Our Resource Expert Summarizes His Case For A New Gold Standard…
You don’t have to be an astute beltway insider to realize that the United States is at a crossroads.
Political, economic, social, and otherwise.
And whether we’re talking about trade wars, Covid-19, an emerging China, or the war in Ukraine, another thing has become clear: nations must control the natural resources necessary to secure not only their economic growth but also their national security.
That’s why I was so interested to see Dr. Stephen Leeb weigh in with his thoughts in a recent issue of his premium newsletter, Real World Investing.
It’s been a while since we’ve checked in with Dr. Leeb. So for those of you who may not be familiar, you should know that Dr. Leeb is one of the foremost economic forecasters in the country and is the author of several bestselling books.
In his latest book, China’s Rise and the New Age of Gold, Dr. Leeb offers a potential win-win solution for a rising China and the U.S., centered around a new monetary order.
In short, a new global gold standard.
It’s a refreshing take on a familiar refrain. And as Leeb argues, this solution will not only secure peace and mutual prosperity between the U.S., China, and the world in the years to come — but also produce outstanding returns for investors.
I reached out to Dr. Leeb’s team and asked them to summarize the thoughts he shared with his Real World Investing subscribers recently.
Here’s what he had to say…
The Case For A New Gold Standard
The U.S. experienced its greatest economic times in the half-century after the Civil War and the 30 years after World War II. It’s no coincidence that in these periods, the dollar was anchored to a gold standard, ensuring that economic growth was tied to productivity. Growth was aligned with deriving output from units of human labor and units of natural resources.
Once we left the gold standard, we took natural resources for granted. Other than for brief oil scares in 1973, 1980, and more recently in 2008 and now today, we simply haven’t paid attention.
Each year since 1996, the Department of Interior has published an annual review of important commodities and minerals. In 1996, of the 47 commodities it then followed, there were 23 in which the U.S. supplied over 50% of its needs and 24 for which we imported more than 50%. In other words, we had close to a 50/50 ratio between relative self-sufficiency and relative dependency.
Fast forward to the 2022 report, in which 64 commodities were reviewed. In only 15 of them – less than 25% – were we relatively self-sufficient. Many of the ones for which we depend on other countries are critical to our technologies, perhaps not to the extent that energy is but still enough so that without them, our computers would be slower and much of our sophisticated weaponry would be far less advanced.
Our nonchalance about commodities over the past 50 years reflects the privilege that we’ve had with the dollar as the reserve currency. We’ve been able to deal with any problem simply by throwing money at it. Why worry about a commodity whose name you can’t even pronounce when you just can print the money to buy it? At least, that’s been the case since we left the gold standard in 1971.
But we are starting to pay a price for our indifference to resource scarcity. The Ukraine war and our sanctions, which have backfired on us and even more so on Europe, are revealing the costs to us of so blithely relying on unchecked money creation as the driver of economic growth.
It is past time to pay attention to these many and far-reaching costs, which I briefly summarize below (and detail in my latest book, China’s Rise and the New Age of Gold). It’s important to understand what the costs to us have been, and what we’ve lost, because it explains why the U.S. will actually benefit from a new monetary order linked to gold. It will force us to return to the kind of disciplined long-term thinking that once made us such a great country.
Last Chance To Cooperate
The first cost can be seen in the relationship between real wages and productivity. Until the early 1970s, the relationship between the two was close. After we abandoned the gold standard, though, real wages diverged negatively, almost flat-lining. Productivity growth slowed – on average by about 30% – but still continued to rise.
The slowdown in productivity growth was a natural consequence of the rising focus in the U.S. on near-term returns rather than on the longer-term projects that are critical drivers of long-term productivity. In other words, productivity was playing second fiddle to the economy’s major driver, money. The breakdown in the correlation between real wages and productivity was also a consequence of our suddenly having no checks on how much money we could spend.
Essentially the government had the chance to increase its size, and it seized the opportunity. We could dispense with Eisenhower’s warning that every dollar spent on the military was a dollar less for a hungry person. That was true, courtesy of the gold standard, when Eisenhower famously warned about the military-industrial complex. But once off the gold standard, it was easy to create enough money to fund both guns and butter.
It started with the Great Society and the war in Vietnam, which was really the beginning of the end of the gold standard, and continued with the Cold War and the growth in entitlements. And except for a few short years in the 1990s, it has continued through the present. An irony is that while guns and butter may have enabled us to win the Cold War, it has ultimately left us in a much more tenuous position today. As we face off against the world’s less developed countries, we have been weakened as vicious circle after vicious circle has led to a highly indebted and fractured society.
Spending On The Wrong Things
Massive government spending, including on consumer protections, the environment, and regulations, was largely responsible for creating an enormous financial-legal colossus on a par with the military-industrial complex. One result was that money that in the past went to wage earners as a result of increased productivity now went to the layer of society in charge of managing all the newly imposed regulations.
The holy grail of a successful economy became the stock market. It is interesting that for the postwar period through the early 1970s, the country’s richest man was J. Paul Getty, who made his money in resources – in particular, oil. Today the wealth of the country’s richest comes from the value of their stock holdings. And in this extremely elite group, there are no resource titans.
Corporate heads became incentivized to make shareholders as rich as possible. Rather than being motivated to support critical research in areas such as material science, corporations went after the low-hanging fruit of consumer spending. Most of the major winners of modern technology in the U.S. have been companies dedicated to incentivizing consumers to spend either on goods or by exchanging information with one another.
It’s true that massive amounts of money also have been spent on both health care and education. But most of this spending has gone to support enormous bureaucracies, while health and education levels for most Americans declined. Today in terms of life expectancy and educational achievement, the U.S. is ranked near the bottom of the developed world. Although the U.S. spends tremendous amounts of money on research and development, that spending is by corporations looking for immediate paybacks. That stands in contrast to the pre-1970s era, when most R&D was supported by the government, for example, subsidies for Bell Labs, spending that led to virtually all the technology we enjoy today.
The end result is that in today’s society, the elite depend on continued spending by those Americans who have to go ever more in debt to keep that spending up. Our once-great country is becoming one in which growth comes only from ever more money.
I hope I have given you a taste of why it is so essential that we opt for the discipline of a gold standard that with a lot of work and bargaining could bring the world together. This is the way we can beat the greatest challenge mankind has ever faced, that of resource scarcity. If the Ukraine war serves as an eye-opener, a vehicle for getting us back to a path we never should have abandoned, then in the end it may have served some purpose.
Editor’s Note: Dr. Leeb and his team have discovered a little-known Executive Order that has gone unreported in the mainstream media. And thanks to this order, the United States is set to become one of the world’s largest producers of a coveted resource.
Investors have a rare chance to get in on the ground floor, offering a chance to lock in life-changing gains before the crowd catches on.