There are a number of possible resolutions to the world debt crisis and to the titanic debt of the USA. Going through the political calculations and game theory of the timing and final resolution is frankly beyond my ability. However, with the dollar index and trade weighted dollar near all time lows, one possible resolution to prevent the dollar from an eventual collapse would be for the US to reopen the gold window for foreign creditors to allow them to exchange dollars for gold.
This would simultaneously impose (again) some kind of limit on the trade deficits that can be run by the US. The simplest way to accomplish this is to revalue the gold on the Fed balance sheet. The Federal Reserve Act of 1913 put a limit on the total amount of credit and currency that could be issued by the Federal Reserve. Here is the pertinent part of section 16 of the Federal Reserve Act:
Every Federal reserve bank shall maintain reserves in gold or lawful money of not less than thirty-five per centum against its deposits and reserves in gold of not less than forty per centum against its Federal reserve notes in actual circulation, and not offset by gold or lawful money deposited with the Federal reserve agent.
There may be some argument over the best measure of notes in circulation. The most conservative measure might be M1 which includes currency and checking accounts. But since the FDIC insures savings accounts and CDs, M2 might be a better measure. Wikipedia has common definitions of money supply. I've read arguments that the Fed balance sheet, the total liabilities of the Fed, could be used but that doesn't seem to come close to the definition in the Act.
If the US wanted to stick with the letter of the original act and limit redemption to M1 money stock, which was $1,908,900,000,000 as of May 5, 2011. Restrictions on redemption to M1 would force creditors to wait for their treasury bonds to mature before making claims on US gold. Here is where gold would need to be priced to restore the dollar link to gold based on M1:
$1,908,900,000,000 / 261,499,000 oz (US gold reserves) = $7,299.84 / oz
Apply the 40% reserve to get a current target of $2,919.94 / oz.
However, the thesis is that the purpose of reopening the gold window would be to keep foreign creditors from dumping the dollar. Most foreign reserves are stored in treasury bonds. Treasury bonds are simply frozen dollars that pay interest -- dollars that thaw on a specific date in the future. Total US debt is over $14 trillion, but not all of that debt needs to be redeemable in gold.
I think it is safe to exclude Intragovernmental Debt, primarily the Social Security Trust fund, because those bonds are not marketable and will be paid out as dollar benefits (or legislated away). That leaves the debt held by the public, made up of both foreign and domestic creditors. The number we are looking for is the number for foreign creditors.
For that, we need to look into the Treasury International Capital System (TIC). The total debt held by foreigners as of February, 2011 was $4,474,300,000,000.
$4,474,300,000,000 / 261,499,000 oz (US gold reserves) = $17,110.20 / oz
Apply the 40% reserve to get a current target of $6,844.08 / oz.
But does the US really need to give gold to foreign private citizens that hold treasury bonds? Maybe not. The point is to keep international commerce flowing smoothly. To that end, we can look at only the debt held by foreign sovereigns. The total official foreign holdings as of February, 2011 was $3,186,300,000,000.
$3,186,300,000,000 / 261,499,000 oz (US gold reserves) = $12,184.75 / oz
Apply the 40% reserve to get a current target of $4,873.90 / oz.
The Fog of Currency War
If all of the above conjecture is correct, it will still be a murky and twisty path to arrive at the destination. I don't believe the US will reopen the gold window until and unless it is forced to do so. It would be an admission of the failure of the US and Federal Reserve to manage the dollar. It would discredit the theory of a workable pure fiat currency. It would discredit a couple of generations of academic economists, including Nobel Laureates, and the economics profession. Not that being consistently wrong hurts the career of economists in general, but they might have o amend a few textbooks. It would also come as a shock to the general population who for the most part has little or no understanding of monetary history or the current money system.
If gold was remonetized preemptively at a price higher than the market price, the transition might be made without any major disruption. If it happens in a disorderly way, the market price may overshoot the remonetized price and come back down to a permanently higher and managed level. In that scenario, the US may not have as much control of the final price.
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