Only The Gold Standard Can Make The US Dollar Mighty Again

Trade wars are not a good thing, it might make Trump and the MAGA crowd feel strong when he threatens huge tariffs in his social media posts, but it is economic suicide. This weekend he posted a threat of 100% tariffs on BRICS nations if they make moves to create a BRICS currency to replace the US dollar (USD) for international trade.

Trying to dictate the currency other countries must use for trade or else, doesn’t make the USD mighty. It actually shows he is worried about its position as the world reserve currency and importance in international trade. Bullies on the schoolyard try to instill fear in others that comes from their own insecurities.

It is much more instructive for investors to consider why the BRICS nations are looking for an alternative to the USD, than focusing on a bully’s bluff. There are two key reasons, one of them is the debt sitting at $36 trillion that is growing in an unsustainable way, and the other is the weaponization of the USD.

Since the 2008 GFC, all the presidents since have gleefully taken advantage of the prolonged Free Money Era to drive up the debt. Obama was the worst spender for two terms, adding over $8 trillion. Trump took a run at beating him in one term by adding around $7.5 trillion and it looks like Biden will be as bad as Trump, likely worse, when all the numbers come in after he leaves office in January.

Instead of making threats like a bully on the schoolyard, coming to terms with the reality that he is responsible for around 20% of the debt ever created is a start. Obama, Trump and Biden have created incredible debt problems due to their addictions to spending. Now the cost of servicing the debt is the third highest expense (higher than defense while the US is involved in two hot wars) and growing at an unsustainable pace due to the size of the debt and compounding interest on the debt.

The other reason that BRICS nations are contemplating an alternative to the USD is the weaponization of the USD after Russia went to war with Ukraine. Russia’s money in banks outside their country was frozen, Russia was kicked out of the SWIFT banking system and they were sanctioned. It caused BRICS nations to think about what would happen to them if they ran afoul of America.

They may have talked about creating a BRICS currency, but their actions have been different. What they have done is sell US debt and USD to buy gold. To the point that gold has surpassed the Euro this year to gain second place in currency reserves held by central banks.

Another action is they allowed more countries into the BRICS network and they have a big list of other countries that want to join. Now the economies of the BRICS nations are rivalling the size of the economies of the West. They are gaining tremendous financial clout as they control a leading position of production of natural resources, including oil, agriculture and metals.

They are also reviewing their US debt holdings and looking at massive supply and getting paid in USD that is constantly destroying purchasing power. It certainly doesn’t sound like an attractive proposition and instead of Trump throwing threats out on social media, he would be better served to make the debt and USD a more attractive investment opportunity.

That would mean slashing the spending to tighten the supply of debt, which would help tame runaway inflation and shore up the USD as the best in class fiat currency. As it is now, the only real argument USD bulls can come up with is that it is the least dirty shirt in the pile of dirty shirts which is an indictment against the entire fiat currency system. Who really wants to invest in dirty shirts, even the least dirty of them? Especially when that least dirty shirt is printed by the country with a mountain of debt.

Since the 2008 GFC, central bankers in and outside the BRICS coalition have been increasing their reserves of gold. Over the past few years, that has gone into overdrive led by the BRICS nations. The answer as to why is fairly simple, gold can’t be printed by any country and is not backed by debt. It is the soundest form of money. Central bankers are putting themselves back on the Gold Standard because they find fiat currencies less attractive, including the world reserve currency.

Gold is ultimately priced based on supply and demand, as demand is powerful, gold supply has peaked and the supply chain is broken. There has not been enough new important gold discoveries over the past couple of decades, which results in too few high-quality new gold mines in development and being built, and the major gold miners are struggling to increase production and replace their old mines with new mines. Which makes gold explorers with important discoveries, new gold mine developers with high-quality projects and best in breed gold miners, extremely good investment opportunities.

It took a couple of decades to break the gold supply chain and it will take just as long or longer, if ever, to fix it. Which is ultimately a better investment for the short-term and long-term than unprecedented supply of debt and a broken fiat currency system. Whether investors in the West realize it or not, the East is moving back to the Gold Standard.

Tariffs may be a good talking point that riles up those that love that stuff. But, it is not economically sound as it will cause devastating inflation. Countries outside America produce what Americans want to consume at the prices they want to pay for them.

BRICS nations have joined together to create a lot of economic clout. Those countries supply an enormous amount of natural resources that American consumers and corporations need. Plus, they control a huge amount of the refining capacity to turn natural resources that come from the ground into products that can be used.

Trump can stomp his feet all he likes, and make threats like a bully on the schoolyard. All that has done is exposed his insecurity about the strength of the USD. The reality is there is no BRICS currency coming anytime soon, what is happening is gold has taken over the Euro as the second leading reserve currency held by central bankers and has the USD in its crosshairs.

The Death Spiral of Debt has a straw that will break the debt camel’s back in the cost of servicing the debt, combined with the constant destruction of the purchasing power of the USD making gold a more attractive reserve currency by the day.

When America was on the Gold Standard, the USD truly was mighty. Since America went off the gold standard in 1971, the country has been on a debt and money printing binge. Which has crushed the purchasing power of the USD by around 90% in the past 50 years.

If Trump truly wanted to make the USD mighty again, instead of talking about tariffs, he would be pushing the country back on the Gold Standard. It is the only way to put constraints on spending by politicians on both sides of the aisle, including Trump.

The biggest economic problem facing the American economy is the Death Spiral of Debt that Trump was a major player in creating. Now the spending needs to be slashed to fix the problem.

Making a new department on government efficiency (that proposes to make less government departments by making a new one) that has no teeth and can only make recommendations that have to be approved by the spending junkies of politicians on the left and right is doomed to struggle at best and likely fail.

Returning to the Gold Standard is the best means to the end because it forces discipline on the politicians, Fed and Treasury. The other alternative is to default on the debt and rebuild from the ground up.

Either way, gold wins.

All the best,

Allan Barry Laboucan