Here is an absurd yet incomplete story about our nation's $300 billion in gold reserves:
Why Uncle Sam is hoarding gold
The Treasury says it won’t tap its gold stockpile, even to avoid a default
This week I asked [the people running the United States Treasury] if they would consider selling some of the country’s gold reserves to pay the bills if the budget crisis escalates later this month.
Their response? Not a chance.
The Treasury has considered that option, among the many others, and rejected it. “Selling gold would undercut confidence in the U.S. both here and abroad,” a spokeswoman said, “and would be destabilizing to the world financial system.” She was quoting an official position laid out last year in a letter to Senator Orrin Hatch, but so far apparently little noticed on Wall Street.
So skipping interest and principal payments would be less destabilizing then selling some gold? That is nonsense, as the writer notes.
What the writer does not explore is that a sale is not necessary; in principal, the Treasury can engage in a simple repo, or gold loan, in which they lend gold to another entity (our friends at the Bank of England, or is that special realtionship over?) in exchange for cash with an obligation to repay the loan and reclaim the gold at a later date.
Now, I am not a gold bug so I have not yet pinned down the details of whether the gold reportedly owned by the Treasury is in fact currently unencumbered and available for repo. But there is simply no way the Treasury is refusing to sell that gold for the faux-stability reasons cited in this article. And let me add, if they have already lent out their gold for cash (at market prices) then selling it won't raise notably more cash; that would be like selling a house that was 99% financed in order to raise money.
I do glean this from a recent NY Times Q&A:
Q. Does the Treasury Department have any options to keep paying some or all of its bills at that point?
A. The inspector general of the Treasury Department said in a 2012 report that when the department approached the debt ceiling in the past it considered multiple contingency plans, including selling the government’s gold or its portfolio of student loans and reducing payments across the board by a set amount. Both alternatives were deemed to be impossible.
Naturally the link provided by the Times to the Treasury report is not working for me but my relentless sleuthing continues apace as I go for the gold; here is the Orrin Hatch letter cited by MarketWatch and which guided the Times coverage.
And now that I see the letter, it is more of the same nonsense. Treasury claims that sales of gold, housing loans or student loans at fire sale prices would disrupt markets and harm the long term interests of the taxpayer. Left unexplored is the alternative of repoing out gold, housing loans or student loans. With cash management skills like this I wonder whether these guys even remember to cash their own paychecks. Ahh, it's probably direct deposit... Totally automatic and beyond their control!
MORE NON-ANALYSIS HERE: The WSJ blithely explains why we can't sell our gold but overlooks the repo question.
STILL NOT A GOLD BUG, BUT... Here is the Treasury's account of our International Reserve Position as of Sept 20 2013. They report 261.499 million fine ounces of gold, unchanged from Dec 30, 2011. At $1300 an ounce that is roughly $340 billion. The descriptive line is "gold (including gold deposits and, if appropriate, gold swapped)", so I presume this would reflect gold encumbered by swaps, if any. I should add that every other line item (e.g., SDRs or yen) have changed a bit.
Well. Either Bernie Madoff's spirit lingers at Treasury and this gold reserve is secretly obscurely encumbered elsewhere (possible!), or the Treasury could lend out a quick $300 billion somewhat painlessly.
Of course, that presumes that the rodeo clowns who oversaw the implemention of Obamacare and told war widows to whistle Dixie have the skill and the will to avoid a financial market debacle.
ARE ALL THE ENRON PEOPLE STILL IN JAIL? One might object that a gold repo is simply a secured Treasury borrowing and is therefore limited by the debt ceiling. When I was young there was some question as to whether forward sales and purchases were loans or something else, so I would hope the Treasury legal team could generate enough fog to cover this. And if a House Committee tries to impeach someone for extending their authority and saving the US debt market, well, bring it on.
But if the lawyers can't get behind a straight gold swap, two alternatives spring to mind, either of which could be fleshed out by any of the Enron alumni.
First, have treasury sell the damn gold to an entity or agency they control; FNMA springs to mind. Then have FNMA arrange the gold swap. This works if FNMA debt is not counted in the debt ceiling, and I am quite sure it is not.
Or, use puts and calls. For example, sell 200 milliion tonnes of gold to the Bank of England ('BoE') at $1,300 an ounce, raising $260 billion. BUY from the BoE a deep in-the-money call, e.g, at $1,000, giving the Treasury the right to buy the gold back in January. And since the price of gold might crash, SELL to the BoE an out-of-the-money put giving them the right to sell the gold back to the Treasury at $1,000 in January.
That put is pretty clearly a new security arguably caught up in the debt ceiling limit but... it only has a market value of roughly 4 percent, or $8 billion. So Treasury can raise $260 billion on the gold sale, apply roughly $60 billion towards the call purchase and apply another $8 billion towards retiring (rather than rolling) a maturing T-bill. That frees up debt ceiling space to issue the put and nets the Treasury about $190 billion. next January either the gold will be called by the Treasury (if the price is above $1,000) or put by the BoE; either way, it ends up back with Treasury, and they will need to be able to pay for it. Or reprise the transaction.
Yes, it does not look exactly like a smooth-sailing ship, but that is a lot of money.
A BUG, OR A FEATURE? I am advised that Islamic banks avoid the prohibition on loans with interest by using repo. But given Obama's puzzling past, this idea might not have a prayer...