In today’s issue:

• There is speculation that Trump might revalue the US gold stock
• It would be a way of getting around the US “debt ceiling”
• Yet on its own this would have little if any market impact

You might have read in the financial pages of late that some of President Trump’s senior economic advisors are considering revaluing the US government’s gold stock to market. Currently, it’s held on the balance sheet at $42.22 per troy ounce, the final official dollar-gold exchange price under the Bretton Woods system. The current market price is just shy of $3,000.

This somewhat arcane topic has come to the fore because the US government is once again approaching the dreaded “debt ceiling”: a hard limit on exactly how much debt the US Congress allows the federal government to issue.

While the president holds the executive power to enforce the Constitution and all laws passed by the Congress, he or she does not have the power of the purse. Only the Congress can authorise the raising of funds for the executive, be that through taxation or debt issuance.

And so, in recent years, as the federal debt has grown exponentially due to historically high budget deficits, there has been a periodic “debt ceiling showdown” during which the president threatens the Congress with shutting down government operations if the ceiling is not raised and more debt not issued.

At the current issuance rate the ceiling will be reached in August this year. Revaluing the gold stock to market would increase its value by some $750 billion.

By law, the government can call upon the Federal Reserve to monetise the gold stock. If the value of the gold stock is officially increased, the Federal Reserve can generate new money equivalent to the higher valuation. Instead of borrowing, the government can then inject this newly created capital directly into circulation – effectively sidestepping traditional debt issuance.

Without drastic spending cuts, however, that wouldn’t buy much time. At the current spending rate, the additional $750 billion would only fund the government into early 2026.

Much ado about nothing?

So then, what is all the fuss about? Or is this just much ado about nothing?

When it comes to the current US fiscal situation, yes, it just might be. In my opinion, what makes this topic interesting is that it lifts the veil somewhat regarding the historical and possible future role of the official US gold stock.

As with most of the developed world, prior to WWI the US was on the gold standard. All major currencies traded at fixed rates to gold and, by extension, to one another. US bank reserves were either gold or silver, although when it came to international transactions, these were normally settled in gold only.

As the primary belligerents in the war, all resorted to money printing and inflation to finance their war efforts, the classic gold standard collapsed. Only the US dollar continued to trade at a fixed price to gold.

While there were attempts to restart the gold standard following the war, these failed as one country after another sought to devalue their way out of economic depression.

The US would eventually follow along. Shortly after FDR was elected in 1932, he nationalised private gold holdings and then devalued the dollar versus gold by some 60%.

This had the effect of enlarging the Federal Reserve’s balance sheet in nominal dollar terms. More dollars could now be created, backed by the accumulated and revalued national gold stock.

The ensuing inflation helped to offset the deflation of credit that had come to characterise the depression. To this day economic historians argue about to what extent this devaluation and inflation helped to shorten the depression. (Some say it was actually counterproductive.)

But note also the effect of the devalued gold on government finances. The devaluation enabled a large, one-off expansion of the US money supply. Some of that was used to purchase the Treasury bonds that FDR issued to fund his “New Deal” programmes.

Those programmes were tiny in comparison to the massive government spending of today. Back then, revaluing the gold stock was a game-changer for the New Deal. But today? Even if the entire $750 billion were revalued, it would barely cover a few months of government expenditure.

Is gold revaluation just a warm-up?

Whether or not President Trump plays the gold revaluation card, the discussion raises a far more intriguing possibility: that a larger, future gold revaluation could be used to place the US dollar back on a gold standard again.

This idea is hardly new. Immediately following his election, President Reagan formed a Gold Commission to study whether and how the US could return to the gold standard. None other than future Federal Reserve Chairman Alan Greenspan was publicly in favour, as were a number of Congressmen.

In September 1981, Greenspan also published an opinion piece in the Wall Street Journal, in which he proposed that the US should begin issuing gold-backed Treasury bonds as a first step towards returning to a gold standard. (In a 2017 interview he told the World Gold Council that he still supported the idea.)

Might Trump consider such a thing? There is some strong evidence that he already has. During his first term he nominated economist Judy Shelton to the Federal Reserve Board. She has written favourably about the US issuing gold-backed Treasuries and even returning to a formal gold standard.

She wasn’t confirmed, but she had Trump’s support. Now that he’s president once again, with a bigger mandate, might Trump push harder towards re-introducing gold to the national monetary discourse? Is the current talk of gold revaluation just a warm-up to something bigger?

I don’t know the answer to that. But we all know that in his first few weeks in office, Trump has been absolutely full of surprises in nearly all areas of policy, domestic and foreign. Might monetary policy be next?

Tomorrow, I’ll continue along these lines and explore just how the US might go about returning to some form of gold standard and what impact that would likely have on the global economy and financial markets.

Until next time,

John Butler
Investment Director, Fortune & Freedom

Objects in Motion

Bill Bonner, writing from Claverack, New York

For years, philosophers have wondered: ‘which came first, the chicken or the egg?’ Now we have our answer:

Dead birds don’t lay eggs.

When bird flu decimates the chicken population, the eggs disappear.

Having solved the chicken/egg conundrum, we move on to another breakthrough.

But first… we have to keep up with the dot-flow… making sense of the headlines as they appear. This from Associated Press:

Defense Secretary Pete Hegseth has directed the military services to identify $50 billion in programs that could be cut next year in order to redirect those savings to fund President Donald Trump’s priorities.

Other reports tell us that the ‘defense’ budget will be cut by 8% per year for five years = 40%.

Really. That’s what they say. Will that happen?

Not likely. Common Dreams:

In a statement issued Wednesday as headlines in major media outlets characterized Hegseth’s memo as a striking call for “cuts,” Acting Deputy Defense Secretary Robert Salesses described the proposal as a push for “offsets” that could be used to fund other military-related efforts favored by President Donald Trump, including an “Iron Dome for America” that experts have ridiculed as a wasteful “fantasy.”

CNN noted Wednesday that “Hegseth himself called for an increase to the defense budget one week ago.”

“While visiting Stuttgart, Germany,” the outlet reported, “Hegseth said, ‘I think the U.S. needs to spend more than the Biden administration was willing to, who historically underinvested in the capabilities of our military.’”

And this from Dave DeCamp:

Pentagon Says Hegseth’s Order Will Redirect Spending, Not Make Actual Cuts

The Pentagon wants to shift spending to Trump’s plan for an ‘Iron Dome for America,’ which will have a huge price tag and likely start a new arms race.

The whole ‘defense’ Establishment is set up to get bigger budgets, not smaller ones. And it’s very good at what it does – getting more money. That oughtn’t change anytime soon…

So, let’s let that dot metastasize while we resume our story, exploring why chickens (producers). eggs (output), and the people who buy them, should never lose sight of each other.

Also in the news in the last week is this from Charlie Bilello:

S&P 500 operating earnings are on pace to hit another record high (TTM), up 10% over the last year.

Today, we are in the ‘shoulds’ and the ‘oughts.’ Readers are forewarned: shoulds and oughts are not good ways to invest, at least not in the short-term. You might go broke while waiting for something that should happen to actually happen. But shoulds and oughts are important to understanding which way things are most likely to go, eventually.

A giant $850 billion object in motion (the ‘defense’ Establishment) ought to remain in motion until it is stopped by a more imposing object (such as bankruptcy or defeat in war).

Yesterday, we reported that corporate earnings are rising far faster than GDP. But corporate earnings oughtn’t go up faster than GDP… or not for long. In order for earnings to go up, sales must increase and/or costs must go down. So, we ask: from whom do these sales come? And from whom are these expense items cut?

The world of oughts is a tough place. It’s a place where you can’t have an egg without a chicken. And you must feed the chicken or it won’t give you any eggs. If you don’t, in a matter of time, you won’t have any chickens either.

As we have seen, most people are getting poorer. How then are they able to spend more money? Corporations must pay employees. And they must buy their ‘inputs’ from other corporations. Employees are an expense item – the biggest one for most businesses.

But employees are also the buyers of US output. How then is it possible to increase sales without also increasing wage expenses? You gotta feed the chickens. And how can you cut expenses without also cutting into other corporations’ sales and profits?

Profits, sales, wages, GDP – these things oughta be self-regulating; they should never get too far out of whack, one with another. And if one goes too high, or too low, it’s a good bet that it will soon get back into line with the others.

Our source, Charlie Bilello, also tells us the chickens are flying high:

Everything is up! Stocks, bonds, Reits, High yield, Low yield, big companies, little companies…cryptos, schmyptos…and…there are now nine US companies with a market cap above $1 trillion: Apple, Nvidia, Microsoft, Amazon, Google, Meta, Tesla, Broadcom, and Berkshire. Seven years ago there were none.

But in the real world of stuff… there is only so much time… so much capital… so many customers and only so many eggs, apartments and automobiles.

If ‘everything’ is up… where does the ‘up’ come from? Who has less so that the owners of ‘everything’ (assets) can have more?

To be continued.

Bill Bonner
Contributing Editor, Fortune & Freedom

For more from Bill Bonner, visit www.bonnerprivateresearch.com