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Trump's Golden Chance to Beat Fed at Its Own Game

golden dollar symbol over hundred dollar bills
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Thursday, 29 November 2018 05:02 PM Current | Bio | Archive

How Trump Can Trump the Fed ​ (Part Three of Three)

In part one of this three-part article, we discussed how King Dollar and the Federal Reserve pose the biggest obstacles to a higher stock market and thus the success of the Trump agenda.

In part two, we evaluated the various options available to President Donald Trump to counter the strength of the dollar and Fed policies, concluding with the simple, elegant, and non-controversial solution of having the gold price “marked to market” on the books of the Treasury and the Fed. We now ponder impact and real world implications that this change would cause.

Before looking at the impact of such a move, it may be important to understand why “marking gold to the market price” has never been done before. An understanding of history is and how the Fed was created is imperative to this evaluation. The simple answer is that since its inception in 1913, the Federal Reserve Bank has maintained its power by undermining gold.

The Federal Reserve Bank was created in 1913. It was the brainchild of J.P. Morgan and was created as a result of a financial crisis and the Panic of 1907. At this time in our country’s history, there was no national currency. Regional banks provided certificates, or “gold notes,” printed against reserves of gold held at these regional banks. With no universal system in place, currency and credit was variable from institution to institution.

Faith is essential to currencies to be accepted. At this time in history, the poor balance sheet of one bank could infect the good balance sheet held by others. Bank runs were a common event. The financial Panic of 1907 was dire and evidence of a system that mandated a change. Had J.P. Morgan not stepped in and provided liquidity for all of the major regional banks, the recession could have turned into a long-term depression. After “bailing out” the banking system, Morgan vowed to never be put in that position again. Six years later his brainchild, the Federal Reserve Bank, was created.

The new Central Bank would issue a national currency called Federal Reserve Notes. It’s the currency we use today. Its formation began from the following foundation. The reserve bank issued paper notes against reserves of physical gold with a 40% backing and a mandate to keep the currency stable.

The new central bank faced a major challenge since individuals were slow to trust the new monetary system. During this time gold and paper notes were interchangeable. Over time, people trusted more and the paper notes became widely used and accepted. The roaring 1920s, a decade of explosive credit, led far more notes printed versus their physical gold backing. As a result the faith necessary for the reserve notes to remain stable was nearly lost by the year 1933. The Great Depression fostered doubt about the new paper currency and found bank depositors turning in their paper notes and withdrawing physical gold. Faith was being lost in the currency and physical gold rose in value above the paper currency. As depositors demanded their gold, a “run” on the physical gold held in reserve at the central bank occurred.

Under Executive Order 6102, Franklin Delano Roosevelt made owning gold bullion and gold certificates illegal within the continental United States. Not only did the order save the remaining gold held in Reserve at the central bank, it also demanded that citizens would only be allowed to use the paper reserve notes and they were forced to turn over their physical gold in exchange for the single universal domestic currency. As time passed what occurred was the genesis of the mentality that physical gold was not relevant or necessary. This move was not without it’s detractors and faith in the reserve banking system would take years to truly be accepted. In the process the United States became the largest holder of gold reserves of any nation, the primary reason the U.S dollar became the world’s currency 11 years later at Bretton Woods.

They say “he who has the gold makes the rules.” In 1944, when determining the new global monetary system, the U.S held all the cards because we held the majority of the gold with over 20,000 tonnes. The result was that the world’s currencies would peg itself to the U.S dollar, and the dollar would be pegged to gold. The Bretton Woods agreement allowed for the U.S to be the world’s greatest superpower the entire globe need follow.

In 1971, again facing loss of faith in the currency as foreign governments were exchanging their U.S dollars for physical gold, without the approval of Congress or the Judiciary, Richard Nixon directed Treasury Secretary John Connelly to close the gold window and thus turned the U.S dollar into a fiat currency where it has remained for 47 years. Gold, which had been the foundation for the currency was officially irrelevant.

This brief history is necessary to make the following conclusions. Gold has effectively been used in the past to directly impact the value of the U.S dollar. The use of gold has also come via presidential order and without the need for sign off or agreement or checks and balances or any other branch of government.

Not only is there precedent, there is nothing whatsoever standing in the way of Trump should he want to take this action.

Marking gold to the market price lacks any controversy whatsoever and therefore its subtle beauty. The price of gold is the price of gold. Simply changing that from $42.22, its 1971 price, to its current price of $1,222 does nothing with the exception of how it appears on the books and how it is perceived. By marking gold to market Trump will not be changing anything other than that.

The impact for this easy move however could be substantial. The number one and immediate impact of marking gold “to market” on the balance sheet of the Federal Reserve is that it would directly counter the Federal Reserve’s quantitative tightening, something Trump is eager to do.

While the Fed is taking $300 billion off the balance sheet in the next year, this move would add back over $300 billion with the simple swipe of a pen. This alone would be a major victory for Trump against Jerome Powell and the Fed. With this one, non-controversial move Trump would be able to offset the strengthening U.S. dollar. It would, perhaps even more importantly, also undermine the Federal Reserve by making gold relevant again.

All of this leaves us to ponder the ultimate big idea for Donald Trump. With the G-20 meetings upcoming, and the world’s leaders all set to meet in early 2019 in the United States, what better time for Trump to propose resetting the entire global monetary system with gold? Can you say Mar-a-Lago Accord?

Adam Baratta is the author of the national best selling book "Gold Is A Better Way." He is one of the leading voices in the field of investments and precious metals today. Adam is the co-owner of Advantage Gold, the highest rated precious metal firms in the country, and the creator of the educational member site, www.goldisabetterway.com.

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AdamBaratta
With the G-20 meetings upcoming, and the world’s leaders all set to meet in early 2019 in the United States, what better time for Trump to propose resetting the entire global monetary system with gold?
trump, fed, gold, dollar
1202
2018-02-29
Thursday, 29 November 2018 05:02 PM
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