The Daily Reckoning Weekend Edition ------------------------------------------------------- Each of these situations was an episode of paper currency depreciation. Today is no different. The rising dollar/euro/yen gold price is simply a reflection of the Keynesian “easy money” policies popular around the world today. Gold: The Truth About Gold Fiat Currency: Using the Past to See into the Future Have You Heard of the OTHER Government Backed "Pension Program?"
Saturday, October 30, 2010
Buenos Aires, Argentina
Joel Bowman, reporting from Buenos Aires...
The world waits...
Stocks barely budged this week. Gold bobbed around like an anchorless sailboat, adrift in a vast ocean of guesses, speculation and rumor. All eyes, meanwhile, are on US Fed Chairman Ben Bernanke, who is widely expected to announce his next round of systematic dollar debasement a few days from now – a strategy otherwise known as “quantitative easing,” or “QE” for short. Trepid investors, unsure of what the value of the world’s reserve currency will be a week from now, sit on the sidelines, awaiting their cue from the man with the magic chopper.
Fellow Reckoners will recall Bernanke’s statement that, should it become “necessary,” he could cure what ails the financial world by dropping money from helicopters. He’s not quite there yet. Readers are invited to have a little patience...
Of course, the battle between central bank-created fiat money and its arch nemesis, gold, is not a new tale. Money meddlers have been tussling with the precious metal since the coin clipping days of the Romans. You’d think the bozos would have learned their lesson by now. But, as Bill likes to say, what one generation learns, the next is quick to forget.
“Gold vs. the Fed: the Record is Clear,” reads a headline from The Wall Street Journalthis week. The article goes on to highlight a few of the dollar’s lowlights during its ongoing battle with the Midas Metal.
“From 1947 through 1967, the year before the US began to weasel out of its commitment to dollar-gold convertibility,” the story begins, “unemployment averaged only 4.7% and never rose above 7%. Real growth averaged 4% a year. Low unemployment and high growth coincided with low inflation. During the 21 years ending in 1967, consumer-price inflation averaged just 1.9% a year. Interest rates, too, were low and stable – the yield on triple-A corporate bonds averaged less than 4% and never rose above 6%.
“What’s happened since 1971,” the article wonders aloud, “when President Nixon formally broke the link between the dollar and gold? Higher average unemployment, slower growth, greater instability and a decline in the economy’s resilience.”
And that’s not all.
“For the period 1971 through 2009, unemployment averaged 6.2%, a full 1.5 percentage points above the 1947-67 average, and real growth rates averaged less than 3%. We have since experienced the three worst recessions since the end of World War II, with the unemployment rate averaging 8.5% in 1975, 9.7% in 1982, and above 9.5% for the past 14 months. During these 39 years in which the Fed was free to manipulate the value of the dollar, the consumer-price index rose, on average, 4.4% a year. That means that a dollar today buys only about one-sixth of the consumer goods it purchased in 1971.”
And to think the Journal is referring only to official statistics! The real story, when adjusting for the number torture going on in the government’s chamber of statistics – what Orwell might call the Ministry for Truth – is far, far worse. But readers get the point. The evidence is in. The facts have been observed. The arguments made. The case against a fiat money system would seem as open and shut as they come.
So why continue down the path leading to the very same cliff every other fiat money leapt from? Ahh... As every liar worth his salt well knows, a mistruth must beget a fraud, which, in turn, must give rise to another lie.
The world is brimming with stories of people who blindly cling to crackpot ideas in the face of any and all rational argument to the contrary. In fact, research shows that, far from inspiring a level-headed change of opinion, a well constructed argument dismantling this or that hocus pocus theory often has the opposite effect, emboldening the purveyors of such falsehoods. Leon Festinger introduced the theory, known as “cognitive dissonance” in his well-known book When Prophecy Fails, co-written with Henry Riecken, and Stanley Schachter.
In it, Festinger and his colleagues infiltrate a cult whose leader, Dorothy Martin, convinces a bunch of fellow village idiots that an apocalyptic flood is going to ravage the earth and that their only hope rests with a group of strangely benevolent aliens who would swoop down at the hour of reckoning to save the believing souls form certain death. One might reasonably expect that, when the fated day came and went without a drop of rain (or alien appearance), the group, no doubt embarrassed but otherwise none the worse for wear, would simply disband and go home. Not so.
Ed Yong, an award-winning British science writer who addressed the subject in a recent article for Discover magazine, describes what happened next. “In a reversal of their earlier distaste for publicity, [the group] started to actively proselytize for their beliefs. Far from shattering their faith, the absent UFOs had turned them into zealous evangelists.”
What corners we humans allow our theories to paint us into!
Perhaps it is the same psychological disposition, a cerebral partitioning of sorts, giving rise to the popular belief that a man can grow prosperous by spending more than he earns. Or that problems caused by too much debt can be cured...with more debt. Or that leaving a central banker in charge of the value of money can end in anything other than currency destruction and eventual financial ruin.
So, what does a central banker do when one round of money printing doesn’t bring about the desired effect? Does he revisit first principles and reexamine the evidence? Or does he double down on his bets, defending his actions with increasingly zealous evangelism? Bernanke gives the world his answer on Wednesday.
[Ed. Note: Earlier this week, a team of our editors converged on the Agora Financial H.Q. in Baltimore to discuss the investment implications of both Tuesday’s election and Wednesday’s Fed meeting. The details of their Emergency Summit were made available to our readers in a special briefing released late last night. Click here for the full wrap-up.]
So where does that leave gold, the anti-fiat currency? Measured in dollars, the yellow metal has quintupled in value over the past decade. Does that mean it’s in a “bubble.” Au contraire, says Nathan Lewis, this weekend’s guest essayist. In fact, Lewis argues that gold’s value hasn’t really changed at all. Details in his thoughtful column, below...
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On what? Not gold or blue chips. And obviously not real estate. Yet they could soon do it – and so could you.
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Gold Never Has Been (and Never Will Be) in a Bubble
By Nathan Lewis
Binghamton, New York
Most serious gold investors follow a basic principle: that gold is stable in value. Changes in the “gold price” represent changes in the currency being compared to gold, while gold itself is essentially inert.
This is why gold was used as a monetary foundation for literally thousands of years. You want money to be stable in value. The simplest way to accomplish this was to link it to gold. Today, we summarize this quality by saying that “gold is money.”
From this we can see immediately, that if gold doesn’t change in value – at least not very much – then it can never be in a “bubble.” There may be a time when many people are desperate to trade their paper money for gold, but that is because their paper money is collapsing in value. It has nothing to do with gold.
Let’s take a look at some of the great gold bull markets of the last hundred years:
We can also see that, if gold remains stable in value, then the supply/demand considerations that affect industrial commodities do not affect gold, which is a monetary commodity. This is why gold is used as money. If its value was affected by industrial supply/demand factors, we would not be able to use it as money.
Thus, “jewelry demand” or “peak gold,” or any other such factor, has little meaningful effect on gold’s value. Day-to-day money flows will affect the price at which currencies trade vs. gold, but this ultimately affects the currency in question, not gold.
None of these historical “gold bull markets” resulted from jewelry demand or mining supply.
Any attempt to attach a valuation to gold is mostly a waste of time. Concepts like the “inflation-adjusted gold price” or the “gold/oil ratio,” or a ratio of outstanding debt or currency to a quantity of gold bullion, are a distraction. An item that doesn’t change value is never cheap or dear. That’s what “gold is money” means.
The “price of gold” may reach five thousand, ten thousand, a hundred thousand, a million, or a billion dollars per ounce. The gold bubble-callers will be frothing at the mouth, until they finally have the realization that there was never a bubble in gold, but only a crash in paper money.
Gold is money. Always has been. Probably always will be. This time it’s different? I don’t think so.
Regards,
Nathan Lewis
for The Daily Reckoning
Joel’s Note: Nathan Lewis is the author of Gold: The Once and Future Money. He is also a fund manager in New York with Kiku Capital Management LLC. You can find his excellent book, with a forward from Addison Wiggin, here.
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-------------------------------------------------------ALSO THIS WEEK in The Daily Reckoning...
More Nukes!
By Byron King
Pittsburgh, Pennsylvania
In a world with growing population, growing prosperity, increasing demand and decreasing availability of energy and mineral resources, there have to be great investment opportunities in these resources. Indeed, that’s where the money is. We should go there, and go there often.
The Food Shock of 2011
By Addison Wiggin
Baltimore, Maryland
Every month, JP Morgan Chase dispatches a researcher to several supermarkets in Virginia. The task – to comparison shop for 31 items. In July, the firm’s personal shopper came back with a stunning report: Wal-Mart had raised its prices 5.8% during the previous month. More significantly, its prices were approaching the levels of competing stores run by Kroger and Safeway. The “low-price leader” still holds its title, but by a noticeably slimmer margin.
The 40-Year Food Outlook
By Addison Wiggin
Baltimore, Maryland
The short-term (1-3 year) outlook for agricultural commodities is bullish enough. When you start looking out decades, the picture becomes one of an epic bull market. Feast on the following highlights from an August report by the United Nations Food and Agriculture Organization, working with the Organization for Economic Cooperation and Development...
The “Fifth BRIC”
By Rob Marstrand
Buenos Aires, Argentina
With a GDP of $521 billion, its economy is less than half the size of its nearest BRIC cousin. But it’s certainly big enough to invest in. It’s a well-diversified economy with sizable incomes from agriculture, natural resources and manufacturing. It’s also well situated between India and China. This means its exports should grow as these larger neighbors grow.
Tale of Two Cities
By Bill Bonner
Baltimore, Maryland
It was the best of times. It was the worst of times.
It is certainly the best of times for economists with a sense of humor. Absurdity and cupidity are right out in the open where you can laugh at them. Today’s financial events – predictable consequences of clownish meddling and currency debasement – are funny enough. The official reactions practically double us up. Central bankers and finance ministers are proudly doing things that they used to be punished for. Henry II brought his bankers together in 1124. Those found guilty of debasing the coinage – an earlier form of quantitative easing – were either castrated or they had their right hands cut off. What can you say about that kind of monetary policy? It worked.
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The Weekly Endnote: Well, that about wraps it up for another week here at The Daily Reckoning. By this time next week, the world will have a better idea of the immediate fate of the dollar...but maybe not what they should do about it. Make sure to take a look at our Emergency Summit, mentioned above, and, as always, write to us with any questions, comments or concerns.
Until then, get out and enjoy your weekend.
Cheers,
Joel Bowman
Managing Editor
The Daily Reckoning
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Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor atjoel@dailyreckoning.com The Daily Reckoning - Special Reports:
Saturday, 30 October 2010
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