Glenn Stevens Talks Bitcoin & Competing Currencies

Some topics of interest were raised in an interview with Glenn Stevens (Governor, Reserve Bank of Australia) which was published on Friday at the AFR. 

The conversation on competing currencies stems from an initial question about Bitcoin (my emphasis):

Stutchbury: What do you make of Bitcoin and does that potentially have any effect on operation of monetary policy if those sort of artificial currencies or means of exchange became prevalent?

Stevens: I’m still trying to understand it to be honest but as best I can see it would be open to you to create a currency called the Michael and get people to buy it and you could promise to, you know, only issue so much of it and if people had confidence in that they could use that as a kind of numeraire. You could measure things in Michaels. You could buy and sell them.

Stutchbury: We call them “Stevens”.

Stevens: Yes. Well, and it might or might not hold its value depending on whether you keep the promise. You could also get speculative excesses in it I would imagine where its market value went up and down as people speculated on its future value and we see elements of that, I guess, with Bitcoin. I – and I think there are several other, aren’t there, similar things around so it’s a very interesting space. I don’t think it has caused us a material problem yet. I suppose it’s possible that any of these potential – these innovations financially potentially if they take off enough could – it will come back to, does it become an object of speculation with a lot of leverage behind it like a tulip mania or not. I don’t know the answer to that. I don’t know. It is certainly fascinating.

Stevens later clarifies (rightfully so) that cryptocurrencies are limited by a computer algorithm. So, unlike the initial example Stevens provides, there isn't need to worry about them holding value based on whether the issuer keeps a promise on how many will be created as it is built into the protocol. 

Fiat currencies (money declared by government to be legal tender) on the other hand are not limited by an algorithm or physical backing, so are at risk of losing their value as central banks engage in various monetary policies which either directly increase the money supply or are intended to encourage borrowing which results in the same. In fact the RBA's monetary policy includes a promise to devalue the currency (with no end date):

"The Governor and the Treasurer have agreed that the appropriate target for monetary policy in Australia is to achieve an inflation rate of 2–3 per cent, on average, over the cycle." RBA

Furthermore the measure that the RBA uses as the basis of inflation is the 'Consumer Price Index' (CPI) rather than an accurate measure of the increase in Australian Dollars circulating (which are mostly borrowed into existence through private and public debt at a higher rate than the CPI).

Bitcoin has an inflation rate (increase in total Bitcoins, not a cost of living index), which is currently higher than many fiat currencies. However, the rate is known in advance, it will drop over time so that within the next decade it will be lower than the RBA's measure and there will come a time when no further Bitcoins will be created.

[Click Chart To Enlarge] Source

In the response above Stevens goes on to say that cryptocurrencies may become an object of speculation 'with a lot of leverage behind it'. I would suggest there is already a lot of speculation behind the recent rise in many of their prices, but unlike traditional assets it is very difficult to do so using leverage. A bank won't lend you money to speculate on the price of Bitcoin (at least not knowingly, you may get away with using an unsecured personal loan or credit card), but they will allow you to leverage 20:1 (i.e. 95% LVR) to purchase a house. Which object of speculation using leverage is more likely to pose a risk to Australia?

In the next question the interviewer poses a question around competing currencies...

Stutchbury: Could it be that the new technology will potentially take us back to a world where there were competing currencies in any one economic system?

Stevens: Well, there are competing currencies now. I mean, you know, you can hold US dollars or Euros or whatever in Australia completely freely if you want to and there would be nothing to stop people in this country deciding to transact in some other currency in a shop if they wanted to. There’s no law against that so we do have competing currencies. Maybe – maybe there will be a world in which currencies based on some computer algorithm to limit supply as opposed to physical gold or something. There have been many such currencies through the ages. The Pacific Islands used to use shells, didn’t they? So there have been many bases for currencies and in the end, I suppose, the ones that will, and this will be a good note to finish on, the ones that survive will be the ones that hold their value which is why we have an inflation target which we’re hitting.

For starters, Australia does not allow competing currencies. The Reserve Bank Act 1959 clearly states:

Other persons not to issue notes
             (1)  A person shall not issue a bill or note for the payment of money payable to bearer on demand and intended for circulation.

And even prior to this Act the issuance of private notes was discouraged through the Bank Notes Tax Act of 1910 which imposed a tax of 10% per annum on all banknotes issued (by private banks).

Granted Bitcoin and other cryptocurrencies don't circulate in the form of notes, however I suspect if the creation and circulation of Bitcoin was specific to a single country then regulatory authorities would crack down on it (if they were able to, take for example the recent shutdown of physical Casascius Bitcoins in the US). It's only Bitcoin's globally distributed & digitally stored/transmitted nature that allows it to circulate outside the control of regulatory bodies.

If we ignore the fact that it's not legal to circulate private currencies and concentrate on Stevens reference to using foreign currencies in Australia, it still remains largely impractical if we are to remain within the bounds of the law. It's true that a business or individual may legally agree to transact in a currency other than the Australian Dollar:

"Every sale, transaction or dealing relating to money, or involving the payment of, or a liability to pay, money in Australia is to be done in Australian currency unless it is done, or the parties to the sale, transaction or dealing agree that it will be done, in the currency of another country." RBA

However, all parties involved are also required to report any capital gains or losses that occur as a result of foreign currency transactions. Foreign currencies are not considered a personal use asset or collectible, so fall under the title 'other assets' and are not excluded from Capital Gains Tax (CGT). Here is what the ATO has to say on foreign currency transactions:

Forex realisation event 1 occurs when there is a disposal from one entity to another (that is, a change in the beneficial ownership happens - capital gains tax (CGT event) A1 - of foreign currency, or a right or part of a right to receive foreign currency.

The time of the event is when the foreign currency, or the right or part of the right is disposed of.

You make a foreign exchange (forex) realisation gain if you dispose of foreign currency, or a right or part of a right to receive foreign currency for more than you paid for it, to the extent that the gain is due to fluctuations in the value of the foreign currency. This will usually be when the proceeds on disposal of the foreign currency, measured in Australian dollars, are more than the cost of acquiring the foreign currency, measured in Australian dollars.

You make a forex realisation loss if you dispose of foreign currency, or rights or parts of rights to foreign currency for less than you paid for them. This is to the extent that a loss is due to fluctuations in the value of the foreign currency. ATO

Can you just imagine the administrative nightmare that would result from performing regular transactions in a foreign currency and having to maintain a record of whether you made a gain or loss as a result of fluctuation in the currency markets? It is simply not practical.

Bitcoin is not immune from the same requirements, earlier this year the ATO commented specifically on the topic (although the comments have a business focus, it does not exempt individuals from the same requirements):

"The tax legislation that applies to conventional commercial transactions also applies to transactions undertaken via the internet or with emerging payment systems.

Paying for goods and services with new types of payment tokens still means that the seller may need to account for GST or include the income in their business tax return.

The buyer may also need to keep records of the value of the purchase if it represents a business expense or if the purchase is an asset which may be subject to a capital gain or loss.

The value used by the buyer and the seller in these transactions needs to be identical and consistent with market prices.

It is most important that people engaged in any type of transaction with Bitcoin or other payment systems keep detailed records and evidence about what trades they make and the source of any assumptions about the value of any transaction in Australian dollars.

This will minimise the risk of there being a difference of opinion between a taxpayer and the ATO over the correct valuation and treatment of a transaction for taxation purposes." Business Insider

Ironically Stevens ends his interview on a point, 'the ones [BB: currencies] that survive will be the ones that hold their value' and in the same breath says 'which is why we have an inflation target which we’re hitting'. How Stevens equates holding value with hitting an inflation target is beyond my comprehension, it seems more like an oxymoron.

The suggestion from Stevens that we have competing currencies in Australia is, quite frankly, a joke. For true competition the laws revoking legality of private currencies need to be scrapped as do capital gains events on foreign currency transactions and for that matter Gold as I argued in an earlier post 'Let Australians Save in Gold Instead of Debt'.

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BB.

 

Can the United States pull off a beautiful deleveraging?

As Ray Dalio points out in a recent video, "borrowers debt levels have simply gotten too big and can't be relieved by lowering interest rates", he explains that there are several ways to tackle a deleveraging which has to occur once we reach this point (cut spending, reduce debt, redistribute wealth & print money):

Dalio's video suggests that in a 'beautiful deleveraging' it takes a decade or more for debt burdens to fall and economic activity to get back to normal (2-3 years of deleveraging/depression, followed by 7-10 years of reflation).

Others believe that the deleveraging will occur over longer period of time, for example David Llewellyn-Smith of MacroBusiness recently wrote:

The GFC was and is the pivot point in a structural adjustment that has only just begun, probably has decades yet to run, and before it’s over will likely change our world to something that looks more like the nineteenth century than our super fast modern version (in the sense of slower moving capital not widespread typhous!).

Put simply, we’re in a long term deleveraging phase for the global economy following a long term leveraging phase. What this means is that pretty much for the rest of your working life, the world is going to be regularly convulsed as its debts are saved against, inflated away, defaulted upon, and even sometimes repaid! It will shake both private and public sectors repeatedly and will afflict both developed and developing economies.

This is neither good nor bad. It is neither bearish nor bullish. It just is.

My response to this post, in the comments below was:

The view that we will see decades worth of readjustment makes the assumption that we don’t see a major event (planned or unplanned) change the entire financial / monetary system as we know it. It makes the assumption that after half a century of imbalances building we will be able to rebalance slowly, but surely, with only the odd crisis to contend with (none of which will spin out of control resulting in a larger collapse or a change to the status quo). I simply don’t buy it.

I think it's very unlikely that the US (or in fact many western economies which have a high level of debt to GDP) will be able to delever so easily this time around. US total credit market debt to GDP is down from the 2009 peak, however has a long way to fall before returning to levels that could be considered sustainable if interest rates were to normalise:

In 1933 US total debt credit market GDP topped at 300% (assisted by a 46% decline in GDP starting in 1929) and took roughly 20 years to bottom:

At the beginning of the Great Depression in 1929, the bulk of US debt was corporate debt tied to the investment bubble in auto manufacturing, electric utilities, household appliances, radio and other sectors that made up the "new economy" of the Roaring Twenties. Corporate debt to GDP collapsed from over 100% in 1933 to under 30% by the mid-1940s. Household debt fell from 50% of GDP in 1933 to roughly 15% in the same time period. Much of the drop in total debt to GDP came during the 1933-1936 period, when the dollar was devalued by 50% and economic growth was very high (albeit from an extremely low base). The ratio rose again when the economy relapsed in 1937-38, but resumed its decline when the economy recovered modestly in the pre-war years. The Dynamist

Today, the US is in an even more precarious position than during The Great Depression. The level of debt to GDP is much higher and more importantly the US is not able to easily devalue the dollar as they did in 1933 when they adjusted the Gold price from $20.67 per ounce to $35 per ounce.

Many other countries left the Gold standard in the 1930's in order to devalue their currencies along with the US. It's not so easy today, the US isn't able to devalue their currency against a reserve asset like Gold as their currency is the defacto global reserve currency. They are only able to compete with other countries to devalue their currency all the while putting on the facade that they have a "strong dollar policy".

The US faces the challenge of trying to reduce their debt burden at the same time as receiving criticism from China and elsewhere over attempts to kick start economic growth & inflation to reduce their massive debt burden (the below just one example of many where they have been criticised for their actions):

A senior Chinese official said on Friday that the United States should cut back on printing money to stimulate its economy if the world is to have confidence in the dollar.

Asked whether he was worried about the dollar, the chairman of China's sovereign wealth fund, the China Investment Corporation, Jin Liqun, told the World Economic Forum in Davos: "I am a little bit worried."

Jin said he was confident that the Obama administration and Congress would ultimately solve the debate over the so-called fiscal cliff, "but of course the printing machine will have to slow down for people to have full confidence in the dollar". Jan 2013, Reuters

It seems to me that the US faces an impossible situation, as they attempt to reduce their significant debt burden, while retaining the US dollar as global reserve currency, a luxury which has allowed them to over spend as long as they have.

It seems to me what the US and the rest of the world could do with is a global reserve asset against which to devalue fiat currencies & extinguish their debt.

You can follow me on Twitter. I'm usually sharing links and opinions daily (@BullionBaron). You can also CLICK HERE to signup for free email updates.

 

BB.

 

A Bullion Company In Australia Hiding $130M Liability

This story slipped past my radar around a week ago... the Australian Tax Office, Australian Federal Police and Australian Crime Commission recently executed search warrants on premises associated with companies operating in the gold bullion and precious metals industries. The following is an excerpt from the AFP media release:

It is alleged the companies fraudulently claimed GST credits and failed to report GST correctly. They formed syndicates to conceal the true nature of their activities and to avoid detection.

As a result of the investigation the ATO has issued garnishee notices and GST amended assessments with liabilities of more than $130 million.

ATO Deputy Commissioner Greg Williams said the ATO takes GST fraud seriously.

“The majority of businesses do the right thing, however the ATO will pursue those that choose to engage in illegal behaviour.”

“Further audits of industry participants will be undertaken in the near future and we will continue to work closely with other government and law enforcement agencies to pursue those suspected of abusing the system,” Mr Williams said.

Bron Suchecki provided brief comment on his personal blog:

GST is a Australian sales tax of 10% that applies to precious metals that do not meet the definition of investment. It likely that the fraud involves scrap gold or silver where GST is payable. Note that it is being classified as "organised crime" which allows the police to invoke proceeds of crime laws so the people behind it can't hide behind the bankruptcy of the companies involved.

One thing I found interesting about the story is that the media release refers to investigating "companies". The explanation that the companies formed syndicates to conceal the nature of the activities suggests to me they are probably linked through ownership/mutual interest. So while the fraud may involve scrap metal (as Bron points out), the group of companies hiding the activities could very well include bullion dealer/s who provide services to the retail buying public.

There has been a little follow up in mainstream media, the state these companies are from has not been identified (The West), the AFP did not respond to requests for further information (ABC News).

Given that the ATO has issued garnishee notices it's possible they wish the companies to continue operating and have the money owed returned over time:

We can issue a garnishee notice to a person or business that holds money for you, or may hold money for you in the future. The garnishee notice requires them to make payments directly to us to reduce your debt. The payments may be a percentage of your wages or we may issue a notice for a lump sum amount. The notice will also specify when payments are to be made. ATO 

While this might be the best outcome for the ATO who is seeking to recover the funds (what are the chances they receive payment if the companies are publicly disclosed), it leaves bullion buying Australians in a precarious position. I know I wouldn't feel comfortable placing a large (or for that matter any sized) order with a company who has $130,000,000 in outstanding liabilities and what if these companies offer storage facilities for their clients? I'd suspect any customers holding unallocated bullion with these companies (assuming they offered such services), would be behind the ATO when lining up for a payout (in the event they were liquidated).

If the companies involved in the investigation were prepared to defraud the tax office of $65 million, then in my mind they shouldn't be allowed to continue operating, they are a risk to small time investors who are just looking for a safe asset, free of counterparty risk (ironic we often bear such risks in the purchase, delivery and storage of precious metals).

If anyone has any information that could lead to the confirmed identification of a company or companies involved in this investigation, please drop me an email (bullionbaron@gmail.com).

I welcome comments on this post, but in the interest of avoiding any lawsuits please do not speculate on the identity of the companies in question. And until the identity of these companies is revealed, tread carefully when buying or storing precious metals in Australia (care you should be taking anyway!).

You can follow me on Twitter. I'm usually sharing links and opinions daily (@BullionBaron). You can also CLICK HERE to signup for free email updates.

 

BB.

 

Gold As Instrument Of International Settlement

Peter Schiff posted a recent article called 'A Green Light for Gold?' where he explored whether we might be nearing the end of the US Dollar as world reserve currency (and explained this should benefit the price of precious metals):

The reality is that Washington has now committed itself to a policy of permanent debt increase and QE infinity that can only possibly end in one way: a currency crisis. While the dollar's status as reserve currency, and America's position as both the world's largest economy and its largest debtor, will create a difficult and unpredictable path towards that destination, the ultimate arrival can't be doubted.

He started and ended the article referring to a road map:

It is rare that investors are given a road map. It is rarer still that the vast majority of those who get it are unable to understand the clear signs and directions it contains. When this happens the few who can actually read the map find themselves in an enviable position. Such is currently the case with gold and gold-related investments.

Sometimes maps can be very easy to read. If the dollar is doomed, gold should rise.

The article implies that the free markets will take the price of Gold higher. However an interesting find in the WikiLeaks cables by Frank Knopers and shared by Koos Jansen on his blog points to a (1974) road map for a post USD (as reserve currency) world where Gold could be used for international settlement. Is this map still relevant (at the time it was just a discussion rather than proposal)? Could we see Gold used in this fashion and at what price would Gold need to be in order to facilitate international settlement?

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FOLLOWING IS TEXT OF STATEMENT MADE TO C-20 DEPUTIES' MEETING ON MAY 7 BY DUTCH TREASURER-GENERAL OORT RE ZEIST MEETING OF EC FINANCE MINISTERS APRIL 22 AND 23 ON GOLD:

I HAVE BEEN ASKED TO REPORT ON AN INFORMAL DIS- CUSSION - AND I EMPHASIZE THE WORD INFORMAL, REPEAT INFORMAL DISCUSSION - WHICH THE MINISTERS OF FINANCE OF THE EEC HAVE HELD ON APRIL 22 AND 23 AT ZEIST ON THE SUBJECT OF GOLD.

BEFORE I REPORT TO YOU ON THE OUTCOME OF THE DISCUSSION I WOULD LIKE TO MAKE CLEAR THAT IT HAS RESULTED NEITHER IN A FORMAL DECISION ON THE PART OF THE EEC COUNTRIES NOR EVEN IN A FIRM PROPOSAL.

MADE IN A WIDER INTERNATIONAL CONTEXT, WHAT CAME OUT OF ZEIST WAS A CONSENSUS ON CERTAIN SUBSTANTIVE PROPOSITIONS THAT ARE TO BE FURTHER EXPLORED BEFORE THEY ARE SUBMITTED TO A NEXT MEETING OF THE COUNCIL OF MINISTERS OF THE EEC. IF AT A LATER STAGE THE COUNCIL REACHES AGREEMENT ON A CERTAIN POSITION, THE FURTHER PROCEDURE COULD BE THAT THE EUROPEAN COMMUNITY FORMULATES A FORMAL PROPOSAL ON HOW TO DEAL WITH THE PROBLEM OF GOLD IN THE PERIOD BEFORE THE REFORM OF THE INTERNATIONAL MONETARY SYSTEM.

IN ZEIST, MINISTERS HAVE AGREED ON TWO GENERAL PROPOSITIONS. FIRST, THEY HAVE RE-ASSERTED THAT THE SDR SHOULD BECOME THE PRINCIPAL RESERVE ASSET IN THE FUTURE SYSTEM, AND THAT ARRANGEMENTS FOR GOLD IN THE INTERIM PERIOD SHOULD NOT BE INCONSISTENT WITH THAT GOAL. SECOND, THEY HAVE AGREED THAT SUCH INTERIM ARRANGEMENTS SHOULD ENABLE MONETARY AUTHORITIES TO EFFECTIVELY UTILIZE THE MONETARY GOLD STOCKS AS INSTRUMENTS OF INTERNATIONAL SETTLEMENT.

THERE WAS A CONSENSUS AMONG MINISTERS THAT AN INCREASE OF THE OFFICIAL GOLD PRICE, ALTHOUGH IT MIGHT SERVE THE SECOND OBJECTIVE, WOULD BE INCONSISTENT WITH THE FIRST. IN ORDER TO MOBILIZE MONETARY GOLD AS AN INTERNATIONAL RESERVE ASSET, THEY HAVE AGREED THAT:

1. MONETARY AUTHORITIES SHOULD BE PERMITTED TO BUY AND TO SELL GOLD BOTH AMONG THEMSELVES, AT A MARKED-RELATED PRICE, AND ON THE FREE MARKET. THE MONETARY AUTHORITIES WOULD HAVE COMPLETE FREEDOM TO BUY OR TO SELL GOLD, AND WOULD HAVE NO OBLIGATION WHATEVER TO ENTER INTO ANY PARTICULAR TRANSACTION.

2. CERTAIN DELEGATIONS ARE OF THE OPINION THAT GOLD TRANSACTIONS WITH THE FREE MARKET SHOULD NOT, OVER A CERTAIN PERIOD OF TIME, LEAD TO A NET INCREASE OF THE COMBINED OFFICIAL GOLD STOCKS.

3. IN ORDER TO APPLY THESE PRINCIPLES, VARIOUS PRACTICAL SOLUTIONS CAN BE ENVISAGED. TWO WERE MENTIONED IN PARTICULAR. ONE IS THAT MONETARY AUTHORITIES PERIODICALLY FIX A MINIMUM AND A MAXIMUM PRICE BELOW OR ABOVE WHICH THEY WOULD NOT SELL OR BUY ON THE MARKET. THE OTHER CONSISTS IN CREATING A BUFFER STOCK TO BE MANAGED BY AN AGENT WHO WOULD BE CHARGED BY THE MONETARY AUTHORITIES TO INTERVENE ON THE MARKET SUCH AS TO ENSURE ORDERLY CONDITIONS ON THE FREE MARKET FOR GOLD.

4. THESE ARRANGEMENTS WOULD BE ADOPTED PROVISIONALLY AND WOULD BE REVIEWED IN THE LIGHT OF EXPERIENCE.

IN CONCLUDING, MR. CHAIRMAN, I WOULD LIKE TO EMPHASIZE ONCE MORE THAT WHAT I HAVE JUST SAID IS NOT REPEAT NOT A PROPOSAL BY THE EEC, BUT A REPORT ON AN INTERIM-STAGE IN THE DISCUSSIONS. MINISTERS HAVE PER- MITTED US TO MAKE THIS REPORT IN ORDER TO INFORM YOU AS EARLY AS POSSIBLE OF THE DIRECTION IN WHICH A CONSENSUS AMONG THE EEC COUNTRIES IS EMERGING. THEY EXPECT DEPUTIES TO INTERPRET THE STATUS OF THE INFORMATION IN THE LIGHT OF WHAT I HAVE JUST SAID.

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Your views welcome in the comments section below.

You can follow me on Twitter. I'm usually sharing links and opinions daily (@BullionBaron). You can also CLICK HERE to signup for free email updates.

 

BB.

 

Let Australians Save in Gold Instead of Debt

A hundred years ago, in 1913, the first Australian currency note (10 Shillings) was issued (as a blue banknote). Payable in Gold, the note was equal to a half sovereign gold coin (3.99g of 22k Gold, roughly A$165 spot value today). Australia formally departed from the Gold standard during the great depression in the early 1930s when the Commonwealth Bank Act of 1932 made Australian currency notes no longer convertible into Gold. In 1931 the Australian currency was pegged to the British Pound, in the 1970s it was pegged to the US Dollar, followed by a basket of trade weighted currencies before being floated in 1983.

Today the Australian dollar is not redeemable for Gold, it is not pegged at a fixed exchange rate against other currencies and the number created doesn't have a fixed limit (a la Bitcoin), today most Australian dollars are borrowed into existence.

I have seen it suggested that a bank must receive a deposit from which it can then lend a majority portion. In fact when someone borrows money from a bank, the bank can create new money (or credit) out of thin air. It will credit the borrower with a deposit (which might be paid in form of a cheque or deposit into the borrowers account) and will also create a loan account for which the bank charges interest on the created money (this is an asset for the bank, earning it income). 

When a bank lends money, the deposit ends up in the hands of the borrower without anybody else having less, hence we have just seen an increase in the total money available. In today's monetary system 'money is debt', it is backed by the ability of borrowers to repay their loans, that is something that should strike fear into the hearts of savers given the reckless abandon with which banks lend today.

Australian dollars can be borrowed into existence by the government running a deficit (borrowing to spend more than it receives in revenue) or via the private sector. Government debt today is relatively low, but has been on the rise since the GFC:

Increases in the government debt to GDP ratio are typically due to two occurrences: world wars (1914 to 1918 and 1939 to 1945) and responses to economic downturns caused by private debt-financed speculation: the 1890s, 1930s, mid-1970s, early 1980s, early 1990s and the GFC in 2008. The rise in the ratio before the 1890s was due to colonial government mass construction of public infrastructure. Philip Soos, Prosper

As can be seen in the above chart, private debt has been a much larger contributor to money growth over the last 40 years. Private sector debt includes household borrowing (primarily for mortgages), investment & business loans amongst other sources.

With private debt having increased at an alarming rate over the last two decades to levels not yet seen in Australia's history (relative to GDP) it should be no surprise that the government and banks are making preparations to socialise the losses across all bank depositors, should the need ever arise.
 

It's not hard to work out where most of the money created by the private sector has flowed...

By any measure Australian land valuations are at nose bleed levels relative to historical norms using several measures, with The Economist indicating our house prices are overvalued 46% relative to rents and 24% relative to incomes:

So where does this massive push of money (debt) into land values leave savers?

Many savers probably point to an increasing bank balance every year and think that their savings are growing, but if we look at real returns after inflation and tax, even the official story shows they are lucky to be breaking even:

That wouldn't be so bad (breaking even, maintaining purchasing power with the money they put aside for spending later), that is if CPI was an accurate measure of the rate at which their purchasing power was declining. For those intending to save money and purchase property in the future, their purchasing power has been eroded more significantly. The removal of land costs for owner-occupiers from the CPI in 1998 assists with hiding the loss of purchasing power in the above chart:

The resulting MacroStats cost-of-living index is plotted below against the headline CPI... We can again see how this measure tracks the official CPI very closely until 1998. Since 1998 it is 0.73 percentage points higher on average (or 3.8%), and in the period 2001-2008, it averaged 1.3 percentage points higher (or 4.4%pa). That gives you some idea of how significant the 1998 methodological shift in the CPI was in disguising housing inflation and creating a feedback loop with lower monetary policy. Rumplestatskin, MacroBusiness

To measure loss of purchasing power you really need to have a look at how the value of your savings has performed relative to what you intended to purchase with those savings. Those saving in Australian dollars over the last 15 years, with the intention to purchase property, have been severely disadvantaged by the drop in their purchasing power.

Money is primarily understood as a unit of account, a store of value and a medium of exchange, but there doesn't necessarily need to be one monetary asset to perform all these roles. The below is an extract from a Freegold blog called 'Flow of Value':

Which tool is best for which job is a subjective decision, best left to the sovereign entity (whether individual or state) evaluating their own money. The criteria used in making this subjective assessment may be infinite, but the most important of these is time: how long does one anticipate holding this money? If the answer is short term (ie. "spending money", used for current expenses), then the best form to hold it in is a fiat currency. If the answer is longer term (ie. "savings", a surplus over and above what is required as shorter term "spending money"), then the best form is gold, to protect ones buying power.

In my opinion individuals should have a choice in what money/currency they choose to save in (and/or transact with).

In the United States some libertarians have proposed to allow Gold & Silver to act as a 'competing currency' to fiat, as explained in this bill (H.R. 4248 (111th): Free Competition in Currency Act of 2009):

Free Competition in Currency Act of 2009 - Repeals the federal law establishing U.S. coins, currency, and reserve notes as legal tender for all debts, public charges, taxes, and dues. Prohibits any tax on any coin, medal, token, or gold, silver, platinum, palladium, or rhodium bullion issued by a state, the United States, a foreign government, or any other person. Prohibits states from assessing any tax or fee on any currency or other monetary instrument that is used in interstate or foreign commerce and that has legal tender status under the Constitution. Repeals provisions of the federal criminal code relating to uttering coins of gold, silver, or other metal for use as current money and making or possessing likenesses of such coins. Abates any current prosecution under such provisions and nullifies any previous convictions.

Many Gold bugs make the argument for a return to a Gold standard, however one has to question the need for this if individuals are able to maintain their own personal Gold reserves to protect their purchasing power. The need for fiat currency to be backed by Gold becomes irrelevant if anyone can save or exchange Gold freely with no red tape and taxes.

What attributes make Gold the best monetary asset to free up for individuals use to protect purchasing power? Jordan Eliseo touches on one of the most important in a recent market update:

Apart from the critique about its lack of yield, the second most commonly heard objection to investing in gold, or valuing gold at all, is that it has ‘no use’.

But what does this criticism really mean? Certainly it is accurate that gold has no (or at least minimal) industrial use. But it is an incomplete observation, for whilst gold ‘lacks use’ from the standpoint of a traditional commodity, this ‘drawback’ is of course precisely gold’s virtue.

Any commodity that did have an industrial use (and was the refore consumable), would by nature suffer from an uncertain overall supply, making it unfit as a monetary asset as unarguably the most important pre-condition for good money is stability. 

The short term price of Gold is dictated on an exchange where paper based contracts trade in place of physical metal, so price stability is not something afforded to Gold in the present climate. However, Gold does offer long term stability in price as shown by consistently returning to similar valuations relative to goods and other asset classes (including, but not limited to house prices, oil & stocks).
 
Another way Gold offers stability is in it's new supply, in fact the low increase in overall supply each year has resulted in a remarkably stable amount of Gold per capita over the last century (as previously covered on the blog):
 

1900: 1.65 billion people / 1.54 billion ounces = 0.935 oz Gold per capita
2010: 6.97 billion people / 5.46 billion ounces = 0.783 oz Gold per capita

One of the main barriers holding back people from having the freedom to use Gold as money today (either as a store of value, medium of exchange or both) is the crippling paperwork and gains/losses that would arise in the current environment, Keith Weiner expanded on this in a recent article (US centric, but same principal applies in Australia):

The capital gains tax renders it inconvenient to use gold and silver as currency.

We should repeal the capital gains tax on gold and silver. If the paper dollar serves our modern economy better than gold then people will continue to choose it. Most economists, notably Nobel Prize winner Paul Krugman, are opposed to any form of gold standard. They think that a purely paper money is good for us, and that gold won’t work. However even without coercive laws, people choose cars over horses and mobile phones over telegraphs. There is no need to force people to do what’s good for them.

So most economists have it backwards. It is the fiat dollar that does not suit a modern free market economy. People will migrate toward gold and silver when we remove the artificial barriers. This experiment will solve the mystery, and liberate people to hold and spend their money as they choose.

Capital gains tax (and in some cases GST) would make it near impossible for Australians to use Gold (and/or other precious metals) as a competing currency. Purpose should play a part in whether an asset is taxed. Consider the following scenarios...

First scenario: A family buys a $300k property in Suburb A, prices rise to $400k and they want to move to Suburb B which is also $400k and risen by the same amount. Should they have to pay tax on the $100k profit (when they sell the first house to buy the next) even though they are not better as a result (and in fact will be worse off only due to moving suburbs)?

Second scenario: A business man intends on buying an $800 laptop from overseas. While saving to purchase the laptop the Australian dollar plunges in value and as a result he is able to purchase the laptop for $80 less, should he have to pay tax on this material gain? What about if the Australian dollar had strengthened and he had to pay $80 more, should he be able to claim that as a capital loss or tax deduction?

Third scenario: A family is saving for a home in Australian dollars from 1998 to 2013, their purchasing power in order to buy a home has been decimated due to prices rising well above the level of official inflation and the after tax return on their savings. Once they have purchased the home should they be able to claim the purchasing power they've lost as a deduction/capital loss?

Fourth scenario: A family is saving in Gold (with intent to purchase a home) from 2005 to 2013 and as a result of doing so their purchasing power has increased due to a strong gain in Gold relative to house prices. Should they have to pay tax on the gain when they sell their Gold to buy the house?

Hopefully you can see the point I am trying to make. Tax isn't always appropriate, especially in a situation where people are using Gold (or another currency for that matter) as a medium of exchange or savings vehicle.

Give Australians a choice, let us save in Gold instead of debt.

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At the start of the year I posed a suggestion to the Liberal Democratic Party (forum link, requires registration to view) that they consider a precious metals policy to attract a group of voters who are disenchanted with Australia's political landscape and have a mostly libertarian philosophy. The suggestion was initially met with positive feedback:

"The LDP is always interested in attracting new members / voters to its platform, so any policy idea that achieves that aim and accords with our principles would be welcome.

I'll need to educate myself on the subject before I can add to your discussion, but your thread is definitely not pointless and I hope we can develop a meaningful policy that meets the aims stated in your original post."

However, after spending several hours collaborating with the Australian precious metals community, writing a policy and then clearing up some finer points with questions posed on the LDP forum I was provided the following disappointing response (from another senior member of the site/party):

"What you are arguing is a variation of a return to a gold standard.  There are plenty in the party who agree with that, and also advocate an end to fiat currency.

We have discussed whether we should do anything about it in policy terms. The conclusion is that there are no votes to be won and the major parties would not pinch the policy, so it's not really worth the trouble.

The only way I can see it gaining acceptance is if you made it very easy to understand and implement. Consider also how our members would explain it to their friends."

So the above post aimed to bring some focus to to the reasons it might be a good idea to allow Gold to act as a competing currency to the Australian dollar.

The core policies I would like to see a political party adopt in order to enable the above (and to tidy up some other precious metals related inconsistencies):

1. Repatriate Australia's Gold Reserves (99.9% are held overseas at the Bank of England).

Australia's Gold is stored with the Bank of England (as previously discussed on this blog). With only 1 tonne (of 80) on loan there seems little point leaving the Gold on foreign soil. Bringing it back to Australia would also act as a deterrent to the Reserve Bank of Australia (RBA) selling our Gold, a move which would not surprise given light of recent comments from the RBA's Assistant Governor, Guy Debelle: “If you think about the intrinsic value of gold, there’s not a lot. Gold often has a high price because people believe that other people believe that it’s worth a lot. When you describe other markets like that, the word ‘bubble’ gets thrown about.”

2. Increase the scope of the definitions "precious metal" & "investment grade bullion" (for taxation purposes) to include all four precious metals in the ISO 4217 currency code standard.

There are four precious metals with a currency code; Gold (XAU), Silver (XAG), Platinum (XPT) & Palladium (XPD). The first three are specifically defined for taxation purposes in Australia as "investment grade bullion" (providing they meet required finesse). Palladium is not listed, however wording in Australian tax law leaves the potential for Palladium to be included: "Any other substance (in an investment form) specified in the regulations of a particular fineness specified in the regulations." This change would specifically add Palladium to the definition of "investment grade bullion" for taxation purposes (aligning it with the other three precious metals) for uniformity.

3. Increase the scope of the definitions "precious metal" & "investment grade bullion" for taxation purposes to include coins containing Gold, Silver, Platinum or Palladium (any finesse) which are now or once were legal tender of Australia or any other nation and which trade as a function of the spot price.

Precious metals are often traded in widely recognised investment forms which don't meet the strict scope defined by the Australian Taxation Office. Investment grade bullion below 99% for Platinum, 99.5% for Gold and 99.9% for Silver is subject to Goods and Services Tax (GST). This means dealers are required to charge GST on coins which many hold for investment purposes, but aren't exempt from GST, for example American Gold Eagles (91.6% Gold), Gold Sovereigns (91.6% Gold) and Round Australian 1966 50 Cent Pieces (80% Silver). Such legal tender coins which trade as a function of spot price (consistently trade at spot + x% premium) would be made exempt from GST.

4. Repeal Part IV (currently suspended) of the BANKING ACT 1959 which allows for the confiscation of Gold from Australian citizens by requiring them to return personal Gold Holdings to the Reserve Bank of Australia at a price set by the Reserve Bank.

While this section in the Banking Act 1959 has been suspended since 1976, there are provisions in Part IV to confiscate Gold from Australian citizens (as described in detail here by Bron Suchecki). Even though suspended, repealing this part of the Banking Act would be a show of good will that the government has no intention of confiscating the Gold of Australian citizens in the future.

5. Introduce an exemption for Capital Gains Tax on "precious metal" & "investment grade bullion" and securities fully backed by investment grade bullion.

Where an individual is using Gold (or any other investment grade bullion) as a savings vehicle or medium of exchange, no capital gains tax would be applicable.

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BB.