 | | The Daily Reckoning | Monday, June 20, 2011 |
- What to do with your gold? Readers weigh in on this important question,
- Addison Wiggin's take on China and the unserviceable US debt load,
- Plus, Bill Bonner on an important moment for the world's intellectual and moral life and plenty more...
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|  | | | Holding Gold in Times of Crisis | | Dear Readers Respond to the Ever-Important Gold Question | |  | | Joel Bowman |
From Buenos Aires, Argentina...
We begin this week's reckonings where we left off the weekender...with some thoughts from our Fellow Reckoners. One email, in particular, garnered a slew of responses after we aired it in Saturday's issue. The topic - what to do with one's gold - is a simple though, judging by the amount of responses we received to the email in question, common enough quandary.
We'll get to your responses below, but first, in case you missed it, here's the question, from Reckoner Anthony:
"A question many people must be puzzling over.
"To buy gold seems logical; paper money has become a big con. So you exchange it for something that has stood the test of time, like gold. But then what? Say it goes to $10,000 an ounce. Or even $100,000. Do you turn it back into paper money? Don't think so.
"Do you use it to buy, say, land? If so, surely that would cost a huge amount as well. In the early 1930s, distressed land in England went for next to nothing. But we had returned to a gold standard then, so the same number of gold sovereigns now wouldn't make it a good deal; you might as well use paper money at paper prices.
"Or do we just wait for the return of a gold standard (official or de facto) and hope that it's going to create some bargains?
"I'm just throwing out some questions/ideas to see what others might think. Using the land analogy, is land massively over-priced or gold massively under-priced? I'm not inclined to sell any gold, or silver, for that matter; at least they've kept their purchasing power, plus a bit, for most things."
Replies one Reckoner, who goes by the curious name "Peter Rabbit (I love karats)"...
"Regarding Anthony's question of what to do with silver and gold in order to capitalize on having the foresight to get out of 'paper money'...
"He answered his own question by stating that 'at least his gold and silver has retained its purchasing power for most "things".'
"I say spend your 'paper' to whatever extent you need to for everyday living and when you come up short...convert a few ounces to fill the void.
"No matter what degree of dilution the fiat currencies dwindle to...your precious metals will always more than make up the difference.
"Remember, gold hasn't budged...it's still the same in every way. It is how gold is VALUED that has changed and will continue to change as long as most governments, (central banks) continue to generate 'money' out of thin air!"
And if gold reaches $10,000 per ounce, or even $100,000, as the question anticipates, how might we metal heads conduct smaller, everyday transactions?
Perhaps that's where gold's perennial bridesmaid comes in, as Reckoner RLB explains.
"That is why you buy junk silver coins, preferably dimes; pre 1965 of course.
"Silver won't be as expensive as gold when the brown stuff hits the fan, and can be used to purchase things. Ten gallons of gas for one silver dime, for instance."
Chimes Reckoner on the exchange value of smaller denominations...
"Why is it so difficult for those of the 'You can't eat gold' group to understand simple transactions with PMs? If gold is $10,000 per ounce, I'd take a tenth-ounce coin and exchange it for $1,000 in fiat currency to spend in a store which only takes fiat currency. When that $1,000 is gone, I'd repeat the process. This can be done with one-ounce gold coins, but the small coins are better if consumer price inflation is ongoing.
"The same style of dealing holds for US junk silver, of course.
"Many seem not to understand that if gold is $10,000, silver is likely to be at around $200 or more - but a loaf of bread might cost $20 or even $50."
Here's Reckoner GB, chiming in from the Lone Star State...
"One does not buy gold to get rich. One buys gold to avoid getting poor. If you are looking for a way to get rich, you will probably have to look outside the United States. Generators of wealth in the US have a big bulls eye on them inviting looting by lawyers or politicians.
"Eventually, things will become more hospitable to generating wealth. At that time, you turn your gold into wealth generation. If you can generate wealth by better managing a parcel of land, then buy land. If you can generate wealth by starting a business on land you already own, start a business."
And to that last thought, Reckoner BD adds...
"First, using gold to buy land is only half the picture. The land (or any other asset) must be productive, i.e., it must produce, or contribute to the production of, a commodity other people want or need - such as food. Thus the land becomes an ongoing source of wealth at a time when need is acute. In his essay 'Abundance and Scarcity' the French political economist Frederic Bastiat (1801-1850) said 'Wealth consists in an abundance of commodities.' He was absolutely right. Note that he did not say 'Wealth consists in an abundance of gold' even though gold is a commodity.
"In other words gold is simply a means to an end, it is not an end in itself. When we buy gold, we are simply storing the value of human energy we invest in producing a commodity which is exchanged for gold. We exchange it for gold because gold does not rot, rust, or otherwise deteriorate like other commodities. Its physical attributes make it an almost ideal store of value - it remains the same for thousands of years. We save it for future use, either by ourselves or our children. We do not buy it just to sit and look pretty."
Thanks to all our Fellow Reckoners who wrote in with thoughts on this obviously popular subject. Though we couldn't possibly publish them all, we hope those that did make it into virtual print, above, were of some help.
For those readers interested in getting their hands on some coins of their own, our friends at First Federal have made available to us a limited quantity of flawless 2011 Gold Eagle First Strikes AND a batch of 2011 Tenth-Ounce Gold Pandas. Be sure to check them both out before deciding which option best suits your investment needs. And, by way of full disclosure, please know that we are able to secure these deals for you because of an ongoing business relationship we have with First Federal, whereby we may be compensated for coins sold.
Also, if you're looking for more information on the nature of money, the future of gold or other such related topics, here are a couple of books you might wish to check out:
Nathan Lewis's Gold: The Once and Future Money, to which The Daily Reckoning'sAddison Wiggin provides a neat introduction, and...
Ron Paul's excellent The Case For Gold, the first official US government investigation into the feasibility of a gold standard in more than 100 years. As a matter of fact, Addison has been trying to get a copy of Ron Paul's book in as many hands as possible recently, even going so far as to give them away.
Check out what Addison is up to with his "Case for Gold giveaway" here, as well as his guest essay for today, below...
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| | The Daily Reckoning Presents | | Debt: America’s Bi-Partisan Blame Game | |  | | Addison Wiggin |
An America News Radio interview with Addison Wiggin on June 11, 2011
Chris Salcedo, Co-Host: Today on America's Radio News line, we're visiting with Addison Wiggin, the executive publisher of Agora Financial and the author of The New Empire of Debt: The Rise and Fall of an Epic Financial Bubble.
Addison, welcome to America's Radio News.
Addison Wiggin, Agora Financial: Glad to be here. Nice to talk to you, Chris.
Salcedo: There's a report out now saying that China is already saying the United States is defaulting on our massive debt - already. This is according to Guan Jianzhong, president of the Dagong Global Credit Rating Co. Ltd., saying that we're already defaulting because of our terrible economic policies here in the United States. And as we're talking to you right now, our federal debt is due to eclipse our GDP for the first time since World War II. This is a bad situation, is it not?
Wiggin: It's a bad situation because China lends us more money than anybody else on the planet. Japan, India and South Korea are right behind them. But China has sort of taken the lead in the discussion of, or the critique of, US policy because they hold some $2.3 trillion in reserves and they own another trillion in US Treasury bonds.
They have been aggressively, over the past 20 years, buying US debt and accumulating dollars due to the trade imbalance between the two countries. And it has been a benefit to them because the dollar has been, historically, the store of value for central bankers around the world.
But following the economic policy of the US, [Treasury Secretary Tim] Geithner at the Treasury, and even the Federal Reserve, the hubris with which they make the decisions, they're expecting the dollar to remain the reserve currency of the world [no matter what they do] and for US Treasuries to be the "flight to safety" trade for as far as the eye can see. And now we're seeing China, and even India and South Korea, raising the alarm, saying, "Look, we are holding this debt. We expect it to be paid back. We expect it to be worth something in the future, and we don't think the path that the US is on is a very sound one, and you better do something about it."
Lori Lundin, Co-Host: Let's talk about our debt here at home. We've got two political parties that are pointing fingers at one another, blaming each other. We've got the current Administration basically saying they walked into a mess and that's it's really not their fault. Then we've got the Republicans saying that this President and this Administration has made things worse.
How did we get into this mess? Is it true that these Bush tax cuts and the two wars and the Medicare prescription drug benefit contributed greatly to our deficit? Or are there other reasons that we're not talking about?
Wiggin: We spent two and a half years making the movie I.O.U.S.A., which was a documentary film following David Walker, the former Comptroller General of the country, around the country as he tried to convince people that the fiscal path the US was on was already unsustainable, even before the election year in 2008. We started filming in 2005, and we actually premiered the film in 2008. So many of the problems that have reached a fever pitch now, existed prior to the current Administration.
We premiered that film on Aug. 22, 2008. So Obama wasn't President yet. But six weeks later, Lehman Brothers declared bankruptcy, and [the government] went into overdrive in the bailout period, and kicking in the stimulus payments to state and local governments. And while we were already on a disastrous fiscal course, people weren't talking about it. And our film was seen as kind of gloom and doom, "We don't want to talk about that."
But as the new Administration came in, they claimed they had inherited a mess. But they went into overdrive, [because the annual deficits] became four or five times more than during the previous Administration. So the problems existed before the 2008 crisis, they just got exacerbated and made terribly worse over the past couple of years. Neither party is capable of admitting any kind of fault and/or proposing solutions that will even address the underlying causes.
Salcedo: Yes, at least at this point they haven't.
And Addison, there's this phrase being thrown out, I wanted to run it by you - and I talked to a various amount of our economists about this - about how tax cuts actually add to the deficit.
Now, me, just being a really simple guy, I always understood that you have to spend the money to add to the deficit. That taxes are a mechanism by which we, the American people, tell these 535 senators and congressmen how much money they can spend, and if they choose to go over it, that's a spending problem, that is not a taxation problem. Am I reading that correctly?
Wiggin: Yes, absolutely. Another way that it gets phrased that's very curious is that they borrowed money to pay for the tax cuts, which doesn't make any sense either. The premise of those statements is somehow it's the government's money first and that we didn't cough it up in order to balance the budget.
Salcedo: Right. They went ahead and spent, and it's up to us to make up the shortfall for whatever program.
Lundin: But isn't it true too that the Bush tax cuts during the Bush Administration accounted for a big shift in our debt and the anticipated revenue that was wiped out, about $6.3 trillion?
Wiggin: Yes, what happened was the financial markets in 2001 and 2002 got crushed because of the dot-com bubble, and then we saw that again in 2006 and 2007. Expected revenues from rising house prices never materialized, because the housing market fell apart.
The country is addicted to these asset bubbles. And politicians, while making their budgets - it happens at all levels, at state, local, federal and with all the agencies - they kind of plan the spending based on anticipated revenues from these rising asset bubbles. But when the asset bubbles fall apart, when the housing bubble crashes, and when the stock market goes down, those revenues never materialize, but the spending continues.
Salcedo: And that's the whole point, that it's impossible for tax cuts to add to the deficit. You must spend to add to the deficit.
Addison Wiggin, we appreciate your perspective. A renowned economist, the executive publisher of Agora Financial, the author of The New Empire of Debt: The Rise and Fall of an Epic Financial Bubble.
Sir, I always appreciate your perspectives. Come back soon here to America's Radio News.
Wiggin: Yes, absolutely. Thank you.
Regards,
Addison Wiggin,
for The Daily Reckoning
Eric's Note: We should not be surprised to discover that China's displeasure with America's reckless fiscal policies is motivating the Chinese government to dump its US dollar reserves and to acquire gold reserves instead. As Addison's 5-Minute Forecastreported recently:
"China's gold stash grew nearly 30% last year. The State Administration of Foreign Exchange just released its annual balance sheet. The gold reserve grew from $371 billion dollars in 2009 to $481 billion in 2010.
"Still, that amounts to a mere 1.65% of China's total forex reserves. As we've mentioned several times this year, China aims to grow its gold stash at least as large as that of the United States.
"That would mean expanding it by a factor of eight. A 30% increase in one year is just the beginning...and it's one more reason we contend that even with prices up sixfold from when we first started recommending gold in 1999, it's not too late for you to own gold now. You can find specific suggestions on how to make it happen in this presentation.
| | | | | | | Bill Bonner | | California: The Greece of the US Financial Crisis | |  | | Bill Bonner |
Reckoning from Baltimore, Maryland...
Oh my, oh my...this is getting interesting...
"How zombie consumers menace the world economy," is a headline from Yale Professor Stephen Roach. Mr. Roach is misusing the word 'zombie,' but he's coming closer to understanding what is really going on.
That is, he's beginning to see things our way!
Greek 2-year debt was yielding over 30% on Friday. Everybody said the situation was dire. And everybody agreed that this time, the Greeks were not likely to get away without a default of some sort.
This is a great moment for the world's intellectual and moral life. Suddenly, people are beginning to realize that you can't make bad debt go away by piling more debt on top of it. And yes, when you make mistakes, you have to pay for them.
Perhaps this insight could be teased out into a broader, deeper understanding of how life actually works. Maybe it is true, after all, that you can't create real wealth by printing up pieces of paper. And maybe it's also true that economists working for central banks can't do a better job of running an economy than they can of running an anthill. Maybe central planning doesn't work after all?
And maybe there are some things you just should not do...such as spend too much money. Or murder people, even if you don't like them. Or send photos of yourself in a ridiculous, obscene pose via the Internet.
Yes, dear reader, maybe there are some things that are right...and other things that are wrong - no matter how smart you are.
As Mr. Yanis Varoufakis, an economics professor at the University of Athens, explained to The International Herald Tribune:
"When you are insolvent you do not solve things with new and larger loans."
In Europe, the very smart financial authorities kicked the can down the road. And now they're tripping over the can.
In America, they kicked the can so far you can barely see it. And it's the size of a 55-gallon drum.
Europe's problem is sovereign debt - government debt - and bank debt. America's problem is private debt now, government debt later.
Europe could fairly easily solve its problem. Greece doesn't really matter to anyone - not even to the Greeks. It could be cut loose. Abandoned. Allowed to go broke, as we predicted it would a couple years ago.
The problem is that there is an ankle bone connected to the leg- bone...and the foot-bone is connected to the ankle bone. And without feet or legs, Europe can't walk. The big banks - especially French banks - hold Greek debt. If the loans go bad in a big way, the banks will probably go broke too. That's why Moody's downgraded the banks last week.
The press says authorities are worried that one thing will lead to another...and pretty soon it will get out of hand. They say they're afraid of a "Lehman moment." But what they're really frightened by is something that happened closer to home. It's a 'Creditanstalt moment' they fear most.
Creditanstalt was an Austrian bank that went broke in 1931. Before it went under, most people had never heard of it. But after it couldn't pay its bills it became infamous. The bank owed a lot of money to a lot of other banks...and then they couldn't pay their bills either...then, the whole banking system went bust. The Great Depression resulted - in which nearly half of America's 25,000 banks failed.
So, the authorities want to avoid a Great Depression. Very understandable. But what's the plan? To kick the can farther? What do they do when they catch up to it again?
In the US meanwhile, it is consumer debt that is the immediate problem. There too the authorities booted it down the road as best they could. But in the New World as in the Old, there's always something that goes wrong. You refinance Ireland...and Portugal needs cash. You give the Portuguese some money...and then the Greeks threaten to go belly-up.
In the US, the authorities refinanced the banks. The bankers got their usual bonuses - and more. But they couldn't do much about consumers. The poor working stiffs were losing jobs, income, and housing wealth - all at the same time.
And now, with their lack of purchasing power, US consumers have the whole world economy at gun-point. "One false move...and you're all dead!" More below:
And more thoughts...
America's Greece may be California.
"California nearing fiscal crisis," reports The Financial Times. Governor Jerry Brown vetoed a budget plan. He said it wouldn't do the job. We didn't see the plan, but our guess is that Brown is right. But this leaves the Golden State in a fix. It needs money. And like Greece, it can't print its own.
So the fingers are pointing. And the hands are wringing. And everyone is worried...except us.
Here at The Daily Reckoning, we've learned to make catastrophe our friend. We open the door and look for it. We invite it over for drinks. If we knew how to send Twitter messages we'd send it one or two. Maybe with photos attached.
'But if California can't pass a budget the police won't get paid...' say the worriers.
So what? Private citizens have plenty of guns in California. The crime rate will probably go down.
'But what about the teachers?' Don't make us laugh. Besides it's summer. Time for a vacation.
'What about people on welfare?' Don't expect us to cry for the zombies.
'There must be something that the state does that is essential!'
Name one thing! Ha ha...
Actually, we don't know what the state does that is helpful and what it does that is hurtful. All we know that it spends a lot of money. So, cut the money off...and we'll see what we really miss.
*** Back to the national stage...the scene is set for another recession. Here's The New York Times:
For those fretting that a string of disappointing US economic data presage a double dip in the recession, there is good news and bad news.
The good news: It would probably take a significant shock to knock the economy off course, even in its weakened state. The bad news: In the current environment there are plenty of potential shocks to worry about. Yes, such as Greece. California. China. Housing. Inflation.
And those are just the shocks we know about.
The fact is, when Humpty Dumpty is sitting on a wall, there's always someone around to give him a push.
*** Let's define our terms. A 'zombie' is someone who lives on the flesh of living human beings. Like a senator. Or a conniving military contractor. Or a welfare chiseler. Or a bailed-out banker.
A consumer who has no money is hardly a 'zombie.' He's only a zombie if he gets his money dishonestly - that is, through theft, fraud, or government.
Even gypsy beggars are not zombies. They provide a useful service; allowing people to feel better about themselves for tossing them a buck or two.
But Roach is right. The immediate problem in America is consumer debt. It went up since the end of WWII to 2007. Since then, it's gone down. This is a big change. And it puts a strain on the whole consumer economy.
The US economy - as well as many foreign economies - is set up to anticipate more and more consumer spending. But US households haven't been able to deliver.
"Growth in consumption has averaged 0.5% annualized," write Roach. "Never before in the post WWII period has consumption growth been this weak for this long."
Well, Stephen, it's a Great Correction. What do you expect? Consumers are correcting 60 years of credit expansion.
In many ways, this is a worse problem than Europe's sovereign debt crisis. In Europe, the problem could be solved by letting a few banks and speculators go broke. It would teach the rest of them a lesson. Most likely, Europe could get back to work soon after.
But America's consumer debt problem will take many years to solve. Household debt is down to 115% of disposable income - down from 130% in 2007. But it averaged only about 75% from 1970 to 2000. Roach thinks it will take three to five years more to bring consumer debt down to more comfortable levels.
Regards,
Bill Bonner
for The Daily Reckoning |
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