What makes him so annoying is his unquestioning, reflexive and almost childlike enthusiasm for state intervention, even in the face of its obvious failure, and his apparent unwillingness to probe any deeper into the real causes of our present economic problems or to show any willingness to investigate the effectiveness or ineffectiveness of his particular medicine. His Keynesian convictions are presented as articles of faith that no intelligent person can seriously question.

A Krugmanesque argument is always built on a number of assumptions that are beyond doubt:

1) Recessions, depressions and crises are the result of the unhampered market. We actually do not have to investigate if markets were really free when recessions occurred or what really were the specific causes of whatever threw the economy off track. When there is a recession, depression or crisis, there must have been too much of an uncontrolled market.

2) The Great Depression was caused by uncontrolled markets.

3) Recessions, depressions and crises are practically the result of one problem: a lack of aggregate demand. People, for whatever reason (and who cares about the reason; let’s not get hung up on those details!) don’t spend enough. If everybody were to spend more, people would sell more. Problem solved. It is the role of government to get people spending again. This is done by printing money and causing inflation so that people spend the money rather than save it. Or by the government running up deficits and spending it on behalf of the stupid savers.

4) The Great Depression was solved by the government spending lots of money and the central bank printing lots of money.

5) This explains ALL economic problems.

6) If there are recessions, depressions and crises, they can all be solved by printing money and by deficit spending.

7) If after many rounds of money printing and deficit spending there is still a recession, then only one conclusion is permissible: There was obviously not enough money printing and deficit spending. We need more money printing and deficit spending.

If after another round of money printing and deficit spending we still have a recession, then….well, are you stupid, or what? We obviously have NOT PRINTED ENOUGH MONEY and we are NOT ACCUMULATING ENOUGH DEBT!

(And, by the way, remember (7) above.)

Krugman is practicing Keynesianism as a religion. The 8 commandments above are not to be questioned. Whoever questions them is not worthy of debate. Consequently, Krugman has turned down requests to debate people like Peter Schiff or Bob Murphy. Interestingly, he agreed to debate Ron Paul on TV. The link is here.

I have to say that Ron Paul did not do as well as I had hoped he would. He did not sufficiently attack Krugman in my view, for the failure and ultimately disastrous consequences of his policy prescriptions. Krugman is the one who should be made to explain his policy recommendations. After all, t’s policies like the ones he is recommending got us into this mess in the first place Krugman needs to explain why his policy ideas have been implemented for years to no effect.

Yet, Krugman succeeded in putting Paul on the defensive, something in which he was greatly helped by the following: While Krugman may be the most outstanding, unashamed and fundamentalist of the celebrity Keynesians, the attitudes of the general public, the other journalists and thus most of the TV viewers are predominantly shaped by Keynesianism as well, and this means that Krugman, more than Paul or any ‘Austrian’ debater, can rely on some sense of intellectual sympathy.

Maybe the viewers don’t quite share the unquestioning, almost vulgar dedication to the Faith, that Krugman epitomizes. Maybe they feel queasy about printing trillions of paper dollars and running trillion-dollar deficits. Of course, a true believer like Krugman will never allow himself such feelings. But in general, the public, too, believes that the free market (and greedy bankers) caused the financial crisis; that we need low interest rates and other government measures to stimulate the economy; and that inflation is really not our main concern. Krugman, I think, cleverly used these attitudes to present himself as the safe and rational choice, and Paul as the weirdo who wants to pour out the state-policy baby with the crisis bath water.

Ron Paul started strongly by pointing out that Krugman’s policy is based on the idea that a bureaucratic elite can set interest rates and decide how much money should be created, and that this involves an arrogant and dangerous pretence of knowledge. Very good point.

Immediately, the apostle Krugman raised his head. “You cannot get the state out of money.” “The Fed has to set interest rates.” “You cannot go back 150 years.”

I think this is where Ron Paul should have dug in and put Krugman on the defensive:

“Why not? There was no Fed before 1913. That the Fed made things more stable is your assumption. But is it true? People like you and Bernanke tell us that the gold standard was to blame for the Depression. In the run-up to the Depression we had a gold standard but we also had a Fed. How can you say that the gold standard was to blame and the Fed was ultimately the solution?

“Dr. Krugman just said, ‘history told us’. That is nonsense. History doesn’t tell us anything. You need theory to interpret history, and your theory is wrong. You assign blame for the depression according to your Keynesian theory. If that theory is wrong – and I think it is completely wrong – your interpretation of history is hopelessly wrong.

“Dr. Krugman, we do no longer live in the 1930s. Why is it that you are harking back to those days? Are we still solving the Great Depression?

“Fact is that the monetary and economic institutions of America were shaped by people with your beliefs, Dr. Krugman. We have your system today. We have conducted and are conducting your policies. And, Dr. Krugman, do you really want to tell the American public that these policies and these institutions, such as the Fed, are working?

“We have no gold standard. Since 1971, the Fed is entirely free to print as much money as it likes. That is your system, isn’t it? That is what you recommend. – You say the Fed needs to keep interest rates low and print money to stimulate growth. That is what the Fed did in 1998 after LTCM and the Russia default, just as you recommended. That is what the Fed did again after the NASDAQ bubble burst and after 9/11 – surely, that was not an Austrian policy but a Keynesian one. It was straight out of your rule book, Dr. Krugman. You say the uninhibited market is to blame for the financial crisis. I say your policy is to blame. The mortgage bubble was blown by the ‘stimulus’ policy of the Fed – low interest rates and plenty new bank reserves – between 2001 and 2005. That was your recommendation, right? And those of your Keynesian buddies, such as Paul McCulley at Pimco.

“Since 2007, the Fed is conducting your policy. So is the US government. You demanded monetary stimulus and you got it. The Fed created $2 trillion dollars out of thin air. Interest rates have been zero for years. The US government is conducting stimulus policy to the tune of $1trillion-plus every year. Are you telling me, these are not Keynesian policies? What is it, Austrian policy?!

“What you are recommending has in fact been the guiding principle of global economic policy for years. What you are recommending is a systematic distortion of the market place. It is persistent price distortion. That is why we had an unsustainable housing boom. That is why we had a mortgage boom. That is why we had a financial industry boom. And whenever these artificial booms – that you create with your policy – falter, the American public has to pay the price. And what do you suggest then? More of the same. More cheap credit. More government debt. In the hope that you can generate another artificial boom for which a later generation will again have to pay the price.

“Dr. Krugman, you just answered the question of this journalist about how much more debt we should accumulate, by saying maybe another 30 percent but that nobody can say for sure. I agree that nobody can say how much debt the system can still take. But tell us, why do you think that the next 30 percent of state debt will magically stimulate the economy and that these 30 percent will thus achieve what the previous 30 percent obviously failed to do.

“Dr. Krugman, you have me worried here. And I think our viewers too. The only response you have to the abject failure of your policies is that we should do more of them. Whatever Keynesian stimulus is being implemented and whatever money the Fed prints, all you ever say is that it is not enough. We need more. Has it ever occurred to you that maybe the problem is the policy itself? Maybe your medicine is making things worse and not better.

“And something else worries me, Dr. Krugman. When do we ever stop printing money and borrowing? I think that you are stuck in a failed paradigm, a failed economic theory and a failed policy program. This has happened to scientists and politicians before. You cannot admit that failure. When you are confronted with the failure of modern central banking, of Keynesian stimulus and of moderate inflationism, your only answer is that nothing is wrong with any of it, it is just not implemented forcefully enough. Dr. Krugman, you remind me of a doctor, who misdiagnosed the disease and prescribed the wrong medicine and who is now unwilling to look at the situation objectively. All you want to do is increase the dosage.

“If the viewers really want to understand what is going on, they should not buy Krugman’s new book but go to the website of the Mises Institute and look for some excellent Austrian School literature, in particular anything written by Ludwig von Mises himself. But if you don’t have time to do this, an excellent start is a book by Detlev Schlichter, with the title Paper Money Collapse.”

Well, I guess this is how it could have unfolded.

Regards,

Detlev Schlichter

How To Debate Paul Krugman was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Nobody knows what the future will bring. I don’t know what will happen to the gold price in the next week, the next month or for the rest of this year. I don’t even know what 2013 will bring. But please remember, neither do all the ‘experts’ out there who are much less squeamish about giving investment advice than I am.

When you invest your wealth you are alone. You have to make up your own mind. And accept the consequences of your decisions.

Having said this, I can assure you that, personally, I remain a big fan of gold. I consider it the number one asset out there. It remains head-to-shoulder above anything else.

Gold has not been trading that well recently. Measured in the world’s number one paper money the precious metal reached an all-time high of slightly more than $1,900 per ounce in September of last year but then retreated and has mainly been trading sideways in a wide range since. Considering the ongoing tensions in European debt and banking markets and considering that the global financial system seems forever dependent on super-low policy rates, one could have reasonably expected gold to do better.

The reasons for the somewhat disappointing ‘price action’ of late are not quite clear but could be manifold. Maybe it is a bit of rally fatigue. Don’t forget, gold traded below $300 ten years ago and had just been through a decade-long, unprecedented bull run. In one of gold’s biggest markets – India – the government recently introduced new taxes and regulations to discourage investment in gold (surprise, surprise), and international central banks are not believed to match their healthy buying of recent years.

But the optimists will say it is something else: things are getting better so there is less need for a crisis-asset.

This is how the Wall Street Journal put it:

“Gold is still benefiting from the view the global economy is fragile, but the idea has been shaken by signs that conditions are stabilizing in the U.S.”

Naturally, the financial and political establishment is rejoicing at the prospect of gold losing its luster. After all, the phenomenal ten-year bull market was the equivalent of a raised middle finger in the face of the international paper money bureaucracy. Ben Bernanke, the money-printer-in-chief, famously answered Ron Paul’s question if gold was money by saying he thought it wasn’t…

“I think the reason people hold gold is as a protection against what we call ‘tail risk’ – really, really bad outcomes…To the extent that the last few years have made people more worried about the potential of a major crisis, then they have gold as a protection.”

–Ben “Helicopter” Bernanke

And this is precisely why the establishment hates gold so much. The modern policy elite, people like Bernanke and his fellow central bankers, are tasked with avoiding bad outcomes, and they have at their disposal a body of theories (in large part faulty) and an interventionist tool kit that did not exist through most of gold’s three-thousand year history as the entire world’s monetary asset of choice.

This tool kit, not least of which is the printing press, is supposed to enable the policy establishment to run the economy smoothly and efficiently and save us from depression and crisis. For the public to turn back to the “barbarous relic” of gold certainly means a major vote of no-confidence for the modern financial architecture and all its supposed safety-valves.

The brilliant Jim Grant calls our post-1971 unrestricted paper money system astutely the “PhD-Standard”: We are asked to no longer rely on the apolitical and disinterested firmness of a precious metal to anchor the monetary system and to thus prevent financial extravagance and excess. Instead we are to put our economic fate in the hands of a bunch of self-confident and proactive intellectuals and bureaucrats who learnt how the world works by shuffling academic papers in the MIT economics department.

Understandably, many people have more trust in gold.

(By the way, this explains why the Financial Times, which adores and celebrates the policy establishment like no other media outlet I know of, only writes about gold when it goes down, when the gold ‘bubble’ is once again ‘bursting’, providing the FT with another opportunity to remind you that gold does not pay a dividend.)

Funny how Bernanke puts it with his “really, really bad outcomes” and “tail risk”. He makes it sound as if you have to be a pessimist of biblical proportions to buy gold. Things must get “really, really bad” because for anything else we have the Federal Reserve. Relax!

Limited understanding meets unlimited power to print

But the problem runs deeper than Bernanke implies. Much deeper.

While Bernanke’s quote contains some truth it also reveals an embarrassing misunderstanding of the nature of the problem, a misunderstanding that he shares with the majority of his policy-buddies.

He implies that these “really, really bad outcomes” are just random and uncontrollable events, unquantifiable statistical outliers, freak occurrences that simply happen, that capitalism in its mysterious unpredictability occasionally throws at us. This is nonsense. But this distorted worldview also shone through clearly in Bernanke’s recent lecture series.

According to Bernanke, inflations, recessions, depressions, asset “bubbles” – all these things come over us like acts of God, like droughts and hailstorms, and Bernanke & Co. are charged with dealing with them on our behalf. The rising gold price is merely an indication that some folks fail to appreciate the establishment’s good work. Hell, can nobody get any respect any more?

No, the problem runs much deeper than Bernanke seems to grasp, and that is precisely why gold is such a great asset in this environment. His limited understanding coupled with his unlimited power to produce paper money is indeed the number one argument for owning gold.

The present crisis is not an accident of capitalism but the inevitable product of the fiat money system and the faulty theories and counterproductive policies of Bernanke & Co. The present crisis is not just another business cycle (and business cycles are, of course, also created by central banks) but the unavoidable consequence of the political decision to abandon a gold standard and to adopt a system (as of 1971) of unrestricted fiat money creation.

As I explain in detail in my book Paper Money Collapse – The Folly of Elastic Money and the Coming Monetary Breakdown such a system, while appearing stable for a long time, inevitably accumulates imbalances as it systematically distorts capital formation and asset pricing.

Though central bankers and their crony economists falsely deem moderate inflation to be good, the constant artificial cheapening of credit through ongoing money injection must culminate in the present horror show of bloated banks, inflated asset prices and an unsustainable debt load.

The really, really bad outcome is entirely home-made and the fully guaranteed by-product of decades of mild to medium inflationism, i.e. the modus operandi of modern central banking. The crisis is built into the system; it is part of the game.

Bernanke still believes that his ongoing money printing is saving the world when it is indeed the root cause of this entire disaster. While Mr. Bernanke poses confidently (and I believe sincerely) as a firefighter, he is really an arsonist. His “stimulus” is adding ever more fuel to the fire.

We should not buy gold because Bernanke’s policy (and that of other central bankers) is ineffectual but because it is so very effective. This policy preserves the accumulated imbalances. It sabotages their dissolution and liquidation, and it constantly funds new imbalances.

Bernanke’s policy is guaranteeing the never-ending crisis. Well, I should say almost never-ending, as it will end in a currency catastrophe when the public begins to shun his fiat money and when paper money becomes a hot potato.

We do not own gold because we fear that Bernanke may stop his policy of saving the government and Wall Street. We own gold because we think he won’t stop saving them.

Could Bernanke derail the gold bull market? Sure! But he would have to abandon his policy activism and become passive. Bernanke may want to look at how Paul Volcker successfully ended a gold rally (or, more accurately, put it to rest for 20 years). It wasn’t by by using the printing press to bail out the world a la Bernanke & Co.

Au contraire, Volcker did it by stopping the printing press altogether and allowing high real interest rates to cleanse the system of the imbalances from previous money production. That is what ended the last gold bull market and it is still the major threat to today’s bull market.

Bernanke, alas, is no Volcker, and stopping the printing presses today will create bigger challenges than in 1979.

The financial crisis is not the reason people seek safety in gold. It is central policy response to the crisis that they seek protection from.

If gold is retreating for now, it is because the investing public sees less need for it with monetary and fiscal stimulus presently sustaining the impression – the illusion, really – of stability and sustainability. So this is a great opportunity to buy gold.

In defense of “hoarding”

Let’s look at the logic of investing in gold. When doing so we immediately are confronted with widespread antipathy towards it founded on ignorance and misunderstanding: We gold bugs are not only pessimists who want to make money when the world goes to hell in a handbasket. We even remove our spending power from the markets for consumer and producer goods and invest our wealth in “barren” and “unproductive” monetary assets. Shame on us!

I use the term “monetary asset” as I do not want here to go into the debate about whether gold is presently money or not. I know that you cannot buy a bus ticket with a gold coin but that is not what we are discussing here.

For the purpose of this investigation gold is (almost) equivalent to physical paper money, i.e. to cash under the mattress. The person who invests in bullion does so for the same reason that somebody may hold a large pile of banknotes in a safe, namely to not commit this part of his wealth to consumer goods that may fulfill his present consumption needs or to producer goods that promise an investment return (dividends and interest).

He is holding money – that is, gold or physical cash- because he wants to conserve his purchasing power. He wants to retain the flexibility of spending that purchasing power on consumer and producer goods some time later but still at the drop of a hat (i.e. remain “liquid”).

Money is the most fungible good, the one that can most easily be traded for goods and services. People hold money because they value that flexibility and the maintenance of their purchasing power higher than what they can get for their money at present prices, including what they can get for it in terms of investment goods at present prices.

There are, of course, important differences between gold and cash. The latter is presently slightly more fungible. Remember the bus ticket. On the other hand, there is no limit to how much paper money central banks can produce today. For the paper money holder debasement is not only a risk it is almost a certainty as it is the declared goal of those in charge of the money franchise. (I come back to that later.)

Keynes had a keen eye for widespread prejudices (against the rentier class, against saving and against money hoarding) and was not above providing pseudo-scientific justifications for these prejudices. Thus, his silly “liquidity preference theory” in his General Theory (in particular chapter 15), according to which it is okay to hold money to be ready for immediate transactions but not okay to hold money because you simply want to sit on the sidelines and retain purchasing power.

This is, of course, complete nonsense. Money, like any other asset, is only an asset because it fulfils the needs of its owners. Consumer goods fulfil consumption needs, investment goods promise monetary return, and money provides flexibility and security (at least honest money does) in an uncertain world.

As Henry Hazlitt has pointed out so well in his critique of Keynesianism, the “hoarder” of money does not speculate in money, as Keynes alleges, but simply refuses to speculate in bonds and stocks and other assets at prevailing prices. He has absolutely nothing against investing in “productive assets”; he just does not want to buy them at the current inflated and artificial prices.

Concerns about the stability of the overall economy and the sustainability of high asset prices are most prevalent at the end of credit booms when cheap money has created a false sense of prosperity and economic vitality, and when the prices of bonds, stocks and real estate are elevated by years of easy credit.

In a system of inelastic money, such as a gold standard, growing demand for money at that late stage of the cycle will cause money’s purchasing power to rise and the money-prices of goods and services to fall (deflation). At the new and lower prices demand shifts back from money to other, non-monetary assets. “Hoarding” ends naturally; it is self-correcting. When money’s purchasing power rises, the opportunity costs of holding wealth in the form of money rise, and so does the attraction of spending that money on consumer or producer goods.

["Deflation" is also just money becoming more valuable...which happens naturally in an expanding economy when money is a real commodity whose supply doesn't grow at a central bankers whim. Prices fall over time and savings are rewarded. Ain't nothin' wrong with that.--Ed.]

That money is not an unproductive asset has been argued by W.H. Hutt in his seminal essay “The Yield from Money Held” from 1956. For an excellent exposition of this view see this speech by Hans-Hermann Hoppe on the same topic. Holding money – and in particular inelastic money proper – is a sensible, legitimate, rational and by no means destructive strategy.

We have had an “on-and-off” but mainly “on” fiat money boom for 40 years. Capital misallocations and asset price distortions have become massive as a result. How big they are and where precisely they are located, nobody can tell. We would have to stop printing money and let the market expose the dislocations and then liquidate them but that is the one thing that authorities do not want to let happen.

Be that as it may, the public’s desire to step back from inflated and systematically manipulated asset markets is understandable and entirely justified and naturally translates into demand for money. Not the “flexible” kind under control of the central planners, but the honest kind, i.e. gold.

But Bernanke & Co., just likes Keynes in his time, does not want you to disengage from speculation in bonds and stocks and real estate. Moving to the sidelines is strictly verboten. You have to keep playing – with your own hard earned savings.

The policy establishment believes that it can manipulate the economy by manipulating your desire for assets through the manipulation of interest rates via the printing of money. These manipulations have to be ever more blatant, direct and heavy-handed.

Manipulation used to be conducted in a roundabout way by just administratively easing the refinancing conditions for banks and then waiting for the ‘stimulus’ to play out in the wider capital markets and the economy. Now that this policy has brought us the aforementioned imbalances, the central banks have to manipulate asset prices openly and ever more directly via ‘quantitative easing’.

Here is Bernanke defending the practice in 2010:

“This approach (quantitative easing) eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.”

If you believe that this brazen manipulation by the paper money bureaucracy is going to work and that it will restore and then guarantee stability and prosperity, you can do without gold. Jump right back in. Put your savings at the mercy of the Great Manipulator! Good luck!

I would only feel comfortable participating in these asset markets if I were confident they were not rigged. It is not a good idea to invest in assets whose prices are artificially inflated for political reasons. The biggest danger, in my view, presently exists in bond markets, in particular in government bonds. As to equity markets, where would they trade without zero interest rates? Where will they trade when inflation picks up?

Sitting on the sidelines makes a lot of sense to me. I want to hold money but it cannot be paper money or bank deposits, as both represent state fiat money that the policy establishment will continue to create like confetti. Additionally, a bank deposit may be your asset…but it is equally the bank’s liability. And let me remind you that banks everywhere are on life-support. Therefore, you have to go back to the eternal and international form of money: gold, which is not anybody’s liability but just your asset.

What about other ‘real assets’, such as property or farmland? Well, I guess you have to have considerable wealth to invest meaningfully in farmland. Also, the yield on farmland in places like Europe is very low and often dependent on state subsidies. With governments everywhere going bankrupt you have to expect those subsidies to be cut at some point with potentially adverse consequences for the value of that land.

Be that as it may, I think it is generally a bad idea to invest in a way that makes you dependent on government spending. Additionally – and this is something that applies to all forms of real estate – you have to expect the level of property taxes to rise. This is low-hanging fruit for the taxman as things are getting desperate for him, too.

All major central banks are in pretty much the same sticky position. None of them have an exit strategy. The Fed has not expanded the monetary base since June of last year. That is not because monetary prudence has set in but because the steroids from the last round of QE are still working. Banks are doing the money creation themselves again. M1 has expanded by 14 percent since last summer, non-annualized. No deleveraging here. Additionally, the myth of Treasurys as safe assets is still alive and kicking, against all evidence to the contrary and probably thanks to the present fixation with Europe. When banks and sovereigns come under pressure again the monetary floodgates will be opened. Just look at the ECB and their recent €1 trillion-plus money injection.

“We’re on crack,” as John Hathaway, the manager of the Tocqueville Gold Fund put is so astutely in the Wall Street Journal. The financial community is completely addicted to cheap money and ongoing stimulus. Just wait for the withdrawal symptoms to set in and you can rely on another round from Bernanke & Co. Unless I see a Volcker-like figure emerging, the avenger of the paper standard, I am happy to sit with eternal money.

Regards,

Detlev Schlichter

Why Gold Is Still My Favorite Asset was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

As the story memorably puts it, on the street, Tide is known as ‘liquid gold.’ Harrison Sprague of the Prince George’s County, Maryland, Police Department says that his undercover agents are asking for drugs but being offered Tide instead. They are busting drug rings and finding more blue liquid than white powder.

To be sure, some news outlets are raising some questions about this story, pointing out that Tide theft doesn’t seem to be a national problem. For my part, I have no problem with the credibility of the report. In fact, it seems entirely reasonable that new forms of currency are popping up in black markets. This is why stores are starting to add anti-theft devices to the bottles.

The driving force here is a war on the dollar. Carrying around vast amounts of cash raises questions among the authorities. It is increasingly difficult to “wash” the money through the banking system. And in any case, dollars are always losing value. So it makes sense to look for other ways to facilitate exchange. This is hardly unusual. The digital economy is getting ever better at bartering services and software as an alternative to letting dollars change hands.

But if we are to think of Tide as money, that means its use goes beyond the barter stage. People aren’t acquiring Tide to wash their clothes, but rather to trade for other things, like drugs. In a limited sense, then, Tide is being used to facilitate indirect exchange. That is to say, it has become a money.

Actually, there are many conditions in which alternative monies can come to exist. You can see this among kids when they trade candy following Halloween night. The kids will gather and first begin to barter, but as the trading term continues, one candy will emerge as the one to get — not to consume, but to trade for other things. For a brief time, one candy will emerge with monetary properties. As trading comes to an end, that very candy will be demonetized and re-emerge as a consumption good.

Money is frequently reinvented under the right conditions, emerging from a commodity currently in use. Cigarettes become money in prison. War zones become hotbeds of currency competition too, in anything from liquor to matches. Throughout history, money has taken many forms, from shells to salt to animal skins. The usual qualities of a commodity that economists say make for good money: durability, divisibility, high value per unit of weight, uniformity of quality (fungibility), recognizability.

Tide doesn’t qualify in every respect. However, it is durable in the sense that it doesn’t spoil. It is divisible. The tamper-proof top provides a measure of security against counterfeiting. True, it’s not as good as a precious metal, but traders aren’t worried about that. They are just looking for some marketable commodity that can take the place of the dollar, which has become extremely risky to use for blatantly illegal purposes.

The government’s war on the dollar as a means to fight the drug war wins nothing in this case. So long as there is a market, so long as there is demand and supply, there will be pressure to come up with some means to make indirect exchange possible. Or so Ludwig von Mises explained in his treatise The Theory of Money & Credit, written in 1912, at the dawn of the central banking age.

One major problem is Tide doesn’t have a stable supply, so its value as a means of exchange will be subject to inflationary pressures. The more that enters the black market, the more its price falls relative to the goods and services it can buy — the inflationary tide could rise and rise.

But as you think about it, as bad as Tide might be as a currency, there is a sense in which the dollar is actually worse. It costs less to print on linen than it does to make a bottle of laundry detergent, meaning that the dollar is more likely to be inflated into oblivion. And whatever is wrong with detergent, if the price falls low enough, the producer doesn’t have any reason to keep making it. Profit and loss signals govern how much is produced. Its physicality alone imposes some limit — and this is not the case for the Fed’s data entries that it calls money.

The monetization of Tide demonstrates something critically important about the institution of money itself. Its existence in the market owes nothing to the government or some social contract. Its emergence, as Carl Menger argued in the late 19th century, grows out of market exchange. Selecting which commodity is to become money is a matter for entrepreneurs and market forces.

No central planner — even one within the black market community — decided that Tide should become money. Also note that Tide is produced entirely privately, which provides an indication of what could be true of all money today. We don’t need government to select it and make it. The market can handle this just fine.

There is a final lesson to observe in this case: It is sometimes asserted that only government is smart enough to be able to select, make and manage monetary affairs. Surely, private parties can’t handle this job, and the attempt will just lead to chaos. But this is not so. Private markets can do all these things, including juggling many different currencies in competition with each other and managing the price relationships between them. This goes on in the developing world all the time, with even young children learning the math and workings of the currency market.

The biggest problem Tide money now faces is a security issue. When you see the armored car driving up to the local Walgreens, you’ll know that they are working on getting the problem solved. The sight can make us all nostalgic for the old days when our official money was something at least as real and useful as laundry detergent.

Regards,

Jeffrey Tucker

Money Laundering was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Just how committed should you be to holding gold (and silver)? Are you holding too much gold as it is…and not enough U.S. dollars?

Or should you be holding anything BUT gold (and silver)? Beyond the cash you need to pay your monthly living expenses, should you hold cash at all? Should every bit of your savings be held in ounces of precious metals? And every bit of your investments be in shares of the companies that drag those precious metals out of the ground?

It might have seemed like an extreme position a few years ago. Heck, it may seem extreme now! But Jeff Berwick is here to explain why it could be the most sensible, most conservative thing in the world to do…

The Fear of Gold

I was on a panel at the recent California Investment Conference in Palm Springs and the question was asked, “What percentage of your portfolio should be in gold bullion?”

The first panelist answered 20%. The second panelist said, up to 30%. Then it came to me.

“I have no problem with someone having 100% of their portfolio in gold,” I stated bluntly. Many in the crowd laughed. Their laughter confused me. What’s so funny about that, I thought?

I went on, “I think it’s weird that people find my answer weird.”

GOLD IS REAL MONEY

After all, we are talking about time tested and true money. The only money that has lasted for thousands of years and is still fully accepted worldwide as a store of wealth. Even Warren Buffet had to recently admit that “Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end.”

And that from a man who hates gold the way Whitney Houston fans hate Bobby Brown. So, by stating that I have no problem with someone having 100% of their portfolio in gold I am making an ultra conservative statement. I am stating that I’d have no problem with someone having their entire portfolio in “cash”. In real money.

What would you rather hold “for eternity”? US dollars? A paper debt obligation of a bankrupt nation state?

The fact that so many found that to be a shocking statement says a lot about where we are in this current process of the collapse of the fiat currency system.

THE FEAR OF GOLD

There is such a “fear of gold” amongst most people that it must be due to statist indoctrination and propaganda. It makes no rational sense to have such a fear of such a time tested and true store of wealth.

The same people who fear gold seem to have no problem holding a significant amount of their assets in euros in a European bank as Europe burns around them, both figuratively and literally. The euro might not exist 12 months from now but no one seems too concerned. They act like its been around forever and always will be, but it only was dreamt up by globalists in 1999.

YOUR BROKER FEARS GOLD

Near the end of 2007 a good friend of mine who had been wanting to sell her house called me. I had been telling her for a few months to sell her house and buy gold because a big housing crash was coming.

She said she had received a good offer for her house and checked with me to make sure I was certain about her selling, buying gold with the proceeds, and renting for a few years. I told her, emphatically, yes.

So she sold her house. At the time gold was around $750 per ounce. We fell out of touch for a few years and she contacted me last year around when gold was near $2,000 per ounce. I smiled when she called, waiting for her to tell me about the fortune she made.

“So?” I asked, waiting for the exaltation.

“What?” she also asked, confused.

“How’d that trade work out for you?” I asked.

“Oh. Well I sold the house. And I put the funds into my brokerage account with my (government registered) financial advisor,” she responded.

My heart sank. I knew what she was going to say.

Her financial advisor had talked her out of it. He said putting all her assets into gold was far too risky. Where in the government training manuals does it tell you to even own any gold!

She got worried too and less than a year after selling, under pressure from her old Chinese parents, bought another house. It was a bit cheaper but after transaction and moving costs it was a loss.

GOLD IS IN A BUBBLE

Of course, now, with gold over $1,700, it is nearly impossible to get anyone from the general public to buy gold. It’s gone too high, they cry! CNBC says it was a bubble, they repeat like trained seals.

It’s gone from near $300 to nearly $2,000 in the last decade. Surely that is a bubble and if it hasn’t already popped it soon will, right?

No. That’s not right. This is the problem with watching the value of anything in terms of constantly depreciating US Federal Reserve Notes. In the following chart, when looking at the price of gold in nominal dollar terms it looks like an insane rocket ride of epic proportions. But, when adjusted by the US Government’s own, heavily massaged inflation statistic (the Consumer Price Index, or CPI), the price of gold has just finally reached nearly the same level it was at in 1980 and looks far less spectacular.

PORTFOLIO ALLOCATIONS

Getting back to the initial question posed on the panel as to what percentage we recommend people hold gold bullion as a percentage of their portfolio. While I stated I’d have no problem with 100%, we actually recommend to our subscribers is to hold 30% of their portfolio in bullion – both gold and silver.

We also recommend, at this time holding 20% of your portfolio in gold mining juniors and 15% in gold mining major stocks amongst other things. That’s because we are expecting all the monetary printing going on with abandon in the western world to foment a true bubble, not only in the price of gold but even moreso in the price of the mining shares, especially the juniors. We are expecting a mania for the ages in these stocks. And, how will we know when to sell? When I am asked what percentage of their portfolio should be held in gold bullion and I say 100% and no one laughs.

Best,

Jeff Berwick

The Dollar Vigilante

P.S. The tech bubble is dead. The housing bubble is dead. And the bubble in government debt is in its death throes. What will be the final bubble? It will be in gold and silver mining stocks.
But even if you are wisely invested in these stocks, are you sure that YOU really own “your” share?

It is one of the dirtiest little secrets in the brokerage business. And 99.9% of people have no idea it is even being done to them. It’s called “street name registration” and it’s how the brokerage where you hold your stocks “registers” your shares. To save money and time, and to allow your shares to be included as assets that THEY can use to do what they want with, your brokerage never actually registers you as an owner of the shares.

Street name registration allows your broker to lend your shares to short sellers, thereby driving down the price of your own stocks. Additionally, this method allows your broker to “re-hypothecate” your assets–meaning it allows your broker to borrow money against your shares and speculate in the derivatives market!

These hidden risks are planting the seeds of tomorrow’s ultimate collapse — In which there may be a system-wide collapse of broker dealers, taking down millions of investors, and ensuring permanent non-recoverable losses to an entire generation!

So how can we safely invest in gold and silver mining shares and avoid the collapse brought on by the coming broker dealer crisis?

There are two methods of owning stocks your broker-dealer will never tell you about. These two methods completely remove the broker dealer counter party risk attached to your shares — effectively removing them from “the system.”

These two methods deprive your broker dealer the abilities to sell your stocks short and to “re-hypothecate” them. Your broker dealer will never willingly tell you about these methods – because they make more money when your shares are in their hands – precisely where risks are greatest to you.

These methods are so safe, that even if your broker dealer collapsed tomorrow, and stole every penny from every client investment account you would be able to sleep safe and sound, knowing your stocks are far out of reach, and legally unavailable to access by your broker-dealer.

This means everyone — all brokers in the Unites States and Canada. If every broker collapsed tomorrow due to waves of bankruptcies, these ownership methods will protect you 100%. You will be able to sleep safe and sound at night, knowing your shares are carrying zero counter party risk.

We’ve put together a complete research paper outlining the process to register your shares and giving you all the info you need to know to do it easily, quickly and properly. We’ve spent hundreds of hours dealing with broker dealers, transfer agents, public companies, and the SIPC in researching and finding out all the details on how to get your shares outside of the system.

We’ve put all his research together into a Special Report called “BulletProof Shares”. To find out more… and to get your copy… just click here.

A Parting Shot:

We have a tale of woe similar to Jeff’s story about his home-buying friend…

We told both our mother and our sister to sell their homes back throughout 2005 and 2006.

“Sell your homes. Buy silver…please!” we urged. We might as well have been asking them

Mom ended up taking out a second mortgage on her existing home, while Sis and her boyfriend kept their old home to rent out even as they bought a bigger place.

Neither of those proved to be particular good ideas. Unless the intention was to lose as much money as possible.

The value of those homes is between a quarter and a half lower. Meanwhile silver multiplied in price. Even after tumbling from its 2011 highs, silver is still about five or six times as much in dollar terms than it was seven years ago.

And of course, our loved ones still won’t buy a single solitary ounce of silver. Even after seeing how much ignoring our advice cost them. They still impressively rationalize their staying in the Fed-goosed real estate market…and they somehow sleep well at night while continuing to ignore precious metals.

We are a little offended. It seems that they’d rather listen to the bobbleheads on news than listen to us and to our Austrian school friends about the dangers inherent in saving in the currency of a bankrupt empire.

Today we’d like to leave you with a few words from our friend Mac Slavo of SHTFPlan.com:

“Over the last half decade or so, as the price of gold and silver have steadily risen, financial experts, advisers and pundits have often argued that gold is a bubble. They said it in the spring of 2008, as gold approached $900 per ounce. Likewise, as gold surpassed its nominal 1980′s high and went above $1000, those same analysts were screaming sell recommendations. To this day, with gold nearing $2000, they are still all marching to the same tune.

“Headlines for the last three years have been heavily weighted against gold, with every price spike being met with bubble talk. When George Soros said in January of 2010 that gold was the ultimate bubble, the media pounced on it as evidence that precious metals were through. Of course, Soros had been acquiring millions of dollars worth of gold assets (and continues to do so today). His message was completely misconstrued. Gold, like any other asset that involves a buying frenzy, will eventually become a bubble. And given the reasons for why people buy gold — inflation protection and as a hedge against the loss of confidence in government stability — we can be fairly certain that gold and precious metals in general will eventually reach exorbitant levels and ‘pop.’

“But, as Daniel Ameduri of Future Money Trends points out in the following micro-documentary, we’re nowhere near bubble territory yet.

“It’s important to note that 1980 was the end of the gold run that started when Nixon closed the gold window in 1971. That was roughly a ten year run up in the price from $35 to over $800 per ounce.

“This, however, isn’t 1980. Our debt-to-GDP ratio [Tuesday] morning hit 101% and is going much higher. We’ve added more federal debt in the last 7 months of 2011 than all of the years from 1776 to 1980 combined. The policy of our government is not to curb inflation is it was in 1980, but rather, to stimulate it, as evidenced by 0% fed funds rates (in the 1980′s it was in the teens!) and the massive monetary printing over the last few years.

“1980, even though the end of the recessionary environment was still a couple years away, is when the people felt confident that crisis of the past decade was coming to a close.”

Back in 1980 Fed Chairman Paul Volcker’s actions curbed — and then killed — the rise in gold and silver prices. Today Ben Bernanke’s actions are just adding fuel to the rocket ship that will carry gold and silver prices to undreamed of highs…and the dollar to unspeakable lows.

While the best time to start buying gold would when it was under $300 (and silver back when it was under $6) just a few years ago, that doesn’t mean you shouldn’t be adding to your gold and silver holdings.

It also doesn’t mean that you’ve missed out on getting in at a great time to make gains from gold’s (and silver’s) rise…

The gold price still has much, much further to go. The price of silver may have even further to go! To see how much…and to set yourself up for even bigger gains based on the rise in precious metals… just click here.

Or don’t click. After all, you may believe the mainstream reports about gold being in a bubble. You may believe that the price of gold has nowhere to go but down. You may want to sell your gold and gold-related investments right now. As Mac continues…

“If you feel like our current economic, financial, monetary, and social crises are wrapping up, then by all means sell your gold.

“But we urge you to consider what Future Money Trends has to say about it before you do.

Micro Documentary: Gold 1980 Vs. Today

We hope you watch the video, good patron. And we hope you can agree with us — and with Mac on this one. Again Mac Slavo:

“Despite what the experts in the media and on television tell us, there is no bubble in gold — not yet, at least.

“You see, bubbles require emotionally driven buying (just like bubble pops require emotionally driven panic selling). When all of those family members, neighbors and acquaintances you know who still reject the notion that our economic and social paradigms are shifting; when they start buying gold and silver at rapidly rising premiums and prices (as opposed to their current selling of precious metals to rip off outfits that include ‘We Buy Gold’ shops) and when they all become experts on inflation, safe haven assets, and gold investing, then it’s a bubble.

“Look around. We’re not even close.

“Gold is going up so long as the governments of the world keep printing money and so long as the public’s confidence continue to deteriorate.”

From SHTFPLan

Regards,

Gary Gibson

Managing editor, Whiskey & Gunpowder

ggibsonagora@gmail.com

The Fear of Gold was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Addison,

I am not given to hyperbole. This is the most important message I have ever sent. I urge you to read it and to share it with others.

Earlier this week, I attended the Utah Monetary Summit in Salt Lake City, Utah. As you may know, the state of Utah passed a Legal Tender Act earlier this year authorizing the use of federally minted gold and silver coins as money in the state of Utah. Now legislators in other states, many of whom attended the Monetary Summit, are evaluating similar legislation.

Among other things, this means the United States is approaching a constitutional crisis because states are beginning to financially break away from the federal government. This is no less serious than the American War of Independence or the War Between the States. The Utah Monetary Declaration (below) is a financial declaration of independence whereby states are beginning to opt out of the Federal Reserve System. A major confrontation seems inevitable.

The issues underlying this historic development include:

1. The unsound condition of large U.S. banks, which have inaccurate and crumbling balance sheets along with $250 trillion in high-risk OTC derivatives contracts.

2. The unstable nature of the U.S. and world financial systems, characterized by unworkable levels of sovereign debt and private debt and by over $600 trillion in OTC derivatives liabilities.

3. The excessive levels of federal government debt and unfunded liabilities combined with falling federal tax revenues prior to the start of the double-dip recession that began in the second half of 2011.

4. The radically inflationary monetary policies of the federal government and of the Federal Reserve, which promise high inflation or hyperinflation in the future.

5. The worsening condition of the real U.S. economy outside of large banks, multinational corporations and Wall Street firms, where federal government bailouts and Federal Reserve monetary easing (money printing) transfer wealth from proverbial Main Street to literal Wall Street.

6. The rapidly escalating polarization of the distribution of wealth, which threatens not only the economic stability of the United States, but also its social and political stability.

7. That the current highly inflationary monetary system is plainly unfair and fundamentally immoral.

As a consequence of these grave, ongoing and growing problems, which are being largely ignored by the mainstream news media, state governments must take immediate action to ensure the functioning of local economies and of state governments, should the federal government/Federal Reserve System break down. Specifically, there is an urgent requirement for an alternative currency to the privately issued Federal Reserve Note, which is erroneously referred to as the “U.S. dollar.”

Replacing a stable form of money with ever expanding debt and inflation undermines capitalism and destroys jobs. The monopolistic monetary system of the United States today is inherently inflationary because it must continually expand in order to prevent a deflationary collapse. The underlying structure and root cause of the monetary system’s inherent and inescapable inflationary bias is the legal construction of money as debt with no direct link to real economic activity. Debt levels in the economy and bank profits are simply out of line with reality.

In addition to the unsustainable and unstable nature of such a system, an inherently inflationary monetary system destroys savings by devaluing the currency. Savings, which are the result of excess production, precisely define the term “capital.” Replacing capital with debt, while highly beneficial for banks that create money out of thin air (through lending), is a deeply flawed concept responsible for the systematic and ongoing breakdown of capitalism in America. This deep structural problem is the absolute root cause of chronic, irremediable unemployment. As a consequence, there will be no genuine economic recovery in the U.S. and jobs will not return unless and until the monetary system is fundamentally reformed.

An ultimately more important issue is also garnering attention among state legislators, prominent (non-Keynesian) economists, religious leaders, political activists and voters. Inflation, particularly if it is systematically understated by the federal government or Federal Reserve, robs savers of the proceeds of past labor and robs workers of the spending power of their wages, living standards and financial futures. Inflation robs the elderly of their retirement and robs investors of their capital by facilitating taxes on alleged gains created solely by currency debasement. Legal tender, created as debt, results in ever larger debt burdens thrust upon innocent future generations that will experience progressively lower living standards and reduced economic opportunity. Generations to come will be born into debt bondage. Thus, the monetary system is at the center of a profound moral crisis.

The morally and literally bankrupt nature of the current U.S. financial system is transforming America into a dog-eat-dog society where every person seeks to live at the expense of someone else, rather than by producing wealth, because production is systematically stolen by the federal government and by banks through the clever device of an inflationary monetary system. The monetary system operates by exchanging fictitious “wealth” (debt-based money created out of thin air by private banks) for the real wealth of borrowers, i.e., the proceeds of their labor. In effect, the monetary system is a massive scam purported to be legal but lacking any demonstrable legal authority. Specifically, there is no constitutional or other legal basis upon which the federal government can force a private monetary monopoly on the states. In fact, the Constitution of the United States explicitly establishes the exact opposite.

The oversized banking system and federal government have grown in an unholy alliance in lock step and now consume so much of the U.S. economy that, together, they not only pillage the real economy, but threaten to kill, once and for all, what is left of the free country founded by the Declaration of Independence. The moral precedent and example set at the highest levels of the federal government and of the banking cartel is that profit, fame, success and wealth are (either directly or indirectly) rewards for immoral acts, rather than for honesty in business. Moral corruption at the top — embedded in the very structure of the monetary system — has slowly spread its gangrenous effect, undermining totally the founding principles of the United States of America, enshrined in the Constitution of the United States and in the Bill of Rights. Rather than liberty, America’s legacy is fast becoming one of moral turpitude enshrined in financial injustice and oppression.

The challenge before our nation today — our moment in history — is not merely a financial or economic or political or legal/constitutional crisis. It is also, and primarily, a moral crisis that could literally destroy theUnited States of America and all that it has stood for in more than two centuries. A stable society requires sound principles. A moral society requires sound money. Today, the United States of America has neither.

This message is a call to action. In the words of poet Dylan Thomas, let us say for America, “Do not go gentle into that good night / Rage, rage against the dying of the light.”

I am personally asking you to read the Utah Monetary Declaration (below), which I, among many others, signed on Monday evening, Sept. 26, 2011, in the Post Chapel on the University of Utah campus at Salt Lake City, and to forward it to all, especially to your state officials. Time is of the essence. Although its duration and pace are as yet unclear, the crisis is already upon us. Please act now and do not delay.

Ron

Utah Monetary Declaration

WHEREAS, money, as a medium of exchange, a store of value and a unit of measure promotes economic activity, growth and productivity by facilitating specialization and trade, the accumulation of wealth and its long-term investment, as well as accountability in setting prices, tracking progress, and settling accounts;

WHEREAS, natural money — precious metal coin — by virtue of its inherent qualities of recognizability, measurability, uniformity, divisibility, durability, portability and scarcity has reliably retained its purchasing power, notwithstanding periodic fluctuations, over the centuries and millennia of human history, serving as an effective medium of exchange and store of value often without any governmental declaration to require, legitimize or perpetuate its adoption and operation as such;

WHEREAS, sound money, by retaining stable purchasing power over time, best serves societal needs by substantially reducing the uncertainty of inflation risk for creditors and deflation risk for debtors as well as encouraging saving and investment among the general populace and benefiting the economic zone in which it circulates by stimulating the economy and by attracting foreign capital and commerce to the region;

WHEREAS, history attests that monopolistic monetary systems frequently engender currency debasement, resulting in serious consequences such as lost purchasing power, inequitable wealth redistributions, misallocation of productive resources and chronic unemployment, and that, as the cornerstone of a free market and society, the right to choose, whether between suppliers of goods and services, political parties and candidates, or between alternative media of exchange, effectively promotes the general welfare;

WHEREAS, for the equal protection of all people, rich and poor, the open circulation of complementary and competing currencies should be fostered and promoted by every sovereign state, including those of the United States of America pursuant to their monetary powers (expressly reserved in article 1, § 10 and in the 10th Amendment of the United States Constitution) to monetize gold and silver coin as an alternative, voluntary medium of exchange, and as an effective check and balance against debasement of the national currency by the national government which is constitutionally precluded from demonetizing state legal tender, through disparate tax treatment, discriminatory regulation, the threat of suppression and seizure or otherwise;

NOW THEREFORE, we the undersigned hereby declare and affirm that:

1. As an essential element of true liberty and of the pursuit of happiness in a free society, all people enjoy the inherent and unalienable right to lawfully acquire, hold and use as a medium of exchange whatever form or forms of money they may prefer, including especially gold and silver coin.

2. All free and sovereign states bear the moral, political and legal obligation not only to refrain from debasing their own currencies (except under the most exigent circumstances) and from erecting barriers to the unfettered circulation of monies issued under the authority of their sovereign trading partners, but also to affirmatively defend and protect against fraud, counterfeiting, uttering, passing off, embezzlement, theft or neglect by requiring full transparency and accountability of all state-chartered financial institutions.

3. No tax liability nor any regulatory scheme promoting one form of money over another should apply to: (a) the holding of any form of money, in a financial institution or otherwise; (b) the exchange of one form of money for any other; or (c) the actual or imputed increase in the purchasing power of one form of money as compared to another.

4. Except in the case of governmentally assessed taxes, fees, duties, imposts, excises, dues, fines or penalties, the authority of government should never be used to compel payment of any obligation, contract or private debt in any specific form of money inconsistent with the parties’ written, verbal or implied agreement, or to frustrate the intent of contracting parties or impair contractual obligations by invalidating the application of a discount or surcharge agreed to be dependent upon the particular medium of exchange or method of payment employed.

5. The extent and composition of a person’s monetary holdings, including those on deposit with any financial institution, should not be subject to disclosure, search or seizure except upon adherence to due process safeguards such as requiring an adequate showing of probable cause to support the issuance by a court of competent jurisdiction of a lawful warrant or writ executed by legally authorized law enforcement officers.

We hereby urge business leaders, educators, members of the media, legislators, government officials as well as judicial and law enforcement officers to use their best combined efforts to reinstate and promote the legal and commercial framework necessary to establishing and maintaining well-functioning, sound monetary systems based on choice in currency.

The signatories hereto concur in the general principles expressed in the foregoing declaration notwithstanding specific reservations some may have as to how such principles should be interpreted and applied in practice.

Next week, the folks over at the Heritage Foundation are putting on their own request for a stable currency… They want a good old debate, to see if there’s anything one can do to stabilize the U.S. dollar.

We’re sending three of our best from the Baltimore office down to Pentagon City next week for Heritage’s two-day event. Expect commentary and coverage from Addison Wiggin, Doug Hill and Samantha Buker.

They’ll let us know what prescriptions are on the table. After all, the dollar is one sick puppy, as Detlev and Ron Hera know. Heritage advertises plenty of hope by calling it the Conference on a Stable Dollar: Why We Need It and How to Achieve It.

All good Whiskey patrons know why a sound currency is great, but do we think it’s gonna happen before all hell breaks loose? That’s the question that the likes of an ex-Fed Reserve president, a Wall Street Journal reporter, a whole slew of university economists and longtime investor and “interest rate observer” Jim Grant will address.

Case for Gold co-author Louis Lerhman and billionaire publisher Steve Forbes will take center stage. We think we know what they’ll argue for, but stay tuned next week, Shooters!

Regards,

Gary Gibson

Notes From the Utah Monetary Summit was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

You might reasonably wonder why the market is so large. A Pew Research Center poll reports that almost 85 percent of Americans say they are happy or very happy.

Yet millions want to be happier still. And they feel they could be, if only they pursued it a little more ardently.

Except… that won’t work. Happiness is a by-product. It is achieved indirectly, by producing something beautiful or useful or by making someone else happy. The search for happiness is one of the chief sources of unhappiness.

Take a look around. Much of the economic misery we see today is due to the unbridled pursuit of bigger houses, fancier cars, and more exorbitant trips. The lure of consumer culture and an obsession with more is precisely what keeps so many from contentment.

The Stoics argued that happiness results not from pursuing affluence and status but rather virtue and wisdom. Pythagoras, the sixth-century B.C. philosopher and mathematician, asked that his followers take time, before going to sleep each night, to pose three questions: What have I done? Where have I failed myself? What responsibility have I not fulfilled?

If we fixate instead on gratifying all our desires, we may become superficial, acquisitive, deluded, or foolish. The headlong rush for happiness can also blind us to serious problems or numb us to the pain of others. After all, every life is lived between the poles of joy and sadness. Laughter and love are part of it. But so are pain and suffering. To deny the tragic aspects of the world is to suppress a large part of what it means to be human.

Playwright Tennessee Williams understood this. Asked in an interview to define happiness, he replied, “Insensitivity, I guess.”

Great artists often try to awaken us — or stir our conscience — by reminding us of the more doleful aspects of life. In response to the 16th Street Church bombing in 1963, an attack by the Ku Klux Klan in Birmingham that killed four girls, saxophonist John Coltrane wrote “Alabama,” an instrumental work that expresses anguish and sorrow more eloquently than words.

Poetry, too, can inspire us with its sorrowful realizations. Seventeenth-century British poet Robert Herrick famously wrote, “Gather ye rosebuds while ye may / Old Time is still a-flying; / And this same flower that smiles today / Tomorrow will be dying.”

Shakespeare captured the same sentiment in Cymbeline: “Golden lads and girls all must / As chimney-sweepers, come to dust.”

History shows that men and women of genius are often melancholic. Consider writers like Ernest Hemingway and Virginia Woolf. Composers like Rossini and Mahler. Statesmen like Lincoln and Churchill. Artists like Michelangelo and Gauguin. Philosophers like Schopenhauer and Kierkegaard.

In 1890, Vincent Van Gogh, overcome by feelings of worthlessness, walked out into the southern French countryside and shot himself in the gut with a pistol. Just 37, he died from the wound two days later. Yet in the previous two years — and despite his bleakness — he completed more than 200 paintings, many of them masterpieces.

Handel, after years spent at the top of the musical world, fell into terrible poverty, ill health, and deep depression. Yet from the depths of profound despair, he completed his greatest work, “Messiah.”

Beethoven raged against advancing deafness and his own finitude, yet created immortal works during this period, including his Fifth Symphony; his only opera, Fidelio; his late string quartets; and the Ninth Symphony, with its triumphant “Ode to Joy.”

Not all innovators are melancholy, of course, and not all melancholy souls are innovative. And I don’t mean to romanticize clinical depression, an often-debilitating illness. But there can be no joy without sorrow, no daybreak without the night. Periods of unhappiness are natural and even valuable. How are we to measure our best moments except against those that are not?

Contentment often saps our motivation. Dissatisfaction is the great spur to progress. Imagine the innovations we would lack today if we were satisfied with quill pens, horse-drawn carriages, or the “evil spirits” theory of disease.

Today, millions equate happiness with money. But studies show that once people are lifted out of poverty, their happiness is not dependent on income but rather love and meaningful work. Reported levels of well-being are also dependent, in part, on genetics, health, circumstances, and coping skills.

Happiness results when our aspirations are being fulfilled and we are optimistic about the future, when we are developing our capabilities or helping others develop theirs. In short, we are happiest when happiness itself is not the goal.

Contemporary philosopher Robert Nozick writes: We want experiences, fitting ones, of profound connection with others, of deep understanding of natural phenomena, of love, of being profoundly moved by music or tragedy, or doing something new and innovative, experiences very different from the bounce and rosiness of the happy moments.

Of all the prescriptions for happiness, perhaps the least helpful one is the now-fashionable idea that you can defeat the blues by “paying attention to yourself.” Hardly. The happiest individuals are invariably those whose ordinary, everyday mode of living is being busy and unconcerned with self.

That doesn’t mean sacrificing your interests for someone else’s. Rather, it means asking not just “what would it take to make me happy?” but also “What limits should I set on this pursuit?” “How should I weigh my own happiness against that of others?” And “What else matters aside from happiness?”

We all want to be happy. But life is also about education, work, courage, honor, empathy, and resilience in the face of hardship. Real contentment comes from a feeling that your life is worthwhile, that it is dissolved into something meaningful and great. That leads to gratitude.

And gratitude, it turns out, is an indispensable part of happiness.

Regards,
Alexander Green
Whiskey & Gunpowder

May 16, 2011

Alexander Green is the Investment Director of The Oxford Club. A Wall Street veteran, he has over 20 years experience as a research analyst, investment advisor, financial writer and portfolio manager.

Mr. Green has been featured on The O’Reilly Factor and has been profiled by The Wall Street Journal, BusinessWeek, Forbes, Kiplinger’s Personal Finance, C-SPAN and CNBC, among others.

He currently writes and directs the twice-weekly Oxford Insight e-letter and three short-term trading services: The Momentum Alert, The Insider Alert and The New Frontier Trader. Mr. Green is also the author of two bestsellers: “The Gone Fishin’ Portfolio: Get Wise, Get Wealthy… And Get On With Your Life” and “The Secret of Shelter Island: Money and What Matters.”

The Trouble with Happiness was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Doug: Sure. This is a story that’s going to end very badly for a lot of people. I’ve said this before, in many different ways, but I think it’s worth saying again, because most people just don’t grok it…

L: Grok. From the Martian word for “drink” and “understand.” In Heinlein’s novels, water was a critical element of Martian culture — makes sense, for a desert planet. When you grok knowledge, as when you drink water, you don’t just hold it in your mouth and spit it out. You take it into yourself, it goes into your blood, and eventually into every cell in your body; it becomes part of you. This is heavy-duty understanding… Sorry for jumping in with the spontaneous lecture. I just suspect many readers will not know the term.

Doug: Or put another way, in the negative case, most people just don’t get what money really is — and what it isn’t. They take it as a given, as part of the cosmic firmament. But it’s not. A prime example of this is the mistaking of debt for money, a phenomenon David Galland pointed out in a Casey’s Daily Dispatch a few weeks ago. This is why the entire world’s monetary system today is headed for a disastrous failure. And this is absolutely inevitable. There’s no way around it.

L: Why?

Doug: Because you can’t use debt as money. As I’ve pointed out before, Aristotle, in the fourth century BC, was the first person to define what money is. And what is it? It’s a store of value and a medium of exchange.

The paper we use today is a medium of exchange — it got that way because governments made it illegal not to accept it — but it’s not a good store of value. And it’s rapidly and radically becoming less of a store of value. What we use as money today is actually not money; it’s currency. Technically, that’s simply a word that indicates a government substitute for money.

What does make for good money? Again, Aristotle gives us the answer. It’s something that has five characteristics: it’s durable and divisible, consistent and convenient, and has value in itself.

L: Some of our readers who’ve studied Austrian economics challenged us on that last bit, last time we talked about gold, because, as the Austrians pointed out, value is subjective. But you don’t mean some sort of value that’s independent of people making value judgments. You mean that people value something that makes for good money, because of its innate qualities — not something “valued” because of government threats of force.

Doug: Right. And for these reasons, gold is almost certainly the best thing to use for money. Not because I say so, nor because Aristotle said so, but because, over time, people have found it to be the most durable, divisible, consistent, convenient, and inherently valuable thing to use. Silver is also good, but it’s less durable because it corrodes. And less convenient, in that it takes about 60 times more of it — at the moment — to offer the same value as gold. Copper is the next traditional step down the ladder.

L: That, plus one reason that’s pertinent today but was not a problem in Aristotle’s world: gold can’t just be printed up on the arbitrary whims of those in power.

Doug: That’s the big one. Using metals as money takes the whole matter out of the hands of the government and its bureaucrats.

L: But we don’t use gold today…

Doug: No, as per David’s example, it’s as though a bunch of friends without any real money started exchanging IOUs for money, and then after a while forgot that the IOUs were supposed to represent, and be redeemed in, real money.

The problem with this is that, in the case of the IOUs between friends, paper is based solely on hope and trust. One can move away, or die, or turn dishonest, or become insolvent — many other things could happen. A guy stuck with a dead man’s IOU has nothing.

With government IOUs, or currencies, it’s worse, because they can increase the number of IOUs in circulation without telling anyone — that’s what inflation is. Since the government creates the IOUs, it gets the benefit of spending them before the inflation they create raises prices, which is basically stealing from the people. And, of course, sometimes governments do “die,” leaving the holders stuck with nothing, just as with the IOUs between friends. In fact, it’s arguably far more likely that such problems will arise from trusting a government to print IOUs than from trusting a friend.

L: Most people feel that they should do right by their friends — government’s don’t have friends, and most see their citizens as being property, like cattle, that require the state’s permission to do anything. Inflating the currency isn’t a crime in their view, just a tool for controlling the dumb masses. But it’s really taxation without representation.

Doug: Sadly so. And since the institution of government is based on force, on compulsion, they feel they have every right to do what they want. They sanitize all types of criminality by saying it’s in “the national interest” or some such poppycock.

L: Okay… but these currencies have worked for a very long time. Why are you right about this and the rest of the world wrong? Why is it inevitable that government currencies will fail?

Doug: [Chuckles] Because governments are not living persons who care and can be motivated to do the right thing. They are collections of individuals — politicians and bureaucrats, not exactly the most desirable types — who pursue their own interests. Regardless of the rhetoric, their interests coincide with the public good only on occasion, like a broken clock being right twice a day. Even in the most enlightened times — even in the best of times — governments have huge incentives to spend more than they take in. These are not the best of times; the population has been trained for generations to expect subsidies and freebies as their due, without regard to who pays or how they will be paid.

I’ll give you an example. When I was on the Phil Donahue Show, the day before the national elections in 1980, I was making the same philosophical points I am now. I explained how they, the taxpayers, would pay for all the goodies — like Social Security and unemployment compensation — that they wanted. A middle-aged guy in the audience asked: “Well, why can’t the government pay for these things?” And the rest of the audience roared approval.

It was then that I first realized that resistance was futile and the situation was basically hopeless. And that someone who can seem perfectly sensible when he’s discussing sports, or the weather, or the state of the roads, was likely to be a moron when it came to economics. And that when he became part of a crowd, it was even worse: he might transform into an imbecile or even an idiot.

Anyway, the dollar has existed for many years, even though it’s degraded over time — first with the creation of the Federal Reserve in 1913, then with the repudiation of domestic gold redeemability in 1933, then with the repudiation of international redeemability in 1971. Even though the government has created trillions of new ones, the dollar is still thought of as some kind of a cosmic standard. In point of fact, it’s no better than the Argentine peso and will have the same fate.

These IOUs have a quite ephemeral reality and are far too easy to create — there’s literally no limit at this point. We don’t even have to actually print them anymore, they’re created by computer strokes — so it’s unrealistic to expect fiscal restraint on the part of any government over time. It’s just too tempting to spend money to make people feel richer than they really are, buying votes.

L: Looking at the deficits and national debt, it certainly seems so.

Doug: The national debt — when was the last time you heard any average person worry about the national debt? Americans have become so used to carrying huge loads of debt around — right out of college with student loans — that it doesn’t even occur to them that there could be any reason for concern over the national debt. It’s an abstraction, like the number of light years to the Andromeda Galaxy.

People used to at least pay attention, though most would say, “It’s not a problem, we owe it to ourselves.” But that was always a delusion. Some people, organized in a club called the government, borrowed it from some other people. But now it’s even more dangerous, because the U.S. government owes it mostly to foreigners: the Chinese, the Japanese, the Taiwanese, and so forth. Americans, who at least theoretically have some interest in keeping the U.S. government straight, are tapped out. So it’s gone to borrow from other societies. And they won’t like it if they are left holding a bunch of worthless IOUs at the end of this experiment.

As the world political situation continues to deteriorate towards something I think will vaguely resemble World War III, the chances are excellent that a U.S. government at the end of its financial rope will default, likely by radically devaluing its dollar. They’re way past thinking in millions. They don’t even think in billions anymore; they’re up to trillions. Soon Obama will have to ask the buffoon he appointed as a science advisor what comes after trillions. Those nice foreigners who gave Americans physical wealth in exchange for pieces of paper are going to find that, indeed, all they got was a bunch of paper. Maybe not even that, but just ledger entries representing pieces of paper.

It’s not just the Chinese and Japanese governments that are going to be unhappy. But hundreds of millions of individuals around the world — in places from Russia to the Congo, to Mexico, to Thailand — that have a trillion of the things under their mattresses, because they justifiably don’t trust their own government’s paper, are going to be even more unhappy with the U.S.

This is big trouble. It’s not just another economic downturn when scores of millions find their life savings go “poof.” What we’re looking at is a cataclysm at some point soon. I hate to sound inflammatory, but I think the situation is much, much more explosive than it appears on the surface, much worse than you see on the TV news.

L: That’s a frightening assessment. But World War III is a topic for another day. As dire as the scenario you paint may be, is it enough to cause currencies to stop functioning as means of exchange? So few people can even conceive of an alternative…

Doug: They probably won’t stop functioning as means of exchange. At least not right away.

Even during Germany’s infamous hyperinflation of the 1920s, or Zimbabwe’s more recent one, in which there were so many zeros after the ones on the bills you couldn’t even count them — people still used the governments’ paper currencies. They still used them! When I was last in Zim, three years ago, we already had to pay for gas with backpacks full of notes; most inconvenient. In the case of Germany, there were still ten- and twenty-mark gold coins available, if not exactly in circulation. People forget that the mark, the franc, the lire, the dollar all used to be names for a certain amount of gold. [Like the pound, all were measures of weight.—ed.]

When World War I started, Germany went off the gold standard — it used to be about five marks equaled a dollar. By 1923 there were trillions to the dollar. Only the Germans who either kept those gold coins under a mattress or had foreign bank accounts still had liquid capital by 1923; everybody else was wiped out. So people didn’t spend their gold if they could avoid it.

That’s what Gresham’s Law is all about. If there is a “legal tender” money — a paper money — floating around, you try to pay your obligations in it. You try to get rid of the hot potato. But you try to get paid in the good stuff and hold on to it. The Weimar inflation of Germany was an utter disaster for that country; it led to all kinds of nastiness.

L: So many people think of Weimar Germany and Zimbabwe as aberrations from far lands, if they think about them at all. Interesting that Germany is at the heart of the euro now, facing Gresham’s Law again.

Doug: It’s been true since at least the days of Rome. But I wonder if it won’t be much more serious this time. All the world’s major currencies are issued by governments of countries that are much more urbanized, with economies that rely mostly on services. In the U.S., the UK, the eurozone, and Japan — all of their currencies are in big trouble for various reasons, and there’s relatively little production of what you might call the basics.

Back in the 1920s, or even a few years ago in Zimbabwe, half of the people still lived on farms, and a lot of people didn’t even have bank accounts, let alone credit cards and pension funds. The demise of the dollar and other paper currencies has got to be much, much more serious than these episodes in the past.

L: Currency regime change hits the global reserve currency — it won’t be easy. Let me come at this a different way. As an advocate of hard money, you understand that inflation of the money supply leads to inflation in prices. If you have 1,000 gold coins in a small village, in the unlikely event that someone digs up enough gold top make 1,000 more gold coins, you now have twice as many coins chasing roughly the same goods, and so prices will go up. But we don’t live in a hard-money economy. We’re off the gold standard. We have fractional reserve banking, we have easy debt financing for individuals, businesses, and governments. So one new dollar gets multiplied and impacts the economy like multiple new dollars. But on the downside, if you have loss of confidence in what amounts to a bunch of currency derivatives, those get wiped out in large swaths, greatly reducing the multiplier effect.

So, is it not possible that we could see the government’s unprecedented creation of trillions of new dollars in debt and currency compensated for by the obliteration of trillions in derivatives, and hence no price inflation?

Doug: That’s a good point. It’s one of the many problems with a paper money system based on credit. All those dollars are created out of nothing — inflation. But when banks fail and bonds are defaulted on, you can get deflation. With a metal money, the money supply grows only about as fast as miners can mine more — which is usually about as fast as the real economy grows. So the value of the money tends to stay constant. Or even go up, in a gentle deflation. That’s a good thing, because it discourages debt and encourages saving. And saving is how either an individual or a society gets wealthy.

But these government officials are now totally out of their depth. I remember in 2007, for once in his life since he became one of the nomenklatura, when Alan Greenspan actually said something clear and understandable. He was no longer chairman of the Fed and was, believe it or not, on the Daily Show, a comedy show. I thought John Stewart did an excellent job when he interviewed him. He asked Greenspan if he knew what the money supply really was — if he knew how big it was. Greenspan, quite candidly, said, “Well, we don’t really know.”

L: I think I found a video of this while you were talking.

Doug: There’s a titanic battle right now between the forces of inflation and deflation. When a big corporation like General Motors, or Fannie or Freddie, defaults on its debt, hundreds of billions of dollars disappear. Assets people thought they had and could have been converted into cash disappear. That’s deflationary. In a sound banking system, in which money is a commodity like gold, money can’t disappear. It can change ownership, but it can’t disappear. But in our current system, it can dry up and blow away as easily as it can be created.

One major problem that stems from this is that some people benefit from government money creation and some don’t. Who gets to spend it first, when it’s most valued, and who gets stuck holding the Old Maid card when it vanishes? It’s usually the little guy — the middle-class guy — who gets hurt when this happens. And in the U.S., the middle class is contracting. The financial gyrations we’re going through are destroying the middle class, which naïvely believes that traditional American values still hold sway and that their government is honest. The lower class has long since lost any values, and the upper class is way too cynical and self-interested to really care. Most middle-class people will end up joining one or the other of these two classes, and that’ll be a moral disaster for the country.

America used to be a place where class wasn’t really important, and you could move between classes easily — not at all like Europe or the Orient. But as the middle class gets squeezed, we’re likely to get class warfare between those on top and those on the bottom.

L: One way to look at the inflation/deflation debate is that even if we do in fact have financial asset destruction — a kind of deflation — on a scale necessary to outdo the truly phenomenal amounts of money creation the U.S. and other governments are engaged in, the implied destruction is just as bad as hyperinflation. The number of banks and other financial institutions that would fail — and with so many people having 401Ks and online brokerage accounts, the number of people whose savings and pension plans would be wiped out — would be truly cataclysmic. That’s what it would take to balance the wanton inflation of the money supply we now see in progress. If that’s the cure, it, too, is deadly.

Doug: I think that’s fair to say. Either way, it’s going to be really serious. As I pointed out a few minutes ago, when you have runaway inflation in a place like Zimbabwe, where most people are living on a subsistence level, people with gardens and chickens will get hurt, but they’ll still get by. It’s not the same when the world’s wealthiest and most advanced economies are falling apart. Americans are going to see a serious drop in their standard of living, which they are completely unprepared for, and it’s going to be a disaster. They don’t have gardens and chickens to tide them over. There’s no way around it.

L: Which brings us back to why. I mean, I’m sure many people can see the picture you’ve painted, but why is it inevitable?

Doug: Because the U.S. government and others like it are between a rock and a hard place. It is simply not a politically acceptable option to step back and let the market correct the gross misallocations and distortions the government has imposed on the economy. They must “do something” — even if they know full well it’s the wrong thing. And “doing something” means spending without raising taxes too much, because they know too much of that will slam the coffin on the economy they are trying to resuscitate. Spending on “stimuli” to “fix” the economy — direct spending on bribes to voters, like extending unemployment “benefits” to years and offering them “free” health care, etc… the way things are structured, the government must spend. Not spending is unthinkable.

There are only two ways to pay for that. They can borrow, which they can only do if they raise interest rates enough to make their bonds attractive, and that, too, would pull the plug on what you so colorfully called the “iron lung economy.” And they can print money, which they can do with some impunity, hoping the bill won’t come due until some other poor fool is in office — but that destroys the dollar sooner or later.

Everything we’ve seen shows that they are doing what is predictable for politicians, since they can appear to be “doing something” with the consequences left to the future: they are destroying the dollar.

The U.S. government is going to be running trillion-dollar deficits as far as the eye can see. Again, they can’t borrow it while keeping interest rates low, so they are going to sell their bonds to themselves, which is to say the Federal Reserve, and inflation is going to explode. There simply is no painless choice, and it’s very close to being totally out of control.

L: What about the apparent recovery of the economy? You dissed “green shoots” in one of our conversations last year, but they seem to be growing more numerous.

Doug: That’s because the government bribed people with that ridiculous “cash for clunkers” program. They gave people $8,000 to buy houses. They are hiring three times as many people to do the census as last time, and the population is not three times as large. And many more bribes. But that’s going to come to an end, and it’s going to get much more grim than it was in the fall of 2008.

L: And this financial apocalypse now, as we termed it last week, is the natural endgame of using fiat currencies instead of real money — this is why you can’t use debt as money.

Doug: That’s why you don’t use debt — IOUs — for money. And those people who are complacent about this, those who read these words and know we’re right but take no action because they can’t believe things will get that bad in America, are going to be very unhappy in the near future.

Readers should do something now, while we’re still in the eye of the storm, while there’s a small cyclical improvement happening, and when most of boobus americanus thinks happy days are here again.

Not only do we have to go through the other side of this storm, but then there’s an even bigger hurricane after that. This is just the beginning of the troubles ahead. Take action now.

L: Financial self-defense 101 — that’s what we teach Casey Research subscribers. But let’s walk through some of the generalities here. Reasonable actions to take would include: buying gold, diversifying assets offshore, and… would you still recommend going to cash with inflation on the way?

Doug: Here’s an easy way to remember it: I would liquidate, consolidate, speculate, and create.

Liquidate: Get rid of any assets you have that might have been favored by the old economy but are likely to be blown away by the new one. That would include speculative real estate holdings in formerly hot markets. Maybe even sell your house, if you can, and rent instead. Or, for sure if you keep your house, get a big mortgage at a fixed low rate that will probably be inflated out of existence. And get rid of your houseful of stuff — the junk filling your basement, your attic, that storage unit you’re renting — anything you don’t really need. Turn it into cash.

Consolidate: Cut your expenses to the bone and consolidate your assets. The best way to do that is to buy gold and silver in cash form (coins) and put them away as savings. The other critical element is getting a major portion of your assets offshore.

Speculate: With the government creating bubbles through its mammoth spending programs, and other bubbles popping, like the collapse of more major corporations, take chances on winning big on bets placed on these trends. It’s possible in such volatile times to make a lot of money, just as you do for subscribers to the International Speculator, and Marin does for the Energy Report.

Create: In the coming years, the world is likely to change as radically as it did entering the industrial revolution. This is going to be a really major change, economically, politically, technologically, demographically, socially, militarily — the whole ball of wax. This is a good time to look around and ask yourself, not, “Who will give me a job?” but, “What goods and services can I provide that people will need in the future and pay me for?” What worked during the late Long Boom won’t work — in order to create, you’re going to have to think creatively.

L: I guess I won’t be working on a business plan to become a personal trainer.

Doug: [Laughs] Nor is becoming a barista a good plan for personal survival at this point.

L: Seriously, I’ve listened to you, Doug. As you know, I’ve decided to buy a lot in your Estancia de Cafayate project in Argentina, I’m consolidating, liquidating, and creating — and speculating, that’s what I breathe, drink, and eat. Thus far, it’s made a huge, positive difference in my life. I sincerely hope our readers are doing or will do the same.

Doug: I know you are. I just wish everyone was as quick a study.

L: Thanks boss. Until next time.

Doug: Talk to you soon.

Doug Casey and Louis James
Whiskey & Gunpowder

March 12, 2010

How to Survive Financial Collapse Right Now was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

The reason there are so many “reasons” is because gold is unlike any other asset. It…

• responds to its own supply and demand
• protects against short-sighted government actions and interventions
• is a bellwether of market sentiment and economic outlook
• protects against currency devaluation and inflation
• is global
• is one of the most beautiful metals ever found in the earth’s crust
• is a store of value
• is timeless
• is money

How many assets can you say have all those characteristics?

In spite of gold’s recent correction, the reasons haven’t decreased. In fact, the case for holding gold is stronger than ever. And over the past two weeks, a few “reasons” have surfaced that have fallen mostly under the radar. These, I believe, portend a higher gold price. In fact, it is catalysts like these that could end up in our children’s history books that, in retrospect, were obvious to see…

1. For the first time ever, China has invested in GLD, the gold exchange-traded fund. Their sovereign wealth fund, China Investment Corporation, recently invested $155 million in the ETF. The amount represents only 0.05% of the sovereign funds’ $300 billion, meaning there’s a lot more where that came from.

Those mainstream lemmings who predicted China was done buying gold now have to deal with the reality that this move more likely signals they are closer to the beginning — and not the end — of a long-term strategy to diversify into gold.

2. The Prime Minister’s Office in India is creating a stream-lined process so that the country’s state-owned corporations can “aggressively pursue the acquisition of strategic mineral resources.” The Indian government, normally known for thick-layered bureaucracy, has created a centralized body that will have “rapid strategic and decision making powers.” This is telling, both from the perspective that they see some urgency to the matter, and that the acquisition targets are minerals.

Given the country’s historic propensity to own gold, it’s not a stretch to think the yellow metal will be high on the list of “strategic investments.” Recall their government purchased almost half the IMF gold for sale last year in one fell swoop.

The upshot? Don’t be surprised to soon hear of India following China’s lead of buying precious metal companies and resources.

3. “Iran is now a nuclear state,” declared President Ahmadinejad last week. The Islamic republic has produced its first batch of high-level enriched uranium, which they claim is solely for electricity purposes but can also be used to create material for atomic weapons if enriched to 90%. In response, the U.S. imposed new sanctions, and the U.N. is considering adding more of its own sanctions, too.

The West recently proposed that Iran export its uranium for enrichment and then have it returned as fuel rods for a reactor. Iran demanded changes to that plan, which were rejected, so claimed they had “no choice” but to start enriching to higher levels on their own. “God willing,” declared Ahmadinejad, “daily production will be tripled.”

I’m sure this will all just blow over, right?

4. The U.S. government must inflate. Here’s another reason we think that sooner or later inflation trumps deflation… by 2020, government economists project that entitlement benefits (Social Security, Medicare, etc.), along with interest payments on the national debt, will devour 80% of all federal revenues.

This assumes entitlement benefits don’t grow, which, of course, they are. The overall national debt, meanwhile, will rise to 100% of GDP within a few years, an alarming level by any measure. Even Moody’s warned that our credit status could lose its triple-A rating if the nation’s finances don’t improve, an unheard-of prospect just a few years ago.

So, we’re abruptly fleeing our debt-adding habits, right? As you probably heard last month, Obama signed legislation that raised the cap on government debt from $12.4 trillion — already close to being breached — to $14.3 trillion to permit more borrowing. As Doug Casey has pointed out numerous times, this is the exact opposite of what the government should be doing and will have serious inflationary ramifications.

There’s only one way out: devalue the dollar to reduce the debt burden. And the direct result of that is a rising gold price. We may very well see another round of deflation, but the endgame is inflation.

What I would point out is that any one of these reasons would be sufficient for wanting to put some gold in your portfolio. It’s the cumulative effect that’s potentially scary, one that argues we should be overweight precious metals at this point in history. The reasons are numerous and, in my opinion, overwhelming.

Regards,
Jeff Clark
Senior Editor, Casey’s Gold & Resource Report

February 23, 2010

1,001 Reasons to Own Gold was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

In order for there to be a restaurant at all some entrepreneur has to put his money and vision on the line and open it. He has a thing called “overhead,” which is irreducible on-going expenses whether he has any customers at all or not. The rent, utilities, taxes, staff, laundry, raw ingredients, and so forth are constants. He is harried by assorted inspectors, frequently with conflicting demands.

In order for a meal to be put on the table once Joe Entrepreneur reaches that point the cooks have to prepare it and somebody has to serve it.

The diner has to have both the inclination to eat there and the wherewithal to pay for the meal and tip the waiter.

When government becomes the restaurant the system flies apart in many ways. Governments do not worry about overheads; indeed, it is an essential function of government to grow. The gang in DC has no concept of being able to “afford” the expenses they occasion. Money isn’t real to them. Other people’s money rarely is. They print some more any time they want to knowing that it reduces the value of the dollars we hold. They hire staff which always turns out to be permanent with reckless abandon.

Back in the real world government makes everything more expensive and more difficult. In our example, the minimum wage concept makes labor more expensive for the business owner. He has his choice of taking less profit, reducing staff, not expanding, or cutting quality. All of those will damage his enterprise. For over two decades I have been listening to small business owners say that they had the business to expand, but that between ludicrous restrictions, regulations, and taxes it simply was not worth their while to do so.

Cap and Trade will make energy far more expensive, and do so by design. Does the restaurateur reduce the fourteen ounce Angus strip to ten ounces? Raise prices? Charge for parking? Use frozen french fries instead of hand cut ones from fresh potatoes? It does not matter which unpleasant choice he makes he will be obliged to offer less to customers who are under the same constraints with their work and family expenses. Every time one of them decides that dinner out is an expense he cannot justify the restaurant suffers.

The waiters are damaged by the harm done by government to the owner and the customers, and so is the cook, so is the busboy, and so is the bartender.

The diner, at least, still has the choice of whether or not to patronize the restaurant, although he has to eat somewhere, whether at home or out. This is where we get into taxation policies.

Statists and, indeed, politicians in general, rarely know anything about where money comes from. They seem to think that “made,” “earned,” “produced,” and “printed” all mean the same thing. They really cannot tell the difference between a US savings bond and gold. They think borrowed money is real and does not actually have to be paid back.

They appear to believe that incomes are immutable, that if you make $200,000 this year that you will continue to make at least that much every year until you retire no matter what else changes. They speak blithely of your electrical bill doubling, not seeing that as causing you to spend less elsewhere because you have a ludicrous fondness for heat and light in your home. They even think you should run automobiles on the stuff. Some of them probably even believe that you can charge the ten thousand dollar battery on a Volt with twenty-five cents’ worth of electricity, as advertised.

They think that burger-flippers will always flip burgers, and their lot will improve only if Congress mandates higher wages for them.

Governments understand only fear, force, and how to use the public treasury to buy votes. Congress fails to grasp the very simple fact that everything is interconnected. In one sense it does not matter who, other than those with Pelosi-like incomes, has his or her light bill doubled, the money that will be allocated for electricity can no longer be spent in another area. If Hal’s discretionary income is $500/month and he has to give $167 of that to Brazos Power and Light, one out of every three dollars that he had previously to spend in restaurants, or to have carpets cleaned, or to buy a new fishing rod is gone forever, vanished into the insatiable maw of government. If Susie, the single mom teacher loses a third of her discretionary income, she will have to do without a washing machine, painting her house, or as many school clothes for her child. There is no way, short of a second job, to replace the money which has been stolen by government action, or that stolen by inflation which was caused by printing of fiat money.

I suppose I sound as though I am speaking to a sixth grade civics class, although most kids have allowances or parents who utter the foulest three words in the English language, “We can’t afford…” One wonders if the constantly increasing out of control “budgets” at local, state, and national levels are caused in part by a system that requires great wealth to be elected to public office, and great dependence on funds gathered by those who demand political favors in return. I live near Bryan, a town of 55,000 people. Can someone explain to me why Bryan needs to spend nine million dollars a year? All of it extorted from local property owners?

You may wonder why I am covering anything this basic here on Whiskey & Gunpowder! Surely you Shooters, of all others, understand the basic principles of business, budgets, and von Mises. One would have thought so–right up to the point where the Editor was deluged with letters asserting that pie in the sky “health care” is a “right” and expressing their sentiments in language unbefitting ladies, gentlemen, and civilized debate. If you understand why we cannot have “single payer” health insurance, fine, pass this on to some child who needs to know.

The basic fact is that there is only so much “money” in the world, when we see “money” as a medium of exchange, which it is. I need a better way to induce the cobbler to make me a pair of shoes than offering him twenty dozen eggs he can’t eat before they spoil, although we might agree that I would deliver a dozen a week until the debt was paid. He, in turn, needs cow hide to make shoes, and I have cows, but I don’t want to skin one just to get shoes…at any rate, it worked better when we all exchanged little slugs of silver or gold for each others’ labor and production. The balance gets destroyed when the government creates “fiat” money and expects us to accept their fairy not-gold at the same value as shimmering silver ingots. We won’t do it. We also know that every time more money is cranked out of thin air every dollar we have is worth less because there is no way to differentiate between the dollar we had when there were only ten in the world and that same dollar when suddenly there are a hundred.

The Statists’ theory is that there is no limit to how much money they can “create,” just as there is no limit to how much milk the cow can give. There really are limits to how much moo-juice Bossy will produce, including her heritage, her age, how good her feed is, and whether or not she has had a calf recently. Even cows want a break after being milked for 300 days. It takes nine months to produce another calf and “freshen,” or begin producing more rich, creamy milk.

My darling Charles and I sent Asia, our Segundo, off to pick up a cow and her week old bull calf today. Mathilda, as we have named her, is three-quarters Jersey and a quarter Black Angus, both animals are black, and they will fit in beautifully with the Black Dexters. Mathilda will handle our milk and cream needs for the next three hundred days, more time than it takes for the goats to reproduce (210 days.) The funny part is that the owner didn’t want to milk her so he has been underfeeding her deliberately so that she won’t produce more milk than the calf can drink! How about that, Shooters, when a “simple farmer” in “flyover country” knows that to get less out of the cow you provide less sustenance than she needs. (We gave her a whole bale of first class hay and a big container of clear water for tonight.) Why can’t all those Ivy League economists and lawyers see that when they take too much of our money we produce far less taxes?

There really are practical limits to how many taxes can be extracted from most of us. Particularly in a land where nearly half of the people pay no taxes at all and a lot of them get “earned income credits” for doing one day’s work a year. There is a large class of people that is paid to do one simple chore: vote for the Statists. I suppose it is nice work if one can stomach it. I don’t know, since no government has ever bought my food, shelter, utilities, and medical care. Given my choice I would prefer to be a slum landlord, but the government beat me to it.

There are two points here that the DC gang had better grasp quickly. The first is that no matter how you jigger the figures, jobless people aren’t making money and they aren’t paying taxes on the money they didn’t earn. Just because they aren’t counted officially doesn’t mean that they aren’t out there, as increased robberies, claims for unemployment, and appeals to churches show. Those who are losing more of their income to higher taxes and utility bills are not purchasing as much, which means that the stores they once patronized are no longer making as much money, so they don’t pay as many taxes.

The Statist solution is automatic: “Oh, we’ll just tax the rich!” “Rich” is a relative term but our dear leader defines it at a quarter of a million dollars a year. Their problem is that if they confiscate all of the earnings of every person in America who makes $250,000 a year or more it won’t be more than a drop in the bucket they have to fill to cover their expenditures. It can’t be done. According to the most recent analysis available, 2006, the “richest” ten per cent. paid fifty-five per cent. of all taxes. Statists think that is “fair,” but what they had better start thinking is that pulling that much money out of those who produce jobs, start new businesses, invest in others, or even play the stock market slows everything down. Charity? When you filter money through the government over ninety per cent. of it is spent as salaries and overhead or disappears from graft or theft. Good private charities more than reverse that ratio.

How many families do you suppose there are with incomes of two hundred thousand dollars a year or more? I’ll tell you, since Newsweek kindly told me: 3.4%. That is 34 out of 1000 families, or 340 out of 10,000 families, or 3400 out of 100,000 families, or 34,000 out of a million families. Those are the ones who pay more than half of the taxes. I’m not among them, but I understand the frustration and annoyance such a state of affairs must cause.

The really fun statistic is this one: those 3.4% do 14% of the consumer spending and they are the ones who create and sustain businesses, which is where jobs come from. When the top five per cent. bears the greatest burden of onerous taxes, sooner or later not only does commerce decline but at least some of them ask why they are bothering. That is one of the difficulties with the proposed health “care” legislation, the bizarre proposition that doctors will submit to a 15% pay cut at the government’s whim. No, they won’t. Those who are old enough will retire. Young people who were planning on enrolling in medical school will think of something else to do.

The best solution I can see is to do the John Galt thing. Quit. If you cannot afford to quit your job literally, stop your consumer spending to the greatest extent that you can.

Put the money into commodities for your family’s use or into chunks of silver. Some of you may shake your heads in bewilderment and ask, “Isn’t that consumer spending?” Well…yes, and no. If you spend a hundred dollars taking your family out for pizza and a movie, that money (minus taxes) goes back into the economy to be taxed again and again in every hand that holds it, and you have nothing to show for it beyond a few memories. If you buy a case of MREs (ugh), your money has gone to an individual who will do whatever with it, but you have taken it out of circulation. You are storing value in the form of food that you can eat during the coming Greater Depression. If you wear the clothing you have now and do not visit Macy’s or Dillards, the shock of what you do not spend ripples through the economy. A nice blouse costs a couple of hundred dollars and you may wear it two years. That money goes to pay those who manufactured, shipped, and sold the blouse. If you turn that money into a dozen ounces of silver you have pulled that value out of circulation. You are richer for having “savings” that cannot be lost through devaluation. You have turned the value of your fiat dollars at present into a metal which will preserve it. You have also hit the tax-and-spenders where they live…

A great many stores and firms are going out of business and this trend will gain momentum. You’re smart. You can figure out for yourself which businesses will not make it through a deepening depression and what you should stock now. Only the big, the smart, and the connected will survive, and the myriad choices you have now will be a distant dream perhaps five years from now. Perhaps in less.

Big government turns you into lunch. Most of us cannot afford to be the owner. Our choice is whether to be the waiter, who may lose his job and will surely see his customers and his tips diminish, or to be the diner. It isn’t too late to do the Joseph thing and stock up for the future, and emulating John Galt and Midas Mulligan will shorten the time until the whole rotten system collapses. Too many carpenter ants have been nibbling at the foundations of our financial structure.

John Galt said to withdraw our minds. The current system doesn’t want those and doesn’t want us to use them. Take away what they do want, an endless stream of tax revenues.

Cordially,
Linda Brady Traynham

September 4, 2009

Free Lunches, Money from Nothing and Limits to Government Theft was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

A recent example from the British press: One of the first lottery millionaires punched a plumber and ended up in court, says The Telegraph. Michael Antonucci won 2.8 million pounds in 1995. But he “blew his entire fortune,” reported the paper last month. Now he’s reduced to stiffing tradesmen. The amount in dispute was just 400 pounds, what he was billed for a “gigantic ceiling mirror fitted above a whirlpool Jacuzzi.” He had the mirror installed when he was still flush. Now that he’s broke, he can’t pay…hence the altercation.

The phenomenon is little different when it happens on a national or even imperial scale. Any money that you don’t earn is stimulus. Without the sweat of honest toil on it, money seems to play a pernicious role in history. There are no examples – none – where it produced genuine prosperity. Instead, when a nation suddenly runs into some easy cash, it is soon spending more than it can afford…and getting into trouble.

The Roman Empire is in some measure a stimulus story. It conquered. It grew. Each conquest brought more booty…gold, silver, land and slaves. And each led to more conquests, which brought forth more booty. But the stimulus of this booty stimulated only the need for more stimulus. It did not stimulate real prosperity. Instead, it undermined it. First, slaves bought by rich landowners destroyed the free labor market and ruined small farmers. And then, imported wheat from the provinces – paid as tribute – put the large-scale farmers out of business too. Italy was then dependent on foreigners for its food.

In the first century AD, Roman conquests reached the point of diminishing returns; the stimulus came to an end. But borders still had to be protected. And Roman mobs, made up of displaced small landowners and out-of-work laborers, needed bread and circuses which drained the Treasury.

The first financial crisis of the imperial period came early. Caesar Augustus tried to solve it…with more stimulus. Neither paper money nor the printing press had yet been invented. So, Augustus increased the money supply in the only way he could; he ordered slaves in the silver mines in Spain and France to work around the clock! This extra money did not bring prosperity; it caused price inflation. In a period of about three decades, Rome’s consumer price index almost doubled. Then, when output from the mines could be increased no further, Augustus’s great nephew, Nero, found a new source of stimulus; he reduced the silver content of the coins. This source of stimulus proved ineffective, but enduring. By the time barbarians took over, the silver denarius contained almost no silver at all. Of course, Rome itself was played out too.

Another early and dramatic example of stimulus-in-action came in Spain in the 16th century. The conquistadors increased their supply of money in the time-honored fashion – by stealing it. Galleons brought treasure from the Americas; increasing the Spanish money supply substantially and fatally. The Spaniards had so much stimulus that they laid down their tools. Why should they work? They could buy things.

The discovery of a whole mountain of silver – Potosi – in the middle of the 16th century insured a supply of stimulus that would last for nearly a century. Results? Predictable. Inflation. In the “price revolution” from 1540 to 1640 the cost of living went up throughout Europe. In England, for which we have the most reliable data, prices went up 700%. And Spain, though it covered 40% of its state budget with this easy cash, still defaulted on its debts about once every 15-20 years, from 1557 for the next 10 decades. Spain, like Rome, welcomed stimulus; it never recovered from it.

Now we turn to the biggest misadventure in stimulus ever – the period after the United States ‘closed the gold window’ in 1971. In the 150 years before then, nations could stimulate their own economies with cash and credit, but only to a point. They could overspend; but they had to settle up in gold. After 1971, on the other hand, the sky was the limit – especially in the United States of America. The US could settle its bills in paper, which was then used by foreign central banks as monetary reserves. Since foreign banks were eager to add to their supplies of reserves, there was no effective limit on the amount of stimulus available. The Fed’s adjusted monetary base grew 900% since 1985, and more than doubled this year alone. Total US debt tripled – as percent of GDP.

As it did with Rome and Spain, more and more stimulus stimulated spending and speculation, but not real output. During the 2001-2007 period, for example, credit in the United States increased by $22 trillion. The nation’s GDP increased only by $4 trillion. For every extra dollar of output, Americans took on $5.50 of debt.

But now the bubble has blown up; the feds are on the case. What do they offer? More stimulus! Cometh a report this week that $23 trillion has already been put at risk in the various bailouts and credit guarantees. As for the US public debt, it is expected to increase until the country goes broke.

Future economic historians will look at these staggering efforts with awe and wonder; they will wonder what the Hell we were thinking.

Regards,
Bill Bonner

July 27, 2009

Romulus, Remus, Stimulus: A Brief History of Monetary Madness was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.