Contact us
CALL US NOW 1-888-GOLD-160
(1-888-465-3160)

If Gold Backed the World’s Debt

  by    2   1

If all the world’s debt were backed by gold, the US dollar price of the yellow metal would be nearly $34,000. Frank Holmes of US Global Investors explains the math in an insightful article.

  • 5.9 billion ounces = total above-ground gold in world.
  • At $1,181 per ounce, that’s about $7 trillion.
  • Total global debt = $200 trillion.
  • $200 trillion divided by 5.9 billion = $33,898.

It’s an eye-opening number in a world where the gold standard reigned supreme for most of modern history.

15 06 22 gold to debt


The United States alone is responsible for 9% of that global debt, with a current debt load of $18 trillion. That’s currently 74% of GDP. A new report from the Congressional Budget Office says that will rise to 107% by 2040.

Everyone agrees that this is an unsustainable trajectory. The CBO itself puts it mildly, “further sustained increases could be especially harmful to economic growth.”

Of course, there’s little chance of central banks returning to a gold standard in the near future. And if they do, it’s definitely not going to be a 100% backing. So what is the value of thinking of the price of gold in terms of total global debt?

It reminds us of one of the key reasons for having a gold standard in the first place – it “limits the amount of debt that can be issued,” as Holmes puts it.

Famed Austrian economist Henry Hazlitt explained this concept in an article from 1979:

Let us begin with a hypothetical illustration. Suppose we have a world in which the leading countries have been maintaining a 100 percent gold standard, that they begin to find this very confining, and that they decide to adopt a fractional gold standard requiring only a 50 percent gold reserve against bank deposits and bank notes.

“The banks are now suddenly free to extend more credit. They can, in fact, extend twice as much credit as before. Previously, assuming they were lent up, they had to wait until one loan was paid off before they could extend another loan of similar size. Now they can keep extending more loans until the total is twice as great. The new credit, plus competition, causes them to lower their interest rates. The lower interest rates tempt more firms to borrow, because the lower costs of borrowing make more projects seem profitable than seemed profitable before. Credit increases, projects increase, and there is a ‘boom.’

“So reducing the gold reserve requirement from 100 percent to 50 percent, it appears, has been a great success. But has it? For other consequences have followed besides those just outlined. Production has been stimulated to some extent by lowering the reserve requirement; but production cannot be increased nearly as fast as credit can be. So as a result of increasing the credit supply, most prices have practically doubled. Twice the credit does not ‘do twice the work’ as before, because each monetary unit now does, so to speak, only half the work it did before. There has been no magic. The supposed gain from doubling the nominal amount of money has been an illusion.”

Hazlitt goes on to explain that a recession and financial panic inevitably follows. Eventually, as a way of solving these problems, bankers propose to reduce gold reserve requirements again and extend even more credit.

Indeed, that’s precisely what has happened. The US completely left the gold standard in 1971. So when the Great Recession hit in 2007, bankers were able to create new debt and paper money with ease.

The growth of debt in our modern world would curl Hazlitt’s toes. McKinsey & Company shows that global debt increased $57 trillion between 2007 and 2014 – nearly 60 percent!

15 06 22 global debt growth

Holmes reviews the US domestic numbers since the key date of 1971:

Forty-four years ago, when the U.S. made the switch to a fiat currency system, the federal government owed $399 billion. Since then, outstanding debt has ballooned 4,411 percent to $18 trillion—more than twice the amount of all the gold in the world. Such massive debt levels can be reached only in a fiat currency system, where money is easy, virtually limitless and unsecured by anything tangible.”

15 06 22 us debt to gdp

Government and Keynesian economists are adept at playing down the long-term problems of large debt-to-GDP ratios. However, the future of the global economy may bear little resemblance to the past.

What will happen as Asia – especially China – comes to play a larger role in global finance and the gold markets? What if China begins to directly back its yuan currency with even a small fraction of its unknown and ever-growing gold reserves? These are questions rarely discussed in the financial media or by central bankers, who have grown complacent in the easy-to-manipulate, fiat world of the past 40 years.

Gold is unlikely to shoot up to $33,000 anytime soon. However, the amount of gold being mined continues to shrink, while global debt continues to rise. Long-term investors know these fundamental facts provide a solid foundation for gold’s growth.

Get Peter Schiff’s latest gold market analysis – click here – for a free subscription to his exclusive weekly email updates.
Interested in learning more about physical gold and silver?
Call 1-888-GOLD-160 and speak with a Precious Metals Specialist today!


Related Posts

Gold Serving as a Lifeline for Indians During Credit Crunch

Gold has become a lifeline for Indians in the midst of a severe credit crunch. When the state-run lender refused to extend Babasaheb Mandlik credit, he used his wife’s gold jewelry as collateral for a loan in order to buy cotton seeds before the summer sowing season window closed.

READ MORE →

Uncle Sam Is Spending Like We’re In Recession; What Happens When We Really Are?

Last week we got the updated federal budget deficit numbers. At $867 billion, the 2019 fiscal year budget shortfall has already eclipsed last year’s deficit of $779 billion. The out of control spending and spiraling deficits are concerning enough on their own terms, but they become absolutely horrifying when you consider that these budget shortfalls […]

READ MORE →

Yield Curve Inverts Flashing Recession Warning; Stocks Plunge

The yield on the 10-year Treasury fell below the yield on the 2-year for the first time in 12 years, stoking recession fears and tanking stock markets. Yield curve inversions have preceded all nine recessions since 1955.  This was the first time the 10-year Treasury yield has dropped below the 2-year yield since June 2007 […]

READ MORE →

China Adds 10 More Tons of Gold to Its Hoard

the country of china shown on a globeChina bought gold for the eighth straight month in July, adding another 10 tons to its rapidly growing hoard. The recent purchases boosted the People’s Bank of China’s gold reserves to 62.26 million ounces – about 1, 945 tons.  China has added about 94 tons of gold to its stash over the past eight months.

READ MORE →

The Fed Has the US Economy on Life Support

The Federal Reserve has the US economy on monetary life support and Daily Reckoning managing editor Brian Maher says it will never again breathe on its own. As hedge fund manager Kyle Bass put it, the economy is trapped within the inescapable tractor beam of zero percent interest rates.

READ MORE →

2 thoughts on “If Gold Backed the World’s Debt

  1. Rupert Atkinson says:

    Revaluing gold is the sensible option. Banning cash will be a disaster, but if it is in their game plan, and it must be if they are discussing it, then the more desperate they get the more it is likely to happen. Their are so many negatives for the average joe and freedom to banning cash.

  2. My understanding of the US’s debt to GDP ratio is 18.2 to 17.7 over 100% and that does not include the unfunded liabilities of SS, Medicaid, Medicare, Fannie Mae, Freddie Mac, Student Loans, etc. etc. which is another 127 trillion or more.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Call Now