Broken Rules for Fools

First, came the bad news. The Wall Street Journal:

Job growth last year was far worse than we thought.

The government has dramatically lowered its estimates for how many jobs the economy generated over the past two years.

The Labor Department’s Bureau of Labor Statistics on Wednesday said that the U.S. added just 1.5 million jobs in 2024, well below the previously estimated 2 million. In 2025, it said the labor market added only 181,000 jobs, versus the previously estimated 584,000.

Then came the good news, also from the WSJ:

The US adds 130,000 jobs in January, starting year off on stronger footing

More jobs?

Fewer jobs?

But our focus today is on gold.

In what was said to be the most memorable event at Davos this year, Mark Carney, former central banker and current Prime Minister of Canada, told the world that the ‘rules-based order’ was over, because the major rule maker has turned into the major rule breaker. And one of the first, and most important rules it broke, was the one that concerned the world’s money.

Context…

Gold is, first and foremost, a naturally occurring metal — Au 79 in the periodic table, with 79 protons and 79 electrons in each atom. Most everything in nature finds a use and for thousands of years gold has been useful as “money.” It fulfills Aristotle’s requirements. It is trustworthy, portable, and divisible.

It is also mostly useless. This is important. Because a useful metal would be priced on the basis of its usefulness. Iron ore, copper, aluminum — there are markets for each, and prices set by users. Ideally, real money shouldn’t have any purpose or value other than as money; it is meant to keep track of the values for other things, not to have a value of its own.

Another key attribute of gold is that it is relatively rare. You can’t add to the quantity of above-ground gold without digging into the ground and hauling it out. In a sense, the value of gold is a measure of the time and energy that goes into mining and refining it. It’s a natural limitation. You won’t spend $1,000 mining an ounce of gold that sells for only $100. But when the ‘price’ (that is, the value of the goods and services that it will ‘buy’) rises to $2,000, you might spend as much as $1,900 looking for it, adding to the above-ground supply and thus keeping prices more or less stable.

All of which is to say that gold makes good money.

Pieces of paper with ink on them do not. They are portable, divisible, and reasonably durable. Alas, they are not rare or limited. As Ben Bernanke explained, above, the feds can produce as many as they want at ‘essentially no cost.’

But pieces of paper proved as attractive as a hand grenade on a playground. Early banks printed up pieces of paper saying, in effect, that they could be used to claim the gold in their vaults.

The paper could also be exchanged for goods and services, just like gold. Then, of course, banks saw that they didn’t actually need to keep all of that gold in their vaults. They could use a ‘fractional reserve’ system. Customers were unlikely to claim all the gold at once. All the bank needed was half as much gold…or 25%…or even 10%…or less, just enough to cover the usual demand for it.

What this did, in effect, was to enable the bank to lend money it didn’t have and earn interest on it. It made the banks complicit in counterfeiting…‘printing’ pieces of paper and calling them ‘money’ that was ‘backed by gold reserves’ that weren’t there.

Economist Murray Rothbard argued that this practice was criminal fraud and should be outlawed.

But it caught on. And today, everybody does it. The US imposes no reserve requirement (in March of 2020 the Fed set reserve requirements to 0% for all depository institutions in the US and has left them there since). Thus did this ‘credit money’ — fake money coming out of nowhere — come to dominate the US economy.

Fake money proved to be an even more effective scam in the hands of government. People were wary of banks’ gold certificates — effectively limiting the supply of them. Banks sometimes went broke. In the Great Depression, for example, some 9,000 of them were judged insolvent. But a government “can’t go broke” because it can always “print up” lawful money.

After WWII, the US led the world in trying to create a ‘rules based’ rather than brute force based, order. There were rules for war…for trade…and rules for money too.

The Bretton Woods agreement set up the dollar as the world’s go-to currency. At the time, the dollar was ‘as good as gold’ because the US pledged to exchange its dollars for gold at any time.

But remember, the key requirement of gold-backed paper is that it be actually limited. Another key requirement, barely mentioned, but which will play a big role in our story, is neutrality.

Gold didn’t care where it came from or whose hands it passed through. Was it mined by child labor? Did it pass through the central bank of an enemy country? Did it come from a country with a positive trade account with the US?

Gold didn’t give a damn. But the Biden and Trump administrations did!

More to come, on how the US broke the rules…and how the broken rules will now cause the US to go broke.