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The Daily Reckoning | Friday, May 27, 2011
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The Business of Killing Currencies How Governments Distort the Value of Money With or Without a Gold Standard
Reporting from Buenos Aires, Argentina...
Joel Bowman
Speculation is not the same as gambling. As our good friend Doug Casey, a perennial favorite at the Agora Financial Investment Symposium, likes to say, speculation is the act (some might say "art") of "capitalizing on politically caused distortions in the marketplace."
Consider, for example, the recent housing bubble...and its subsequent bust. We touched on this in Wednesday's issue.
Superficially, the mortgage meltdown looked like, and was so labeled, a "crisis of confidence," leading to a convenient excuse for greater intervention by the Feds. Of course, and as usual, the exact opposite was true: the bubble was in fact a crisis of overconfidence, nurtured by the very same pinheads who pumped, via the Federal Reserve, more credit into the system during the 1990s and early '00s than the free market would ever have reasonably tolerated.
As far as the perpetrators of the whole mess were concerned, the state- sponsored manipulation of the mortgage market, "worked"...which is to say, home prices went up...and up and up and up. But that was only half of the equation. The other half - the down and down and down part - is at present working its way through the bowels of the market. At last count, home prices - already 33% off their peak - were falling at a rate of about 1% per month. Ouch!
Needless to say, such a grotesque distortion had both its winners and losers. The winners, for their part, were to be found closely huddled around the DC-to-Wall Street profit pipeline, suckling on bailout funds and pulling ripcords on their golden parachutes. Losers, meanwhile, tended to resemble ordinary folks who were left to foot the bill, ordinary folks without the means to employ the gun-for-hire that is the state along with its various and multitudinous law "makers" and inner- beltway lobbyists.
Similar market distortions - from the tech bust in 2000-01 all the way back to Tulipmania during the Dutch Golden Age of the early 1600s - all find their origin in monetary meddling of one form or another. The asset class affected may vary, in other words, but the culprit - namely, governments who manipulate the money supply - is always the same.
The biggest distortion of the modern era, therefore, is not flower bulbs or dot-coms or even housing prices. These are effects, not causes. There is a much greater distortion underway, one that underlies all of these booms and busts, peaks and troughs. It's the distortion of the value of money itself.
Explain Morris and Linda Tannehill in their book, The Market for Liberty:Governments commonly sap the strength of their currencies by engaging in inflationary practices. (They do this because inflation is a sort of sneaky tax which allows the government to spend more money than it takes in, by putting extra currency into the economy, thus stealing a little of the real or supposed value of every unit of currency already there.) As tax burdens become more oppressive, few governments can resist the temptation to circumvent citizen protest by resorting to inflation. They then protect their shaky currencies from devaluation, as long as possible, by international agreements which fix the relative value of currencies and obligate nations to come to each other's aid in financial crises. In a sense, the main protection which an inflated currency has is the fact that all the other major currencies of the world are inflated, too.
The history of centrally controlled monies is a history of theft, inflation and, eventually and invariably, defaults. From coin clippings during the Roman Empire through to debasement of German marks under the Weimar Republic...to hyperinflationary corruption of, in no particular order, Hungarian pengos...Zimbabwean dollars...Greek drachmai...Brazilian cruzeiros...Polish zlotych...Chinese yuan...Nicaraguan córdobas...US continentals...Peruvian soles...Angolan kwanzas...Russian rubles...Argentine pesos...
..and the list goes on (and on...and on...).
And it's happening today, sometimes covertly, other times right out in the open. Belarus, for example, this week devalued its ruble by 36%...overnight!
For some, the solution lies in returning to a "gold standard," to be maintained and safeguarded under the vigilant eye of the benevolent, "night watchmen" state. Fringy politicians and newsletter writers often advocate some form of metal-backed currency, whereby the state would be able to mint coins and print notes only so far as it had gold and/or silver in reserve to "back it up."
This line of thinking seems, to us at least, to miss the point entirely. Have governments not gone out of their way to demonstrate their utter incapability of keeping a promise? The United States HAD a gold standard...more than once. (It also had a constitution. Remember that?) And what good did it do? Nixon may have severed the last thread of the dollar/gold peg back in 1971, but he was certainly not the first to devalue the greenback against the Midas metal. Remember, before FDR confiscated all the gold in the land back in 1933, an ounce of gold was only "worth" $20. (More correctly, a dollar was worth 1/20th an ounce of gold.) Then, in one fell swoop, the original New Dealer "revalued" the metal to $35 an ounce, thereby devaluing the dollar to 1/35th an ounce of gold. Some "standard."
Men and women, kings and tyrants, prime ministers and presidents, both black and white and from the east and the west, have made a career out of cheating the citizens they affect to serve out of the value of their currency. Why give them another chance?
No. The solution is not vesting more trust in the state and the do-good meddlers who infest it. The solution is not tying them to a gold standard (again) only to watch them wriggle out from under it (again). The counterfeiters-in-chief of the world's central banks have done enough already to prove they can't be trusted, with or without a gold standard.
The solution, rather, is competing, free market currencies operating outside the reach of the easily, demonstrably corruptible influence of those in positions of power who would seek, as they always and forever do, to devalue it for their own ends.
Mired, as we are, in the archaic realms of state-backed currency monopolies, it is sometimes hard for us to imagine just what a truly free market currency might look like. Would it be backed by gold? Silver? Both? Or would the market, driven by the competitive need to provide a safer, more reliable store of value, create an alternative, superior guarantee of trust?
Advocates of a small but fast-growing digital currency network called bitcoin think they've found the answer (or, at the very least, an answer). If it is successful, claim its adherents, this totally- decentralized, peer-to-peer (P2P) currency could supplant the world's central bank-issued fiat money, potentially providing savvy speculators with an opportunity to cash in on the greatest politically motivated market distortion of our time. But even if this particular currency does not fulfill the hopes and aspirations of its enthusiasts and participants, it has at the very least shown that the free market is ready for the challenge.
We'll have more on this fascinating challenge to the old world monetary hegemony in future issues. But for now, let's turn for a moment from the future of money to the future of energy. In today's issue, Patrick Cox, editor of Breakthrough Technology Alert, discusses one ingredient that could power a better, safer nuclear industry of tomorrow. Details below...Patrick Cox Breakthrough Technology Alert Presents...
Is This The Last Stock You'll Ever Need?
This one tiny stock could be the last one you'll ever need. You're about to see a story so shocking and hidden - it could rival the great wealth creations in history.
Get all the details - right here - before midnight Monday, May 30.The Daily Reckoning Presents Dr. Thorium or: How I Learned to Stop Worrying by Killing the Bomb
An Interview with Patrick Cox by WYPR’s Midday with Dan RodricksDan Rodricks, Host, Midday: I'm Dan Rodricks, and you're listening to a special edition ofMidday we call Power Ahead: The Energy Future. We continue our discussion about nuclear power with a specific look at something of international public concern since the tsunami hit Japan. Can even an advanced economy master nuclear power safely? Can nuclear power be safely harnessed?
I'd like now to introduce Patrick Cox to our program. Patrick Cox is an editor with Baltimore-based Agora Financial, our lead collaborator for Power Ahead. Patrick Cox is the editor ofBreakthrough Technology Alert, keeping an eye on transformational technologies for investors...
We want to talk to Patrick Cox about thorium nuclear power... Please tell us about thorium nuclear power and the big picture of nuclear renaissance.
Cox: It's interesting because in the early days of nuclear power, there were two schools. One was the current technology of light water reactors that produce plutonium, which is weaponizable. As a matter of fact, that's why that technology was chosen, because the military wanted this plutonium in order to build the nuclear stockpile that we all know about. On the other hand, we had people like Edward Teller, who was slandered in Dr. Strangelove, and his friend Alvin Radkowsky, who was the world's leading reactor designer, who very much were opposed to plutonium-producing nuclear power and wanted to go the direction of thorium.
And thorium has numerous innate advantages. One is that it doesn't produce weaponizable byproducts, but it's also true that the nature of the metal is such that it produces safer reactors. It burns at a lower temperature, and there's also a great deal of it. As a matter of fact, there's more energy available easily in thorium than there is in uranium, petroleum and coal combined. There's just an enormous amount of this stuff.
Rodricks: Why isn't it used now if it's safer?
Cox: We have this enormous regulatory bureaucracy. If you know anything about the SEC, if you know anything about drug development and how difficult it is to get a drug into the market, that's easy compared to nuclear reactor design. This is an international agency with huge armed tentacles everywhere, and it's influenced by the existing players. But it's happening outside of the United States anyway. If you go to the French, they are developing and have now signed an agreement with Lightbridge, which is the company that was founded initially by Alvin Radkowsky. They're working on thorium.
The Red Star Russian reactor designer, which serves most of Asia, is working on thorium... There are lots of thorium reactors running, and there are lots of different strategies for bringing thorium into the mix... The thing to remember is that thorium requires an extra neutron to work. In order to create fuel, you have to add a neutron. If you stop adding the neutron, then the reaction stops.
Rodricks: So that's what gets you to that term I heard you use a little while ago, "meltdown-proof."
Cox: Right. And there are many different ways of doing that.
Rodricks: So the problems we're seeing at Fukushima Daiichi, then, with those reactors, is water reactors. So you could see where maybe the world looks at that and then looks at thorium and says maybe we ought to go with thorium?
Cox: It's inevitable.
Rodricks: Could you put thorium in 104 US nuclear power plants and make them all safer? I mean, could you transition to that?
Cox: Yes. As a matter of fact, Lightbridge (NASDAQ:LTBR) is the leader in this technology. It is consulting with the Gulf states, with the French, the Russians, and probably will end up consulting with the Indians and the Chinese, as well. There are many different strategies for getting thorium into the fuel stream. Some of them are as simple as dropping a different fuel rod into the existing light water reactors, which would somewhat improve safety, though in the long run - I think the thing we should realize is these reactors in Japan were 40 years old.
I mean, you don't drive a car that's 40 years old. They had made some serious mistakes. Seth Grae, the CEO of Lightbridge, points out that the backup systems on these reactors were all on one circuit, which is absurd. It's mind-boggling that people who are known for their technical competence had done something that stupid. I mean, the problem of what we really need to do in terms of safety is to move to the next generation of nuclear reactors, which are going to be an order of the magnitude safer than what we have now operating in Japan, in the United States. There are thorium reactors running right now in Russia. I mean, they're going to go online in the next two years. They're going to be sold.
Regards,
Patrick Cox from his interview with Midday's Dan Rodricks, for The Daily Reckoning
Joel's Note: Right now, Patrick has his eye on what he calls "the single best way to play thorium's inevitable rise." What's more, thanks to uranium's bad press, you can get in fairly cheap right now.
Patrick has the inside scoop in his Breakthrough Technology Alert newsletter. "The stars have lined up to push this company to the forefront," he says, "Its competitive advantage over other nuclear technologies will also significantly lower power costs. Buy it and ignore it. Your children will thank you."
Interested reckoners can check out Patrick's presentation, titled "Is This The Last Stock You'll Ever Need?" right here. What Are the 3 Easy Steps to Epic Penny Stock Payouts?
New penny stock guide for retirement wealth boosts, college funds, and play money windfalls reveals 3 easy steps for chances at penny stock gains.
Watch this for the full story.Bill Bonner
Reckoning from Normandy, France...
Bill Bonner
We're here at our Second Annual Bonner Family Office Partners' Reunion. No time to write. We've got to pay attention!
Besides, nothing happened yesterday. No kidding. The Dow was flat. Oil was flat. Gold went down a little.
Nothing worth talking about, in other words. So, we'll be quiet.Things Get Curiouser and Curiouser As if it were not strange enough! Microsoft bought a phone company with no phones for $8.5 billion. Then, the public bid up the price of another Internet company, LinkedIn, to the point where buyers were paying more than $20 for every dollar of revenue that came the company's way. As for profits, they capitalized each one at more than 700 times. At this rate, an investor wouldn't earn his money back until 2,711AD.
He will need luck. People don't usually live that long; especially crazy people.
But oddities are so common now; it is as if every man you pass on the street had two heads. One out of every four American homeowners owes more on his house than it is worth. Even in desert cities, such as Las Vegas, more than 70% are underwater. Nationwide, house prices are down 33% from their peak and still falling at 1% per month. That is, the typical homeowner loses about as much on his house as he takes home from his job.
And last week, Dominique Strauss-Kahn was arrested. Who can deny that we live in a remarkable era? Odder than the charge against him was the fact that he was locked up for it. Bankers are used to getting bonuses for that sort of thing. On DSK's watch, the IMF's loans outstanding increased 10 times. Poor Greece was stuck with another $42 billion it couldn't possibly repay. But at least he took the Greeks to dinner!
Richard Nixon changed the world's monetary system back in 1971, cutting off the dollar from gold. He did it on prime time television. But the US dollar had been a reliable store of value for so long, few people imagined anything else. Only a few hard-bitten cynics, philosophers and monetary historians noticed that something very important had happened. They rolled their eyes and bought gold with both hands.
Allowed to persist, novelty becomes familiarity. Pretty soon, people begin to think that the extraordinary is normal; as for the normal, it begins to seem weird. The new system wobbled for the first 10 years, and then found its footing. Now, 40 years later, it is standing fast. It seems normal. But of all today's oddities, nothing is odder. If the gold bugs thought the system was headed for destruction in '71, they should see it now!
In '71, the money base - as measured by the holdings of the US Federal Reserve bank - was only $800 billion. And it had taken nearly 60 years to get there. Yet, just since 2008, the Fed has ballooned its balance sheet up 200% to $2.5 trillion.
In '71, the US government seemed to have thrown caution to the winds, with a deficit of $23 billion. Fiscal conservatives gasped and clutched their hearts. They'd better sit down, because today the deficit is expected to top $1.6 trillion this year alone, up 7,000%. Debt per working person rises at the rate of $115 per working day - about what the typical worker takes home.
And yet, the yield on a 10-year US Treasury note was around 6% in 1971. Today, wonder of wonders, it is only 3.13%, as if US finances had improved over the last 4 decades!
Putting '71 and '11 side by side you have to admit that one is strange. But which one? Surviving gold bugs - viewing these facts through their bifocals, perhaps from the comfort of their retirement homes - have begun to twitch. The price of gold has risen every year for the last 11 years. But even now, what is remarkable about the gold price is not that it is so high, but that it is so low. It is barely ordinary. Adjusted for inflation, gold sells for less today than it did in 1980. To match its previous high - set when the US ran its penultimate budget surplus and Paul Volcker had already begun to tighten credit - the price would have to climb into the mid-$2000s. But did 1981 justify a $2,500 gold price (in today's dollars) or does 2011?
Neither quantitative easing nor the Internet had been invented in Nixon's time. The Internet was advertised as a triumph over abnormality. With the world's wealth of wisdom at one's fingertips there was no further reason for mankind to err in sin and darkness. He had merely to turn on the WWW to light his way. Want to know what quantitative easing is all about...or how previous episodes of printing press money, un-backed by gold, have turned out? You have only to consult Wikipedia. It's free.
Just look for previous examples of successful pure-paper money systems. You won't find them. Because the gold bugs were probably right all along; removing the gold from the world's money system is almost sure to be a prelude to disaster. It is just a matter of time. Perhaps lots of time.
Regards,
Bill Bonner
for The Daily Reckoning
Saturday 28 May 2011
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