Sunday , 25 September 2022

Will European Central Banks Revalue Gold to Write Off Their Bad Debts?

The more debt is being accumulated on the balance sheets of European central banks, the more likely they will revalue gold to write off this debt…

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@$$4$Government debt to GDP levels in many countries are at all-time records and I’m not aware of any politician or economist that has outlined a clear strategy to lower the debt burden. Technically, there are six ways to lower government debt to GDP:

  1. Economic growth
  2. Default
  3. Higher taxes
  4. Austerity
  5. Debt relief
  6. Inflation

I don’t think option one, two, three and four are viable, which leaves debt relief and inflation. Inflation is currently elevated and shifting wealth from savers to debtors but can inflation stay elevated and solve the debt problem without destabilizing societies? When people on lower incomes can’t make ends meet, they tend to revolt. Social instability leads to political instability, which leads to monetary instability, which leads to more social instability. In many countries, like the United States, we can already observe this doom loop.

Revaluing Gold to Write off Bad Debt

One possible solution is that central banks use unrealized gains of the gold on their balance sheet to write off sovereign bonds, providing debt relief to their governments and when the unrealized gains aren’t sufficient (spoiler: for many countries the unrealized gains aren’t sufficient) central banks can revalue gold. [For a look at how this works from an accounting perspective please refer to the original article.]

…Because gold is the only international currency that isn’t issued by a central bank and thus can’t be printed, there is no limit to its price denominated in fiat currencies, which can and are printed. To illustrate, European central banks accumulated most of their gold during Bretton Woods when gold was valued at $35 dollars per troy ounce. At a current gold price of roughly $1800 dollars these central banks have unrealized gains worth hundreds of billions of dollars (denominated in euros on their balance sheet).

How can these unrealized gains be used? When the gold price rises, the value of the gold on the asset side of a central bank’s balance sheet increases. At the same time, on the liability side of the balance sheet an equal increase will be recorded in what is referred to as a “revaluation account.” A gold revaluation account, which effectively has no limit, registers the unrealized gains on gold…[but] is it possible to use gold’s revaluation account to write off bad debt? …[When asked that question] Germany’s Bundesbank replied that according to the prevailing accounting rules any unrealized gains in gold can only be used for unrealized losses in gold, not for losses in assets such as U.S. dollars or European bonds…Case closed? No, because central banks can change the rules at will. Using gold’s revaluation account, for literally anything, has been done before and there is no reason why it can’t be done again…

I asked BuBa (Bundesbank) why not change the rules, use gold’s revaluation account and if needed revalue gold…[and] they replied that, “at this stage, we prefer not to speculate” about changing the accounting rules and revalue gold to write off bad debt meaning that they don’t rule out this possibility [noting]…that “in general” the accounting rules are set “by the ECB Governing council in accordance with the limits set by the European Treaties” implying that there are exceptions…

A New Global Gold Standard 

Revaluing gold to write off bad debt would require central banks to set a floor price for gold. If a central bank uses its revaluation account fully, the gold price ideally doesn’t fall back or this central bank will incur unrealized losses. As such, the central bank would need to stabilize the gold price, which is a form of a gold standard.

When it comes to revaluing gold, Europe is most likely to take the initiative, as opposed to the United States, because revaluing gold would damage the dollar’s status as world reserve currency which is not something the U.S. aspires to do…[but] the euro, [being] the second most liquid currency in the world…[could] revalue gold by printing euros and buying gold without devaluing much against other currencies and commodities. [Even so,] European central banks would face risks in revaluing gold as they can’t know how much gold they must buy, and thus print euros for, at what new price. Although, I think the moment they will start buying, countries outside of Europe will join purchasing gold as they too have a debt problem.

…Europe has been preparing a new global gold standard since the 1970s (as I have written about extensively here) and revaluing gold would be a logical step towards a new international monetary system based on gold. It might not be the classic gold standard, but perhaps a system of gold price targeting, allowing countries more easily to devalue their currency if needed. After all, currency devaluations are a fact of life.

By revaluing gold, bad debt can be written off and the new price will cause the currency in circulation to be sufficiently backed by gold. A reset offering a new international monetary system.

The above version of the original article by Jan Nieuwenhuijs (https://thegoldobserver.substack.com) was edited [ ] and abridged (…) to provide you with a faster and easier read. Also note that this complete paragraph must be included in any re-posting to avoid copyright infringement.

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