Gold Price Surge Possible Windfall For IMF
"...The IMF wants to grant some debtor nations forgiveness on their loans. But if the IMF writes these loans off its books, its balance sheet deteriorates. The IMF had wanted to sell some of its gold holdings - holdings that were donated to it from other countries, such as the U.S. - for a capital gain in order to offset the loss from loan forgiveness. But this gold sale plan came under criticism from some quarters, especially the U.S. House of Representatives. So, the IMF has come up with a Rube Goldberg plan that would essentially revalue part of the IMF's gold holdings at market value, thereby generating a capital gain without the actual sale of gold. The capital gain from this revaluation, then, would offset the loan write-off from the debt forgiveness. So, every dollar that the price of gold increases - it increased $26.20 cents today and about $56 since mid July - is another dollar of potential debt forgiveness.
Suppose the debtor country had to repay its loan to the IMF. To do so, its citizens would have to save more, consume less. When the IMF received loan repayments from the debtor country, it would presumably lend these proceeds to some other country or return to the donor countries some portion of their donation. (Fat chance for the latter!) The end result is that the citizens of the debtor country would cut back on their spending so that the citizens of some other country could increase their spending.
But if this IMF scheme gets the go-ahead from donor countries, it would give the IMF, in effect, the power to print money up to the limit of its gold holdings. The debtor country's citizens would not have to cut back on their spending because of the loan forgiveness. Thus, they could spend more and no one else need spend less. This however, would be inflationary in a global context. So the Fed might have one more reason to raise rates. How does the Fed raise rates? It sells some of its holdings of U.S. government securities. How does this affect U.S. taxpayers? Because the Fed returns to the Treasury the interest it earns on its holding of U.S. government securities - after expenses, of course - the Fed's sale of Treasury securities necessitated by the higher inflation would reduce the budget surplus.
Why has the price of gold surged in the past two days? Because European central banks said that they would halt gold sales over the next five years. Do you think that this no-sales pledge was taken to benefit the IMF? After all, don't you think that this gold-revaluation scheme by the IMF is an easier sell to G-7 taxpayers than going directly to the donor countries asking for more funds?
Normally, an increase in gold prices is thought to signal higher inflation. In this case, the rise in gold prices could be the cause of higher global inflation, not just the signal."
Paul Kasriel
Chief Domestic Economist
ntrs.com |
