I noticed yesterday that gold has soared above $5200 per ounce, yet the U.S. government’s gold stockpile is still booked at a mere $42 per ounce, making up over $11B at that low price.
The Fed holds gold certificates* so it effectively owns this gold, and its gold certificate account makes up part of the asset side of its balance sheet, thereby making up a very small part of the collateral against which Federal Reserve Notes are issued. (Bullion coins, as I understand it, are not minted from this stockpile; instead the Mint procures the gold for that purpose from the open market.)
So what would happen if it was decided to value the gold stock at its market value of $1T? It’s currently a bit more than that, but $1T is good round number.
What would the fiscal results of this be with regard to inflation and the USD exchange rate?
Would inflation diminish, and the dollar rise in value because it would have more “backing”, even if said increase is comparatively miniscule?
Would inflation increase on the assumption that the government would now be enabled to spend more?
Or would there be some totally different result?
And a bonus question: Do other countries typically book their gold stockpiles at far below market value? Or not at all, simply regarding it as a valuable strategic asset without assigning it a monetary value?
*Just book entries now, not the real paper certificates
An additional question - does it really matter? The US national debt is about $38.9T so how much of a difference would it make to call it $37.9T?
Recall during the shutdown threats when Biden was president, there was a discussion of minting a $1T coin to carry on the work of government. “Look, we have $1T in cash, we can keep spending!”
My completely non-economist opinion - Inflation usually is a result of too much money circulating, so saying “oh, we have $1T more in the bank” has no effect unless it results in even greater spending. there may be some adjustments in the market allowing for this possibility, but in general, if it’s business as usual spending-wise, it would be business as usual inflation-wise.
The real question would be, what if they start selling those gold reserves, adjusted beforehand or not? My off-hand guess, less debt floating around, interest rates on bonds get lower, etc.
I agree it’s a worthwhile question, but from what I gather, not being an economist but just hearing the news, it seems that perception is everything. The USD might be perceived to have that tiny bit more of gold-based value.
Most economists will agree that the current prices of everything, including the price of a dollar, already reflect all publicly available information. This information is already publicly available. A change in accounting methodology like this should not have any effect on supply and demand and price.
For tin-pot nations, inflation results from printing money. Since there’s not enough to pay for all the crabs legs, lobsters, and fruit baskets, or civil servants and tanks, they print money instead. When the rest of the country sees there is plenty of money for those paid by government, they raise their prices to get a share of that and compete for goods with well-paid government types, resulting in all aorund inflation.
The USA does not do this. Instead, they issue government bonds to make up for shortfall revenues. (Essentially borrowing against next decades’ tax revenue). The interest rate is seen as the market’s calculation of factors before the bond matures, like the anticipated inflation, future tax revenue from the nation’s economic activity, odds of being paid back, odds of bond rates in future that may be better or worse, etc.
As Saffer mentions, odds are that buried in that calculation is the option of the USA selling it’s gold reserves if it really had to, and - obviously - at current market value. Whether it’s on the books now at the current value is a trivial issue.
The only time I’ve seen the book value an issue, was with some old traditional corporations. A&P and Greyhound come to mind. generally accepted accounting principles said to carry assets on the books at their purchase value. Those companies carried their properties at book value, despite having acquired downtown properties at 1930’s prices. By the 1980’s the share price did not reflect massively increased property values, making a takeover lucrative when those properties were sold.
I say nothing would happen. The uses the US government have for gold are marginal, limited to commemorative coins. The US went off the gold standard during the Great Depression and suspended all convertibility in 1971. There’s no reason the markets should or would care about this.
There are occasional proposals to sell off a share of US gold holdings. But that’s neither here nor there for the OP.
Inflation would not change. The exchange rate would not change.
Here’s a question: who is making the change in valuation or is calling for it? Is it the President? The Secretary of the Treasury? The Chair of the Federal Reserve? And moreover, why are they doing it? I can imagine the markets moving by a small amount if they thought that the shift in policy cast light on future policies that actually matter. So if the President is prepping the markets for a sale of gold, perhaps that’s a signal that he’s less serious about the underlying budget deficit of the US. This would only matter in a context where the deficit trajectory was unclear.
Maybe there would be a way that a daily move in the market could be attributed to this policy announcement. In the press. I suspect though that the move would be too small to distinguish from the daily noise, meaning the effect may not existed in the first place.
A sale of gold probably would not affect interest rates or the money supply, because the Fed targeting of interest rates, with purchases and sales of bonds if necessary (or just the setting of the fed funds bracket) would counteract any such pressures.