Welcome back to our mailbag edition of Inside Wall Street with Nomi Prins.
That’s where, every Friday, we put your questions to Nomi and her team of experts.
First up this week, reader Robert C. has some ideas about how to fix the cheap-money distortion Nomi has been writing about…
Dear Nomi, congratulations on your new appointment. As you know, we have lost approximately 90% of our purchasing power since the Federal Reserve opened for business in 1914. It is time for a new gold standard.
As you know, gold cannot be devalued. As J.P. Morgan stated in his testimony before Congress in 1914, “Gold is money. Everything else is credit.” I would appreciate your views on this subject.
– Robert C.
Nomi’s response: Thanks so much, Robert! I believe that if we still had some form of a gold standard today, the Federal Reserve and other major global central banks would not have been able to build such massive books of assets… interest rates wouldn’t be so low… and overall cheap-money monetary policy wouldn’t be so much more helpful to corporations and mega banks than it is to average people.
What the gold standard provided until 1971 was a mooring for the creation of money supply. That’s because gold can’t be fabricated out of thin electronic air, like fiat dollars or yen or pounds can. That would have provided an implicit cap on inflation – or, as you put it, purchasing power relative to the dollar or any other fiat currency.
One of the interesting things I discovered while researching my 2014 book, All the Presidents’ Bankers, was that Wall Street was very much a factor in pressing the Nixon administration to take the U.S. off the gold standard.
The reason was simple. Since its inception, major Wall Street bankers sought the Federal Reserve to help them access cheap credit in exchange for keeping gold reserves there. But once they didn’t have to anymore, and they could keep paper money or debt in reserve instead, banks were free to take on more risk with their credit decisions.
This ultimately led to global credit crises in the late 1980s, 1990s, and of course, the 2008 financial crisis. The Fed and other central banks eventually went overboard in their manufacturing of money in the wake of that crisis – and now again since the Covid-19 pandemic. And that’s because they didn’t have to worry about a physical peg of any sort, meaning they didn’t need to consider any limits in advance.
If we had a gold standard today, I believe it would have curtailed the irresponsibility of excessively dovish monetary policy, as well as the private banking subsidies that central banks have provided.
That said, I think the chances of returning to the old gold standard are slim to none. I think there are better chances, though, of a blended gold standard, administered by the IMF as part of its special drawing rights (SDR) multi-currency basket.
Moving on, nuclear energy is on readers’ minds this week.
That’s because of contributing editor Eoin Treacy’s recent essay, When It Comes to the Green Transition, Nuclear Is the Best Option.
That essay ruffled some feathers with your fellow readers, including Andrew S…
Forget nuclear energy. Nuclear is a bad idea. Fission is dirty – waste products are a nuisance. Fission makes fuel for nuclear bombs – not desirable! Fusion is a failure – spend no more on this!
You did not mention Thorium fuel – at least this does not make nuclear bomb material. Free Energy is the ultimate Green Energy. You failed to mention it, so how much do you really know?
– Andrew S.
Eoin’s response: When I think about the future of nuclear energy, I mostly think about Generation IV designs. These are new nuclear reactors that consume less material, have no melt down risk, and produce much less high-level waste. These designs are inherently safe and use fuels like uranium, thorium, and or plutonium.
There is a lot of experimentation going on right now with many different reactors under construction around the world. Ultimately, the goal of lowering costs will focus on settling on a small number of designs and building lots of them. That’s why small modular reactors – like Generation IV designs – are such an attractive proposition.
I would caution against thinking energy will ever be free. It’s really a question of when you pay. With the classic utility model, you constantly pay reasonably small amounts. With solar panels, wind or geothermal, all the costs are upfront.
These options are a bit like timeshares. They look cheap at the beginning but costs can mount up with maintenance. Many renewable solutions need backup power. Regardless of how you get it, it is an extra cost.
Meanwhile, reader Bruce P. questions nuclear’s role in the Green Energy revolution…
Not mentioned in your biased article on nuclear energy are:
1) Nuclear energy is not renewable. If all electricity was generated by nuclear power, all known uranium reserves would be exhausted within one decade. Use of nuclear energy would only postpone the inevitable transition to renewable energy
2) How do you keep the nuclear waste out of the biosphere for 10,000 years while the radiation decays? Mankind has a very poor record for dealing with nuclear waste – it does not deal with it!
– Bruce P.
Eoin’s response: I agree nuclear energy is not strictly renewable. However, I would caution against falling into Jevon’s Paradox. William Stanley Jevons was a budding economist in the late 1800s who thought the U.K. would soon run out of coal. He failed to anticipate better mining methods and advances in technology. 100 years after his prediction, the U.K. was producing more coal than ever.
Bull markets in commodities are defined by the rising cost of production. Demand increases, as the available material is mined, prices rise. If demand continues to increase, the price will rise further until a new source of supply is found. That often comes as a result of technological innovation.
The shale revolution is a perfect example of that cycle in the oil market. 15 years ago, a lot of people thought the world would run out of oil. Today, we depend on a fuel mix to ensure supply security, and that will not change in future.
The world is about to see demand for electricity jump in a big way. Living standards are rising for billions of people around the world. At the same time, electric vehicle and battery demand is set to explode. We need lots of new generating and transmission capacity and soon.
As my colleague Laurynas pointed out recently, copper demand growth is about to experience a renaissance as battery demand trends higher. I think the price of the metal could more than double over the next few years. When we include the cost of carbon emissions into the mining process, materials are about to get a lot more expensive.
I am merely suggesting that nuclear energy should play a central role in ensuring we all get electricity whenever we want it.
A renewable energy future where people cannot afford to pay for it is not much of a future. Cheap, reliable supply is a lot easier with nuclear in the equation.
Switching gears, we’ll close out today’s mailbag edition with a question about silver.
It follows contributing editor Laurynas Vegys’s recent essay, This Overlooked Metal Soars When Inflation Is Rising…
Many articles have talked about the increasing shortage of silver, and the fact that most silver is derived from base metal production.
However, I haven’t heard anyone discussing the fact that most silver is epithermally deposited on the surface of the Earth… such as the deposits primarily found in Mexico. As you dig deeper, unlike gold, you typically get less silver.
Since base metal mines, like copper, are “long in the tooth,” I suspect that the amount of silver actually recovered per ton mined should also be in decline.
Could you address this issue in one of your upcoming articles on silver investing?
Most of us know that if silver demand increases, the supply cannot be easily ramped up, since most of it comes from base metal production. And base metal producers will not ramp up their metal production for a few grams per ton of silver.
However, this shortage becomes even more acute if silver yields are also dropping.
– Norman J.
Laurynas’ response: Thanks a lot for reaching out, Norman! You’re right in saying that a lot of silver on our planet is deposited in epithermal deposits. And Mexico, with its remarkable endowment of silver, is the prime example.
These deposits usually contain economic concentrations of precious metals such as gold (and silver)… and in some cases, base metals such as copper, lead, iron ore, etc. In other words, gold – not base metals – is a primary economic metal found in such deposits.
What does this mean? That it’s the price of gold that will largely determine whether the silver contained in these deposits gets mined. Keep in mind that while around 80% of silver is mined as a byproduct of other metals, most of that is also gold.
As you suggest, I’ll be sure to address all of this in greater detail when the opportunity presents itself.
And that’s all for today. Do you have a question that we didn’t get to?
Write us at [email protected], and then be sure to tune back in next week.
We may feature your question – along with Nomi and her team’s response – in a future Friday mailbag edition.
Senior Managing Editor, Inside Wall Street with Nomi Prins
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