Dust flux, Vostok ice core

Dust flux, Vostok ice core
Two dimensional phase space reconstruction of dust flux from the Vostok core over the period 186-4 ka using the time derivative method. Dust flux on the x-axis, rate of change is on the y-axis. From Gipp (2001).

Saturday, February 4, 2012

Can oil and agricultural land really replace gold?

Last time we discussed the ratio of government debt to gold holdings for select countries (primarily the PIIGS, but also the US and Canada). The article appeared on Zerohedge, and among the comments was this one:

Gold is just one asset class among many. TO divide debt by a single asset puts in play the grand assumption that gold is the only thing of value in the country that any creditor would want. I would argue that, while gold has its place, barring the breakdown of the financial system there are many other assets that are fungible with credit and paper money.
Re Canada: Canada has many fungible assets. How about dividing debt by oil reserves?  Or  fecund and cultivatable land? or other minerals and metals. 
The comment was made in response to the graph I had showing that Canada's debt was about 4000 x greater than its gold holdings.

There are points here worth addressing--some of which crossed my mind in an earlier article about gold mining and exploration. Ask geologists why they spend so much time looking for gold (at least 50%, by exploration expenditure) and your answers will probably be something along the lines of that is what pays the bills. But why should there be so much effort to finding gold, as opposed to, say, copper, nickel, aluminum, and zinc--all of which we use in much greater quantities than gold?

The answer is that gold, unlike any of the other metals listed above, is money. As money, it is irreplaceable, for reasons posited by Aristotle. In exploring for other metals, like lead or zinc, there is always a chance, however unlikely, that the industrial demand will fall dramatically due to technological advancement. Such risk affects every decision made from exploration to mine development for the different metals in different ways.

While it is true that gold is just one asset class among many, it is the only one that extinguishes debt. Credit and paper money merely transfer the debt from one debtor to another. Neither speak to the ability of the debtor to make good the debt.

What about other physical goods like oil or land? One problem is that, as I understand it, the oil and most agricultural land are private property and not something the government can properly use to pay down debt. But even if these things were public, rather than private property, they are not as good as gold for repaying debt. For one thing, the livelihood of Canadians depends on the present (and future output) of agricultural lands and oil fields. Selling them to repay debt would be like a carpenter selling his tools to repay his debts.

To tax the output of our mining, oil extraction, and agricultural fields to repay debt is to subject ourselves to a lower standard of living--which is the result in any case of incurring debts with no counterbalancing assets. Gold, as a non-productive asset, could have been sold without lowering our standard of living (were there any).

There is a lot of Crown Land which might be sold--although at what price is unknown. The only way to find out is to put it on the market. 

1 comment:

  1. That is possible agricultural land has a great potential. By the help of professional advice it can be replace in gold in profit talk.