After reaching a new all-time high of €1,365 per troy ounce last week, the price of gold looks ready to celebrate the new “unlimited” fashion at the ECB with some healthy action of its own, expect the following months to be very exciting. The temptation to print is just too strong, the old school bundesbankers stepped out and those left behind are more than happy to sound tough in press conferences, but still accommodate the politicians with easy money. The truth is that without free, unlimited money, they would actually have to make hard choices. Imagine that! The horrifying thought of having to choose between ice-cream and chocolate cake, instead of simply having both, is simply unconceivable.
The idea that some banks should be allowed to fail is simply not countenanced. It is true that when a non-banking company fails, the assets and people don’t disappear: the assets will find new owners and the workers new jobs. It might take some time, it might be traumatic and some value will be lost along the way, but eventually resources, if the market is allowed to clear and the price mechanism is allowed to work, will find productive and valuable employment.
Fractional reserve banks are different; they have been given the legal privilege to create money out of thin air, to operate a legally sanctioned ponzi scheme and therefore when they go bust, not only does the money all evaporate, but the fraud is exposed and the nature of the system is revealed. Confidence vanishes and the whole house of cards could come tumbling down.
Of course this danger does not exist for full reserve banks. When all your deposits are backed 100% by gold in the vault and the ownership of that gold is in your name (not the bank’s name) and this is verified by trusted third parties, confidence is irrelevant. It’s that simple. The Bank of Amsterdam, which operated on a full reserve standard for over 150 years, survived wars, invasions, revolutions, plagues and political upheaval.
Today’s banking system, operating with a money multiplier sometimes reaching triple digits and reserve ratios so low that even a small outflow of deposits forces the bank to run to the central bank for help, are so inherently unstable that unless a constant, unlimited inflow of new, fresh money continues to be pumped into the system, they will all collapse. As Jim Rickards puts it “There is so much snow on the side of the mountain that any one additional snowdrop can precipitate the avalanche”.
Better find a refuge while there’s still time.