Wednesday, August 23, 2023


Today this blog turns 15!
At the Speakeasy, there's a new post up called Credibility Deflation, because this is also the 13th anniversary of the original post, Credibility Inflation! If you would like to subscribe to the Speakeasy, there's a link in the side bar, or just shoot me an email at fofoamail at gmail dot com.

Here, I'm giving you a short post from a couple of weeks ago, titled How 'bout a Brick, because today is also the 15th annual BRICS summit, which ends tomorrow. I don't know what's going to come out of the summit, but here's something I wrote about it recently:

How 'bout a Brick
“In these fertile grounds
people escaped reality with the New Idea
of long term debt, (Deep bond market?!?)
being held as a money asset. Yes, here was born
the American Experience that comes to maturity today.”
-Another via Zinpa

Earlier today, someone wrote:

"Anop – good article.

At the end the author concludes:

“What the BRICS don’t have – at least not yet – is a viable bond market with which to challenge the US bond market. However, according to Rickards, the means by which states financed warfare in the twentieth century might provide a greatly expanded BRICS bloc with a means of quickly developing a viable bond market:”

Many people have made a similar claim that the BRICS monetary system requires a deep bond market. I’ve been thinking that using internationally recognized debt (US treasuries) as central bank’s primary reserves is an artifact of Bretton Woods post 1971 rather than a prerequisite of a monetary system. If they hold gold as a primary reserve, use an anchored BRICS trade currency for trade, and are able to settle accrued imbalances in gold there is no need to have a deep bond market.

Any thoughts on this from the SE or FOFOA?"

Here's another quote from the article:

Given the choice between putting your savings in a BRICS bond or in Zimbabwe Dollars, Sudanese Pounds, Venezuelan Bolivar or even Russian Roubles, the BRICS might well emerge with an instant market of several billion people. After which, even western traders are going to get involved. At which point, would you rather invest in a BRICS Bond or a British Gilt?

Okay, let's think about this. According to Jim Rickards, they will define the new BRICS international trade clearing currency as a weight of physical gold. He said it could be an ounce, but whatever they say it is doesn’t really matter. It’s just how the exchange rate will be calculated in each country, between that country’s local currency and the new BRICS clearing currency. The exchange rate will be the price of gold in that currency.

They're not creating a new physical currency like the dollar (which was defined as a weight of gold once, but also belonged to a single country, and therefore the definition had to be defended by that country's gold reserves). They're also not creating a new country-less ("supranational") reserve currency like the SDR (which is defined as a basket of certain countries' currencies, and redeemable in those currencies). According to Rickards, they are creating something more like the idea of the Bancor, which was sort of a hybrid, somewhere between the SDR (being country-less) and the pre-71 dollar (being defined as a weight of gold).

Let's call it a brick (like a brick of gold). And, rather than an ounce, let's imagine that they define it as 1 brick = 1 gram of gold. Right now, 1 gram of gold costs about $62, so that's a reasonable definition. (According to Rickards, they considered using a basket of commodities, including oil and gold, but went back to just gold.)

They'll work out the details of how it will work. I don't need to speculate on the range of possibilities, but it's quite large. And let's be clear, this is not Freegold they are creating. And it's not going to end the $IMFS, which is ending regardless. But let's go back to the question in the quote: "Given the choice between putting your savings in a BRICS bond or…"

A brick is going to be kind of like an SDR. You can't hold an SDR. There are no physical SDRs. There's no SDR bond market. An SDR is a unit of account, and it was originally defined as 1 USD, which in turn was defined as 1/35th of an ounce of gold (which is pretty close to a gram, btw).

In the 70s, the definition of an SDR was split into a basket of currencies. Today, the definition of an SDR is 0.57813 USD + 0.37379 EUR + 1.0993 RMB + 13.452 JPY + 0.080870 STG = 1 SDR. So, you can't hold an SDR, but you could hold those currencies in those exact amounts, and you'd be holding the very definition of an SDR, i.e., an SDR. But just beware, they change the definition of an SDR every five years or so.

Now, if a brick is defined as a gram of gold, then if you want to hold a brick (which you can't), you'd just go buy a gram of gold. See?

If everyone is doing that with their savings at the individual level, then there will be little need for central banks to settle trade imbalances at the national level. This is the essence of Freegold.

Each country's currency will have an exchange rate against a brick, which will basically be the price of a gram of gold in that currency. And if you're an importer or exporter, doing international business within the BRICS zone, you'll invoice, pay and be paid in bricks, which you'll get from, and sell back to, the local banking system, which will get them from your local central bank. They'll be digital central bank tokens, issued by the BRICS secretariat.

Let's say, and this is just a guess, but let's say they decide to issue to each participating central bank an amount of BRICS equal to double their central bank gold reserves. That's a reasonable amount, and it would be well above (maybe 40% greater than) expected intra-BRICS annual trade volume. They could call it "50% backing" which, in gold standard terms, would sound good (even though they're not actually backing it with their central bank gold).

The original five BRICS countries have a combined total of 5,296.8 tonnes of gold, which is 170M ounces, or 5.3B grams. If they issued double that, it would be a total issuance of 10.6B bricks, with a current dollar value of $657B. As you add more countries to the BRICS, you issue more bricks, and right now, 40 more countries want in, including Saudi Arabia.

Since bricks are digital, they could easily be divisible down to the penny.

If you, a Chinese exporter, receive a surplus of bricks, you will exchange what you need in currency for yuan (at the bank), and you'll buy gold with the rest (perhaps also at the bank). The banking system could easily offer exchange of yuan, bricks and gold, but you can't hold bricks in your account for more than, say, a week (perhaps a little longer depending on your particular business needs).

All bricks exist on a central ledger at the BRICS secretariat, and are credited to the accounts of the member central banks. The central banks exchange them with commercial bank customers on demand, at the going exchange rate, and commercial banks are merely the facilitators of these transactions between individuals/businesses and the central bank.

When bricks get sent to an exporter in another country, they are debited from the sending central bank's account, and credited to the receiving central bank's account. The receiving customer then has a week to either send them as payment to someone in another country, or exchange them for local currency or gold. If he does nothing, then they get automatically exchanged for local currency in his account.

Now, this might seem like a gold standard since you can redeem them for gold at the bank, but that's no different than buying gold with cash. In fact, it could work the same if, instead of buying gold from the bank, there was an independent gold dealer right next to each bank, and you simply exchanged all of your bricks for local currency, then walked through the glass doors to the gold shop to buy whatever portion you wanted to save in gold.

This is the essence of Freegold, that currency is redeemable in gold, at a floating rate. It's redeemable from the marketplace, not from the central bank gold reserves.

So, the brick is essentially a CBDC used for intra-BRICS international trading, but it can't be used locally, and it can't be used for savings. If you need to borrow some bricks for a transaction, the loan will be denominated in local currency, not in bricks.

Bricks will flow back and forth, and most trades will net out, but if bricks start accumulating in certain central bank accounts, it will represent a trade imbalance, and it can be dealt with at the central bank level. Yes, it could be settled in gold, but it doesn't need to be a transfer from the deficit country's official gold reserves.

In Freegold, currency exchange rates will naturally adjust to trade balance differentials. A trade deficit will indicate that one of the currencies is overvalued, so its exchange rate will naturally decline. In this brick system, the country with the trade deficit/brick deficit will need to buy back bricks with gold from the country that's running the trade surplus. But if you just take gold out of one central bank and put it in the other, that doesn't do anything to fix the overvalued currency. That's basically an exchange rate manipulation, not unlike the Bretton Woods system.

So, if I were designing and running this new brick system, I would instruct the deficit country to go buy enough gold on the open market with newly-printed local currency to buy back the bricks from the surplus country. This would draw more gold into the BRICS system, stressing the gold markets of the West.

It may seem complicated, but think about it from a central bank's perspective. If the supply of physical gold runs out in your country, it means the price of physical gold is too low in your currency. So, what do you do? Under the old form of gold standard, or gold-backed currency of yesteryear, you'd have to supply the market with your gold reserves to defend the exchange rate of your local currency and the brick. But under this system, you can just bid up the price of gold in the currency you print by printing, until more physical gold shows up in your country.

You don't need to go into the $IMFS FOREX market and buy foreign currency to buy gold elsewhere. Let the open market take care of that. You just keep raising your bid for physical gold until it shows up.

In this new system, the brick has replaced the dollar, and physical gold has replaced dollar settlement options, like buying Treasuries or other US-based financial assets. And when you look at the flow of capital that has been coming into the US through the $IMFS for the last 50+ years, if only a portion of it starts settling in physical gold in places like Dubai and Shanghai, that'll really test the limits of the link between the LBMA's XAU price and the global physical market price of gold.

Think about this dynamic happening, not just in one country, but BRICS-wide. And imagine Western currency traders seeing this dynamic play out in real-time, with Eastern gold bourses running low on physical, and their central banks putting out bids that are higher than XAU is trading on the FOREX. What will be their most-profitable move?

It might be something like "sell XAU and buy physical" as long as they're the same price. Can you see how this would test the link between the price of paper and physical gold?

And what would be the bullion bank's best move in that case? The essence of the FOREX trader's best move is a demand for physical allocation or delivery from the bullion bank. But the bullion bank doesn't have the physical reserves to meet such demands, so it's going to say cash only, here's your cash, go buy your physical from someone who has some.

But anyone who has some at that point will either be sitting on it, or sending it to the BRICS to cash in on the arbitrage opportunity. They won't be selling it for the same price as a unit of XAU.

The difference between the price of physical and the price of an LBMA XAU liability will be called "the premium." And very quickly, the premium will soar. FOA said this many times:

The day of big premiums on gold coins and bullion is coming… -FOA (10/15/01)

look for the premiums on cash bullion and cash coins to begin rising well above contract and futures prices. […] because we are moving into full cash settlement of gold, without physical delivery, you can take this wholesale price and add whatever premium is necessary to buy your physical gold. -FOA (10/25/01)

the real bullion markets will get extremely thin and build up a huge premium to contract settlement.
-FOA (10/26/01)

The coming premium price, paid for physical delivery, will develop for all to see. -FOA (11/2/01)

"Buy what has value at the greatest discount and wait for the politics of money to price your new savings correctly"!

The politics of wealth today is centered around gold bullion and only gold bullion: that is where the wealth and power will be manifest: this is where the gains will be! …

Place as much of your wealth in physical gold as your understanding allows, and save this "virtual wealth" of the ages today: waiting for it to become real wealth, priced correctly in the market place, tomorrow.

Make no mistake, the wealth is there "but only there in bullion"! Because a free bullion market cannot be denied or controlled when it stands between the opposite goals of [opposing] political powers!

In this: it will separate from the politically-crushing reality the current dollar based paper gold market represents. The premium on bullion will soar!

The “Political will” [of the old world] is about to help make our investment real. For myself, a large percentage of my wealth is being saved by going with the evolution of paper money: not against!

This trend is visible now and based on the forward flow of human affairs, not the backward rules of money theory!
-FOA (11/3/01)

You see, it's not that complicated. It really is a simple concept. It's the ultimate fiat currency. Half of the world declares its international trade clearing CBDC currency, the brick, to be defined as the price of a gram of gold, and then lets the other half of the world supply the gold that backs it.

You might now be thinking, what will happen when the LBMA collapses and gold revalues by 40x or whatever? It's simple. A brick will be automatically redefined as 1/40th of a gram.

It's like when the dollar devalued because it was running out of gold, only in this case, nobody gets screwed. The BRICS central banks have not lost any gold. If anything, they've accumulated more through this process. No one is holding bricks as savings. No one has loans in bricks. In fact, if bricks are backed by anything, it's the $IMFS's physical gold market.

A brick is a country-less token defined as a weight of gold, and backed by the open physical gold market. When that open market runs out of physical (at LBMA XAU prices), the brick will devalue in gold terms to accommodate the necessary revaluation. (That may even end up being the primary modus of revaluation.)

Where will these billionaires and oligarchs park their billions without a deep bond market like the $IMFS, you ask? They will have the same options they have right now. They are more or less cut off from the $IMFS anyway, and if not, it doesn't hold much upside at this point. So, they can keep it in buildings, businesses, banks, yachts and local currency. They just can't keep it in bricks, unless you're talking gold bricks. 😉