coincidence that the central banks of every major industrial nation, as well global financial institutions, including the IMF, are quietly amassing gold.
The move toward a gold-based medium of exchange for foreign debts makes perfect sense in a world where paper wealth is quickly becoming a phantom. Instead of fearing such a change, we should embrace it – and if we’re smart – get ahead of it.