Now the Fed is Talking about Gold Revaluation

Summary

The Federal Reserve recently discussed the idea of revaluing gold to address the U.S. fiscal crisis. With the national debt growing and spending increasing, the Fed’s proposal focuses on using gold reserves to create 'budget-neutral' spending without raising taxes or borrowing more. This could involve revaluing gold certificates, allowing the Treasury to receive billions in new cash. Historically, gold revaluation has been used to boost government spending power, as seen during FDR's era. However, the method raises concerns about inflation and its impact on future government spending, particularly amidst the growing national debt.

Takeaways

• 😀 The Federal Reserve has recently published a paper discussing gold revaluation as a potential solution to U.S. fiscal challenges, particularly in relation to the national debt and budget deficits.
• 😀 The U.S. Treasury holds 261.5 million troy ounces of gold, but the legal value of this gold is set at $422 per ounce, far below its current market price of over $3,300 per ounce.
• 😀 The key issue with not revaluing gold is that the U.S. is essentially leaving money on the table by not adjusting the official value of its gold reserves to reflect the current market price.
• 😀 If the U.S. were to sell gold, it wouldn't be inflationary, since the transaction would simply transfer an asset from the government to another party, without affecting the total money supply.
• 😀 The paper outlines three methods used by other countries for gold revaluation, which can involve increasing a central bank's balance sheet or transferring valuation gains directly to the government.
• 😀 Gold revaluation allows the government to create budget-neutral spending, printing money without raising taxes or increasing debt, but this new money would likely be inflationary.
• 😀 A proposed bill in Congress, the Bitcoin Act (S.954), includes a plan to revalue gold to increase government spending power and fund Bitcoin purchases, though it has not yet been passed.
• 😀 The Bitcoin Act aims to revalue gold certificates held by the Federal Reserve to reflect the current market price, which would create a large gain for the government, but also require the creation of new money to cover the difference.
• 😀 Historically, gold revaluation has been used as a way to boost government spending without increasing taxes or borrowing, with examples from the Gold Reserve Act of 1934 and FDR’s gold confiscation and price adjustment.
• 😀 Gold revaluation could provide the U.S. government with additional spending power, but given the massive national debt, this move is unlikely to make a significant dent in fiscal challenges and could lead to further inflation.

Q & A

What is the main topic of the Federal Reserve's paper on gold revaluation?

The Federal Reserve's paper discusses the potential of gold revaluation as a way to increase government spending without raising taxes or increasing public debt. It focuses on how some governments have used gold revaluation to offset fiscal deficits and increase spending capacity.

Why is the US Treasury not currently revaluing its gold reserves?

The US Treasury has not revalued its gold reserves because, while the legal value of the gold is set at $42 per ounce, the actual market price is much higher. However, revaluing the gold would not change the Treasury’s spending capacity, as they are not selling the gold to generate cash.

How does the concept of 'budget-neutral' spending relate to gold revaluation?

'Budget-neutral' spending refers to increasing spending without raising taxes or borrowing more money. Gold revaluation could allow the government to create additional funds by increasing the reported value of its gold reserves, without technically borrowing or taxing, by using the printed money to finance spending.

What are the three methods of gold revaluation discussed in the paper?

The three methods discussed are: 1) increasing the central bank's balance sheet and liabilities along with the gold reserves; 2) transferring the increased value to the central government via revaluation accounts; and 3) using the increased value to offset central bank losses, instead of transferring the profits to the government.

What role does the 'Bitcoin Act' play in the context of gold revaluation?

The 'Bitcoin Act' (S.954) proposes that the US Treasury should revalue its gold reserves to reflect the market price and use the resulting funds to purchase Bitcoin over the next five years. This act suggests a potential way to handle budget-neutral spending, much like gold revaluation, but specifically for Bitcoin.

How does gold revaluation impact inflation?

Gold revaluation can lead to inflation because it involves printing new money to cover the difference between the old and new values of the gold. This increases the money supply in the economy, which can lead to upward pressure on prices, although it doesn't directly involve borrowing or raising taxes.

What historical precedent does the US have for gold revaluation?

The US has used gold revaluation in the past, notably in 1934 when President FDR raised the official price of gold from $20.67 to $35 per ounce. This allowed the government to increase its spending power and issue more money backed by gold, despite not having acquired additional gold.

Why is the concept of revaluing gold controversial?

Revaluing gold is controversial because it involves manipulating the official value of an asset to create money without real economic backing. Critics argue that this can lead to inflation and further debt, and that it represents a form of financial manipulation rather than addressing structural fiscal issues.

What would be the immediate effect of gold revaluation on the US government?

If the US revalued its gold reserves, it could theoretically generate an additional trillion dollars for government spending. This would be a significant increase in available funds, though it would not solve long-term fiscal problems like national debt, and could exacerbate inflation.

Why is the Federal Reserve's stance on gold revaluation important in the current fiscal climate?

The Federal Reserve’s stance on gold revaluation is important because it represents a potential tool for addressing the growing US budget deficit and national debt. With the US facing significant fiscal challenges, revaluing gold could provide a temporary solution to increase government spending without directly increasing debt or taxes.