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Gold vs Paper - A Tale of Two Cities

Commodities / Gold and Silver 2014 Oct 28, 2014 - 05:44 PM GMT

By: DeviantInvestor


This is a work of fiction with a few similarities to the reality we all know and trust, or … the reality that we think we know.

City A in a Paper World:

A financial genius had a plan!  He and his offspring implemented the plan over several hundred years.

  1. Charter a bank.
  2. The government authorizes this bank to create and print paper money, backed by gold or silver. (It took surprisingly little in bribes to convince the government leaders that this Bank was a wonderful idea.)
  3. The Bank accepts gold, silver and other valuables as deposits into its vaults, and then lends paper money, backed by those gold and silver deposits, to governments, businesses, politicians, and individuals.
  4. The debtors borrow paper money but are required to repay in gold.
  5. The Bank owners pay themselves huge salaries, become trusted confidents of government leaders, and pillars of the society. Wealth is transferred to the banker class.
  6. The Bank owners also “encourage” politicians to create wars and other costly programs, and to borrow from the Bank to pay for their adventures and excess spending. (Surprisingly little money is required in payoffs from the Bank to the politicians.)
  7. Debts increase, governments buy votes with promises, and the Bank becomes increasingly important in global affairs.
  8. The Bank also agrees to store gold from many other countries for “safe keeping.” The gold is never audited.  A few people wonder why it is never audited.
  9. So many debts are incurred by governments, businesses, and individuals that the money is transformed into paper, not gold, nor is it redeemable in gold. Of course, it is still “as good as gold.”
  10. More promises, more wars, more debts! The money is no longer backed by gold.  Prices and total debt rise even more rapidly.  The money is reissued as paper currency with no intrinsic value.
  11. More paper currency is created every day, and prices for food and energy rise to 10 times, perhaps 100 times, what they were a few decades ago.
  12. The Bank continues to create currency and collects interest on all the outstanding debts. Bank owners declare substantial bonuses for themselves and buy gold, knowing the true value of the paper they have been distributing to the populace.
  13. A few other people notice the massive creation of currency and the price of gold moves higher. This worries the Bank.  A new policy is implemented – the gold in the Bank’s vaults is gradually sold and of course the sale is called something else, like a swap, or a lease, or a scam, or deep storage.  This slows the price rise of gold.  The bank owners and other elites continue to stockpile gold to protect their own private wealth.
  14. Currencies become more digitalized and are easier to create, control and manipulate.
  15. Derivatives are created. They provide additional leverage to control prices and increase wealth for the banker class.  Greed intensifies and is richly rewarded.  However, the risk of another market melt-down of paper assets increases daily.  Denials and reassurances are issued by important people.
  16. Eventually the system of digital and paper currencies and debt is so bloated that it exceeds the wildest delusions in a typical Ponzi scheme. A reset must occur.  An excuse is required.  A scapegoat is desperately needed.  Call forth a diversion!
  17. The Bank owners contemplate many possible diversions – an epidemic, a nuclear attack, another ground war, a cyber-attack that crashes financial systems, an EMP, a huge scandal involving an increasingly useless national politician, a massive power failure, a 1,000 year drought, food riots, an earthquake, and more.
  18. The “reset” (some called it a crash, Armageddon, the apocalypse, or paying the piper) resulted in the middle and poorer classes losing most of their savings through inflation, their standard of living declined, and a few riots occurred. Most of the wealthy insiders owned gold before the reset that crushed the purchasing power of paper and digital currencies while the purchasing power of gold and silver rocketed higher.  It had happened before but few were aware until too late.
  19. More controls over transportation, food, energy, employment, currency transfers, and medical care were instituted to protect the people from the currently designated critically important threats.
  20. Few lived “happily ever after.”
  21. Repeat: This story is fiction.

City B in a Gold World:

  1. Money is either gold or silver. Currency units are backed by gold and anyone is welcome to exchange digital or paper currency units for physical gold.  Few bother to do so.
  2. The gold reserves that back all the currency in circulation are stored in massive vaults, and are audited each year.
  3. Governments do not go into debt for longer than three months. All government debts are paid at the end of the fiscal year.  Honest accounting is used and financial information is reported to the media.  If government overspends revenues in a year, politicians lose all retirement benefits.
  4. Without the economic resistance from high taxes, inflation, and a huge government, the economy and most residents prosper.
  5. If politicians want a war, they explain how the war will be financed, the supposed benefits of the war, where the money will come from, and the legislature votes. Victory and defeat are defined and measurable.  If the country is defeated in the war, the politicians who instigated the war are executed by a military firing squad while all other politicians who voted for the war are cast out of office with no pensions.
  6. Most politicians and citizens admit the system is deeply flawed but history has shown that other choices are often worse.
  7. Some people lived “happily ever after.”
  8. Repeat: This is a work of fiction.


Our fictional City A might resemble some major cities in the western hemisphere.  It is inhabited by regular people as well as politicians, rats, and central bankers.  Currency units are digital, purchase less every year, and are created in large quantities every day.  The political and financial elite control most of the government and the economy for their own benefit.  Economic statistics and financial TV continually assure the people that “it’s all good.”  The crashes of 2000, 2006, and 2008 caused many people to question the usual narrative.

City B does not exist.  Currency units are backed and redeemable with gold, the government runs a balanced budget, and politicians are not allowed to use tele-prompters.

A reset seems inevitable and possibly imminent.  As they say, the market always does what it is supposed to, but not when we expect it.  The next crash could be rather severe, unless financial TV is right this time and it truly is all good………

GE Christenson aka Deviant Investor If you would like to be updated on new blog posts, please subscribe to my RSS Feed or e-mail

© 2014 Copyright Deviant Investor - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

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