Why Gold is Still the Best Measure of Price Stability
Bill Bonner
Reckoning today from Paris, France...
Yesterday, the Dow shot up more than 200 points, for no apparent reason. Gold backed down below $1,600 for a very obvious reason.
Nothing goes up in a straight line, not even gold. After such stunning gains over the last few weeks, the stuff that Ben Bernanke does not regard as money, gold, needed a rest.
But if gold isn’t real money, what is?
Pieces of paper that a private bank and the US Treasury say is real money?
“This,” they insist, “is a dollar. You shall use it as money.”
“Why?”
“Because we say so.”
“Because we say so” is good enough for most people most of the time. But there are times when it’s not. Such as when the financial authorities are up to no good. Then, smart people turn back to gold.
There’s no magic to money. It works as a medium of exchange and a store of value when, and only when, its quantity is strictly controlled. That’s what’s nice about gold. Its quantity is controlled by nature herself. People have been trying to get around it for centuries. Alchemists labored long and hard to turn base metal into gold. None succeeded.
The only way you can increase the supply of gold is by mining it...which is expensive and time consuming. Of course, technology helps. But technology tends to advance with the economy itself. So when the economy is growing at 1% a year...the quantity of gold tends to increase at about a 1% rate too.
What a miracle! Prices remain stable because the quantity of gold increases at almost the exact rate necessary. This is why you can reach about as far back in history as you want, you’ll find that gold was just about as valuable a thousand years ago as it is now.
In the 19th century, paper money was backed by gold. People had learned their lessons in the panics and bubbles of the 18th century. They didn’t trust pure paper currencies. Lincoln fiddled the dollar during the War Between the States...inflating the currency to pay for his killing campaigns – but it was put right soon after. Apart from that, for the whole period...from the beginning of the 19th century to the creation of the Federal Reserve in 1913...the dollar was stable and reliable; people trusted it because there was real money – gold – standing behind it.
But now, the chief of America’s central bank says that gold is not money; the dollar is supposed to be money now. And now, the feds don’t worry too much about how many dollars they issue. Their primary goal is no longer preserving the purchasing power of the buck – it’s lost 95% of its value since the Fed was set up. Now, they’re more concerned with the stock market, with the housing market, with consumer spending, and with the next election.
So, what do you think, dear reader? Can you have confidence in these men? Do they know what they are doing? Did they see the crisis coming? Did they understand what was happening? Have their efforts to fix it been successful so far? Is protecting the value of your money – and the financial health of the nation – their number one goal?
Five years from now, which do you think will be worth more? The dollar without gold behind it? Or gold, without the dollar?
The dollar, you say?
Well, good luck to you!
El Conquistqdor Francisco de Orellana
The Conquistador who put the Amazaon baisn "on the map"....Francisco Orellana
Thursday, July 21, 2011
Tuesday, July 19, 2011
Sticking With the Golden Formula As Empires Crumble
Reckoning from Paris, France...
The European democratic social welfare model – which took root in North America, Australia and other colonies throughout the globe – is putting in a giant, multi-decade top. Birthrates are low. GDP growth is low. Job creation is low. Debt is high. Its money corrupted by the paper-based dollar, the whole system has degenerated...ossified...and decayed. Now, it is dominated by frauds, incompetents and parasites.
Kurt Richebächer used to call it 'late, degenerate capitalism.' We call it Zombiedom!
Hold onto your gold.
We left you yesterday just as we were describing how the US slipped into corruption and degradation. It was nothing personal, we were about to say. It was nobody's fault in particular. That's just what happens.
We were also musing – on Bastille Day – on why monarchy was not such a bad system of government, after all. At least, Louis 16th was less sensitive to mob pressure; he didn't have to keep his eye on the opinion polls. He could do things that were necessary, even when they were unpopular.
As a government matures, more and more people find ways to game the system. This is true of all forms of government, not just democracy. People always want to get ahead in the easiest, surest way possible. Often, it's easier to steal money than to earn it. In a monarchy, people court favors and privileges from the ruling class, just as they do in any other system. They win battles, procure women, keep secrets or tell them, they don't rebel...or they do, they are useful...or troublesome. They connive. They plot. They flatter. They use their elbows and their brains. They do what they have to do to gain an advantage.
In democracy, they grease the legislature to get special laws limiting competition...special tax breaks...bailouts...jobs...and titles. Why do you think Wall Street is the single largest contributor to Congressional campaign coffers? Because it has a lot at stake. And who would have thought – 100 years ago – that the president of the United States needed a well-paid assistant in charge of African-American Media? Does he also have an assistant in charge of Irish-American Media? And who covers the Yiddish press for him?
There's a little niche...a sinecure...a bit of spare change for almost everyone.
As time goes on, the number of leeches, parasites, and blood-suckers multiplies. You see it at the local level as at the national one. If you want to build a house in Anne Arundel Co., Maryland, for example, you have to be prepared to pay thousands of dollars in bribes. Engineers, clerks, administrators, environmental protectors – a whole gauntlet of zombies stands between you and finally breaking ground.
Last week, at the dump, we noticed a large group of men in clean white shirts and hard hats wandering around. They seemed to have notebooks in their hands and stopped from time to time to write something down.
Who were they? Surely they were on the government payroll somewhere, somehow; they were probably making sure that the county dump was run according the latest standards of Zombiedom.
But it is not just government that is corroded. The private sector – especially those parts of it that are most closely connected to government – gets twisted too. Education in America is a government industry – even though there are plenty of private schools and universities. At the university level, it is almost impossible to exist without doing Washington's bidding. Students are supported by grants and loans – coming from the government. And universities depend on government research and other projects for a major part of their funding.
Plus, the universities are no different from any other advanced, degenerate system. As they age, they too are full of their own tweedy leeches. Americans came to believe that their children would do better in life if they had a university education. This proposition was so little challenged that it led to almost a complete lack of price resistance. The more people paid, the better they liked it; presumably, because they were sending their children to the 'best' universities. Families mortgaged their houses in an effort to pay for their children's college education.
Now, of course, the nation is saturated with university graduates who are largely illiterate and incompetent. People are beginning to realize that a college diploma is as bad an investment as a house. The Financial Times:
The cost of education...in the US has soared in recent decades while median incomes have stagnated... In the past decade, tuition rates at public universities have risen 5.6% a year above inflation...
"Over the past 60 years," says Jim O'Neill, head of the Thiel Foundation, "owning a house became part of the American Dream. People were told: 'buy a house, don't worry about the price; you'll earn it all back later.' Now it's the same thing with college."
In the curious way that Zombiedom takes over, the idea that a university degree would pay off was not entirely an illusion. As society became zombified, the value of phony professionalism grew. Degrees and qualifications are important in organizations that don't actually produce anything. An active, profit-oriented entrepreneur will not particularly care if a person has a degree or not; he wants a producer. But universities, the health care industry, many large corporations, and the government itself are not output oriented. Usually, no one knows if they do anything useful or not. So, how can they select or advance employees – except by reference to degrees and qualifications?
The cost of a university education, as a percentage of disposable household income, has risen from about 18% in 1985 to nearly 35% today. But did a college degree really pay off? Guess how much more a university graduate earns today...in real terms...than, say, a college graduate in 1985.
Zero.
More to come...
Regards,
Bill Bonner
for The Daily Reckoning
The European democratic social welfare model – which took root in North America, Australia and other colonies throughout the globe – is putting in a giant, multi-decade top. Birthrates are low. GDP growth is low. Job creation is low. Debt is high. Its money corrupted by the paper-based dollar, the whole system has degenerated...ossified...and decayed. Now, it is dominated by frauds, incompetents and parasites.
Kurt Richebächer used to call it 'late, degenerate capitalism.' We call it Zombiedom!
Hold onto your gold.
We left you yesterday just as we were describing how the US slipped into corruption and degradation. It was nothing personal, we were about to say. It was nobody's fault in particular. That's just what happens.
We were also musing – on Bastille Day – on why monarchy was not such a bad system of government, after all. At least, Louis 16th was less sensitive to mob pressure; he didn't have to keep his eye on the opinion polls. He could do things that were necessary, even when they were unpopular.
As a government matures, more and more people find ways to game the system. This is true of all forms of government, not just democracy. People always want to get ahead in the easiest, surest way possible. Often, it's easier to steal money than to earn it. In a monarchy, people court favors and privileges from the ruling class, just as they do in any other system. They win battles, procure women, keep secrets or tell them, they don't rebel...or they do, they are useful...or troublesome. They connive. They plot. They flatter. They use their elbows and their brains. They do what they have to do to gain an advantage.
In democracy, they grease the legislature to get special laws limiting competition...special tax breaks...bailouts...jobs...and titles. Why do you think Wall Street is the single largest contributor to Congressional campaign coffers? Because it has a lot at stake. And who would have thought – 100 years ago – that the president of the United States needed a well-paid assistant in charge of African-American Media? Does he also have an assistant in charge of Irish-American Media? And who covers the Yiddish press for him?
There's a little niche...a sinecure...a bit of spare change for almost everyone.
As time goes on, the number of leeches, parasites, and blood-suckers multiplies. You see it at the local level as at the national one. If you want to build a house in Anne Arundel Co., Maryland, for example, you have to be prepared to pay thousands of dollars in bribes. Engineers, clerks, administrators, environmental protectors – a whole gauntlet of zombies stands between you and finally breaking ground.
Last week, at the dump, we noticed a large group of men in clean white shirts and hard hats wandering around. They seemed to have notebooks in their hands and stopped from time to time to write something down.
Who were they? Surely they were on the government payroll somewhere, somehow; they were probably making sure that the county dump was run according the latest standards of Zombiedom.
But it is not just government that is corroded. The private sector – especially those parts of it that are most closely connected to government – gets twisted too. Education in America is a government industry – even though there are plenty of private schools and universities. At the university level, it is almost impossible to exist without doing Washington's bidding. Students are supported by grants and loans – coming from the government. And universities depend on government research and other projects for a major part of their funding.
Plus, the universities are no different from any other advanced, degenerate system. As they age, they too are full of their own tweedy leeches. Americans came to believe that their children would do better in life if they had a university education. This proposition was so little challenged that it led to almost a complete lack of price resistance. The more people paid, the better they liked it; presumably, because they were sending their children to the 'best' universities. Families mortgaged their houses in an effort to pay for their children's college education.
Now, of course, the nation is saturated with university graduates who are largely illiterate and incompetent. People are beginning to realize that a college diploma is as bad an investment as a house. The Financial Times:
The cost of education...in the US has soared in recent decades while median incomes have stagnated... In the past decade, tuition rates at public universities have risen 5.6% a year above inflation...
"Over the past 60 years," says Jim O'Neill, head of the Thiel Foundation, "owning a house became part of the American Dream. People were told: 'buy a house, don't worry about the price; you'll earn it all back later.' Now it's the same thing with college."
In the curious way that Zombiedom takes over, the idea that a university degree would pay off was not entirely an illusion. As society became zombified, the value of phony professionalism grew. Degrees and qualifications are important in organizations that don't actually produce anything. An active, profit-oriented entrepreneur will not particularly care if a person has a degree or not; he wants a producer. But universities, the health care industry, many large corporations, and the government itself are not output oriented. Usually, no one knows if they do anything useful or not. So, how can they select or advance employees – except by reference to degrees and qualifications?
The cost of a university education, as a percentage of disposable household income, has risen from about 18% in 1985 to nearly 35% today. But did a college degree really pay off? Guess how much more a university graduate earns today...in real terms...than, say, a college graduate in 1985.
Zero.
More to come...
Regards,
Bill Bonner
for The Daily Reckoning
The Greater Depression Is Upon Us
The phrase "Greater Depression" was coined by Doug Casey a decade or so back, as a way of describing the economic crisis he foresaw as inevitable, and which is now materializing.
Doug Casey now believes that the unfolding crisis is going to be even worse than he first imagined, and the longer the rest of us at Casey Research study the tea leaves, it is hard to disagree that the Greater Depression is still ahead.
Consider:
The eurozone is growing increasingly desperate. Watching the heads of Europe dither and debate over further bailouts to the unhappy Greeks and other troubled PIIGS – before ultimately reaching back into the pockets of the equally unhappy citizens in Germany and the decreasing number of still-functioning economies in the eurozone – reminds me of a down-on-his-luck blackjack player. He's mortgaged his home to play the game but is now down to his last chips. He doesn't want to risk his remaining resources but has no choice, because to walk away now will mean taking up residence in a cardboard box. And so, reluctantly, he shoves across another pile. As the PIIGS start to default and either leave the eurozone entirely or are shunted off into some sort of sidecar organization, there will be great volatility in the euro and in the European markets.
The U.S. debt situation is far worse than anyone in Washington is willing to admit. We keep hearing calls for more, not less debt creation. But if people would stop kidding themselves and tally up all the many demands the U.S. government has against it, the actual debt-to-GDP ratio rises to something on the order of 400% – and even that is likely understating things. The fundamental flaws in the U.S. monetary system – flaws that have given license to the bureaucrats to smash the limousine of state straight into a wall – have required a remaking every 20 to 30 years or so. The problem is that there is pretty much nothing else that can be done to save the status quo at this point, and so the monetary system is likely to collapse. That means big changes ahead, including – or perhaps starting with – a poisonous ratcheting up of interest rates.
China's miracle mirage. While having aspects of a free market, the hard truth is that China is run as a command economy by a cadre of communist holdovers. This is apparent in the cities that have been built for no purpose other than creating jobs and boosting GDP. It is also apparent in the growing inflation in China – the inevitable knock-on of the government's decision to yank on the levers of money creation harder than any other nation at the onset of the Greater Depression. Meanwhile, signs of social unrest crop up here and there. Though so far they have been swiftly put down, there is no question that the ruling elite has to walk a very fine line. If the Chinese economy stumbles seriously, all bets are off. That we are talking about the world's second-largest economy means this is not of small consequence.
Japan is essentially offline. Reports from friends in Japan – including one who was initially skeptical about the scale of the problems at Fukushima – have now changed in tone by 180 degrees. You can almost feel the growing sense of desperation as the already massively indebted nation begins to slide toward an abyss. There is little standing in the way of the world's third-largest economy's slide.
The Middle East is in flames. This, too, is far from settled. As usual, the U.S. government has been hopping here and there in an attempt to maintain its influence, but at this point pretty much everything is up for grabs. The odds of the U.S. retaining the same level of influence in the region that it has enjoyed over the last century are slim to none, especially now that even the Saudis are shipping more of their oil to China than to the U.S. Again, big changes are ahead.
I'm convinced that nearly everything about today's world is going to change over the coming decade... much of it for the worse.
But that doesn't mean that people – you – can't come through this in more or less good shape, just as our parents and grandparents made it intact through the last Great Depression. Pay attention and take action, and you'll do far, far better than most.
Some investment ideas...
First and foremost, protect yourself against the collapse of the U.S. monetary system. It is not as simple as ducking into the nearest coin store and loading up, though that should certainly be one part of your strategy. Between now and the endgame that leads into what we can only hope will be a new money based on something tangible, there will periodically be opportunities to make big moves with your portfolio.
As Doug also likes to say, you should do whatever you want in this world, as long as you are willing to accept the consequences. If you are willing to risk going down with the ship, then do nothing.
Some other investible ideas...
Everyday essentials. Energy is the classic essential. Sure, energy use and prices will ebb and flow with the economy, but ultimately everyone uses energy every day, and the people in emerging markets want to use a lot more of it. Carefully thought-out investments in energy, ideally bought on the dips, belong in everyone's long-term portfolio.
Breakthroughs to a brighter future. Throughout modern history, companies that make significant technological advances transcend bad economic times. Do you think that the company that finds a cure for a common variety of cancer will be weighed down, even by a stock market crash? Hardly. In cautious amounts, these sorts of potential breakthrough stocks belong in your portfolio.
Investing in the inevitable. A ton of charts and data point to just how unusual and unsustainable today's low, low U.S. interest rates are. When these sorts of baseline trends eventually change direction, they tend to move in the new direction for years, and even decades. No one can pick the bottom, but anyone who is paying even a little attention can and should be getting positioned to profit from a sea change in U.S. interest rates while they still can.
One foot over the border. History has shown that having even one foot over the border can make the difference between losing everything and coming out just fine. Internationalizing your assets is not always easy or convenient, but that doesn't make it any less urgent that you do so.
The bottom line is that while the scale of the crisis is beginning to become more widely apparent, and reading and thinking about it can become fatiguing for those of us who have been on this story from the beginning, the base case for a Greater Depression is fully intact. We need to gird our loins and continue to take active measures to prepare – with the caveat that even in this base case, there are prudent measures you can take to ensure that not all your eggs are in one basket.
Regards,
David Galland,
for The Daily Reckoning
Doug Casey now believes that the unfolding crisis is going to be even worse than he first imagined, and the longer the rest of us at Casey Research study the tea leaves, it is hard to disagree that the Greater Depression is still ahead.
Consider:
The eurozone is growing increasingly desperate. Watching the heads of Europe dither and debate over further bailouts to the unhappy Greeks and other troubled PIIGS – before ultimately reaching back into the pockets of the equally unhappy citizens in Germany and the decreasing number of still-functioning economies in the eurozone – reminds me of a down-on-his-luck blackjack player. He's mortgaged his home to play the game but is now down to his last chips. He doesn't want to risk his remaining resources but has no choice, because to walk away now will mean taking up residence in a cardboard box. And so, reluctantly, he shoves across another pile. As the PIIGS start to default and either leave the eurozone entirely or are shunted off into some sort of sidecar organization, there will be great volatility in the euro and in the European markets.
The U.S. debt situation is far worse than anyone in Washington is willing to admit. We keep hearing calls for more, not less debt creation. But if people would stop kidding themselves and tally up all the many demands the U.S. government has against it, the actual debt-to-GDP ratio rises to something on the order of 400% – and even that is likely understating things. The fundamental flaws in the U.S. monetary system – flaws that have given license to the bureaucrats to smash the limousine of state straight into a wall – have required a remaking every 20 to 30 years or so. The problem is that there is pretty much nothing else that can be done to save the status quo at this point, and so the monetary system is likely to collapse. That means big changes ahead, including – or perhaps starting with – a poisonous ratcheting up of interest rates.
China's miracle mirage. While having aspects of a free market, the hard truth is that China is run as a command economy by a cadre of communist holdovers. This is apparent in the cities that have been built for no purpose other than creating jobs and boosting GDP. It is also apparent in the growing inflation in China – the inevitable knock-on of the government's decision to yank on the levers of money creation harder than any other nation at the onset of the Greater Depression. Meanwhile, signs of social unrest crop up here and there. Though so far they have been swiftly put down, there is no question that the ruling elite has to walk a very fine line. If the Chinese economy stumbles seriously, all bets are off. That we are talking about the world's second-largest economy means this is not of small consequence.
Japan is essentially offline. Reports from friends in Japan – including one who was initially skeptical about the scale of the problems at Fukushima – have now changed in tone by 180 degrees. You can almost feel the growing sense of desperation as the already massively indebted nation begins to slide toward an abyss. There is little standing in the way of the world's third-largest economy's slide.
The Middle East is in flames. This, too, is far from settled. As usual, the U.S. government has been hopping here and there in an attempt to maintain its influence, but at this point pretty much everything is up for grabs. The odds of the U.S. retaining the same level of influence in the region that it has enjoyed over the last century are slim to none, especially now that even the Saudis are shipping more of their oil to China than to the U.S. Again, big changes are ahead.
I'm convinced that nearly everything about today's world is going to change over the coming decade... much of it for the worse.
But that doesn't mean that people – you – can't come through this in more or less good shape, just as our parents and grandparents made it intact through the last Great Depression. Pay attention and take action, and you'll do far, far better than most.
Some investment ideas...
First and foremost, protect yourself against the collapse of the U.S. monetary system. It is not as simple as ducking into the nearest coin store and loading up, though that should certainly be one part of your strategy. Between now and the endgame that leads into what we can only hope will be a new money based on something tangible, there will periodically be opportunities to make big moves with your portfolio.
As Doug also likes to say, you should do whatever you want in this world, as long as you are willing to accept the consequences. If you are willing to risk going down with the ship, then do nothing.
Some other investible ideas...
Everyday essentials. Energy is the classic essential. Sure, energy use and prices will ebb and flow with the economy, but ultimately everyone uses energy every day, and the people in emerging markets want to use a lot more of it. Carefully thought-out investments in energy, ideally bought on the dips, belong in everyone's long-term portfolio.
Breakthroughs to a brighter future. Throughout modern history, companies that make significant technological advances transcend bad economic times. Do you think that the company that finds a cure for a common variety of cancer will be weighed down, even by a stock market crash? Hardly. In cautious amounts, these sorts of potential breakthrough stocks belong in your portfolio.
Investing in the inevitable. A ton of charts and data point to just how unusual and unsustainable today's low, low U.S. interest rates are. When these sorts of baseline trends eventually change direction, they tend to move in the new direction for years, and even decades. No one can pick the bottom, but anyone who is paying even a little attention can and should be getting positioned to profit from a sea change in U.S. interest rates while they still can.
One foot over the border. History has shown that having even one foot over the border can make the difference between losing everything and coming out just fine. Internationalizing your assets is not always easy or convenient, but that doesn't make it any less urgent that you do so.
The bottom line is that while the scale of the crisis is beginning to become more widely apparent, and reading and thinking about it can become fatiguing for those of us who have been on this story from the beginning, the base case for a Greater Depression is fully intact. We need to gird our loins and continue to take active measures to prepare – with the caveat that even in this base case, there are prudent measures you can take to ensure that not all your eggs are in one basket.
Regards,
David Galland,
for The Daily Reckoning
Subscribe to:
Posts (Atom)