Russia has made rubles convertible into gold. The exchange rate specified is 5,000 rubles per gram of gold.
That is approximately 80 rubles to the US dollar. That is about the market exchange rate before the Ukrainian invasion. The message, of course, is using the US dollar as a weapon may not work. There is a danger in believing sanctions work. History shows they do not.
Never underestimate your opponent’s ability to respond to your action. It is a form of strategic arrogance to think they cannot or will not. Never fail to answer the question, what will happen after we do this?
Russia is defending their currency in a way many people will find interesting.
Gold-backed currencies are the conscience politicians don’t have. That connection has been known since 1928. George Bernard Shaw addressed the question in his book, “The Intelligent Woman’s Guide to Socialism and Capitalism.”
“You have to choose (as a voter) between trusting to the natural stability of gold and the natural stability of the honesty and intelligence of the members of the government. And, with due respect for these gentlemen, I advise you, as long as the capitalist system should last, to vote for gold.”
It is, of course, not so simple, but there is an element of truth in the thought. The principal flaw is currency is needed to permit trade and thus prosperity. Gold is in very limited supply, and as the world’s economy grows, there must be more currency.
The Russians have used the link to stabilize their currency. Without that stability, the economy becomes even more fragile.
As a prediction, the price of gold will rise in terms of US dollars, and the conversion rate of rubles will improve. At least for a while.
Historically politicians prefer to have no limits on how much they can spend and, therefore, how much money there must be available. It is not possible to meet their spending ambitions with taxation. If they tried, they would soon become retired politicians practicing law as they were before. So fire up the presses, and let’s manufacture money. Ink, paper, a press, and some engraved plates are the only requirements to make paper money. Much easier than manufacturing gold.
As they print more, the value of each unit gradually becomes less. People don’t realize it immediately, and a condition economist John Kenneth Galbraith called the bezzle appears. “This is a period, incidentally, when the embezzler has his gain and the man who has been embezzled, oddly enough, feels no loss. There is a net increase in psychic wealth.” In his book, “The Great Crash 1929.”
As you have noticed, bezzle is a token for embezzle. That is precisely what inflation is. Theft! That it can be disguised as something else is the real problem. Michael Pettis, in an August 2021 article, raises this point.
“Economies at times systematically create bezzle, unleashing substantial economic consequences that economists have rarely understood or discussed.”
That sounds ominous. Perhaps the Russians can shine a light on our problem.
The Russians may be able to sustain the relationship for a while. It is the third-largest gold producer globally at 281 tonnes per year. (behind China and Australia) Given its economic structure able to use the gold produced as it wishes. According to Trading Economics, Russia already has more than 2,200 tonnes in their reserves. It takes 1,000,000 grams to make a tonne, so five billion rubles per tonne at the new exchange rate. A tonne is worth about $64 million today.
There are about 66 trillion rubles in circulation now. 2,200 tonnes back only 11 trillion rubles. So a fractional reserve only.
There is the sustainability issue. Indeed, foreign governments could try to buy and convert rubles, which is possible in theory. They would have to purchase the rubles, though, and that would improve their exchange rate and raise the price of gold as they did so. A complex task at best.
How do you feel about governments using currency as a tool in war? I think it is likely to cause more problems than it solves, but that seems to be the skill of politicians everywhere.
It’s a close decision, but I think the Russians will prevail in the short run.
There are some things to notice.
Monetary sanctions tend not to work unless they cause the other economy to collapse nearly immediately. The Russian economy is resource-based, so it is difficult to collapse.
Russia doesn’t need their oil and gas as much as Europe. At least for the next several years, the Europeans cannot practically get it anywhere else. They will deal for Russian petroleum regardless of US machinations. When the Europeans overcome their need, the Chinese will be happy to accept Russian output. I expect pipelines are being planned as you read.
American efforts must destroy the Russian economy quickly or risk creating a potent Russian-Chines combination. The two countries fill each other’s economic holes. Russia has a relatively small population, natural resources and agricultural land; China has people, production capability and finance skills. There are long-standing cultural differences to overcome, which may be the sole factor that saves American economic dominance. As the Chinese curse goes, “May you live in interesting times.”
The American response to the Ukraine invasion is self-defeating if carried too far.
Gold-backed currencies may revive, but I doubt it. A basket of supply-limited cryptocurrencies might serve as well.
Expect central banks to create their own crypto-currencies. It will disguise their money printing activity a while longer. Independent cryptocurrencies may rise in price as they do.
Undertsand the idea of bezzle. The March 2022 year-over-year inflation rate was just announced at 8.5%. The government is not stealing your dollars. You still have all of them. They are stealing the value of your dollars, and that is what you should care about.
Fiat currencies are valuable only so long as people accept them as having value. Do not count on that continuing forever.
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I build strategic, fact-based estate and income plans. The plans identify alternate ways to achieve spending and estate distribution goals. In the past, I have been a planner with a large insurance, employee benefits, and investment agency, a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business. I have appeared on more than 100 television shows on financial planning. I have presented to organizations as varied as the Canadian Bar Association, The Ontario Institute of Chartered Accountants, The Ontario Ministry of Agriculture and Food, and Banks – from CIBC to the Business Development Bank.
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