Jim Sinclair’s Commentary

Now do you still want to argue with Armstrong or Alf?

"Thorsten Polleit, Honorary Professor at Frankfurt School of Finance and Management, did some calculations for this and found (as of March ’09):

backing all of M1 with gold. M1 divided by gold oz. results in $6000 per oz.

backing M2 with gold and you get $31,000 per oz.

backing Euro M3 and gold is E26,000"

Does Mises’ Equation Give a Basis for Gold Price?
May 03, 2009

Assuming you agree to a strict Austrian approach to life and love, Mises advocated sound monetary policy by returning to a gold standard and developed this equation for a “regression” to a properly backed currency called the gold cover ratio:

GCR = (C+D+T+S+L) / G

Where C is cash, D is demand deposits, T time deposits, S savings, and L banks long term liabilities. And our favorite variable G is oz of gold at Fort Knox.

Thorsten Polleit, Honorary Professor at Frankfurt School of Finance and Management, did some calculations for this and found (as of March ’09):

backing all of M1 with gold. M1 divided by gold oz. results in $6000 per oz.

backing M2 with gold and you get $31,000 per oz.

backing Euro M3 and gold is E26,000

But the real impact of Mises’ work is not in what the price of gold should or could be but rather the conclusion that no matter what the government does (e.g. quantitative easing, free running printing presses, artificially low interest rates, stimulus packages, bank bailouts, TARP, TALF, etc, etc) we still get a serious erosion if not all out loss of the exchange value of fiat money.

Deflation (mark to market) results in bank failures wiping out bond holders or savers or both but monetizing any substantial portion of the bubble debt means hyperinflation. No escape. This is why Geithner looks like such an idiot. Not because he’s not smart.

Government debt issuance only buys time. Sooner or later rates go up and voila, insolvency as payments usurp ever larger chunks of real working capital and wages.

Thus Mises concludes that a market agreed upon currency with real valuation and without government intervention behind it is the only way to avoid fiat money crisis after crisis. After all, when they first established the Federal Reserve they too saw the need to tie it to a gold standard and did again in legislation intended to abolish the Fed again in 1936…