Seven Days of Loses Makes One Weak

Ouch! The poor Dow Jones Industrial Average has continued it’s rout for the last 7 days. Falling from 10750 to close today at 8579. That’s a decline of roughly 20% in one week. If we go back one full year, the Dow closed at 14164 on 10/9/07. A loss of roughly 40%. Put those two numbers together and we see that the Dow has suffered half of its 40% decline on the year in the past seven trading days.

Gold closed the day at $910. For those of you who have read my book and are interested in the Dow-Gold ratio, gold was priced at $730 an ounce one year ago. It’s $910 today. So the Dow-Gold ratio has fallen from a ratio of requiring 19.4 ounces of gold to buy 1 “share” of the Dow a year ago to only requiring 9.43 today. That’s a decline of roughly 51% in one year. Any way you slice it, stocks have been an absolute bloodbath.

It’s been a good market for us bears, and it will continue to be. I am predicting that the Dow-Gold ratio will continue to fall all the way to a bottom of two or three. That’s another 70%+ loss or so, but I don’t think it will come this year. I think the stock market is do for a snap back. The carnage will take a breather and it will lull in people who feel it’s a good time to buy. People who do so hoping to make a good long term investment are going to be sorely disappointed. You might see some short term gains, but it’s still a long way down. It’s a traders market.

I haven’t seen many stories today discussing these market declines in terms of the Efficient Market Hypothesis (EMH). In years past, whenever you’d see these market declines a Hedge Fund somewhere would suffer some huge loss. Typically the press would ask the manager for a comment and the manager would say something like, “The market activities of the last couple of weeks of market activity are so extraordinary that they were impossible to predict. These types of market only occur once every 1000 years.”

Those statements were based on predicting stock market returns as a normal distribution about a daily average with each day having no influence on the days following it. As we’re seeing, that’s just not the case. The last few days along have seen a string of huge loss after huge loss one right after the other. That’s not bad luck; that’s a bear market.

I have a hairstylist friend who works in a very expensive hair salon. She keeps my book at her station and has noticed a lot of people asking about it lately. It prompted one of her clients revealing that she and her husband had lost the entire $250,000 investment they had made in a hedge fund just a few months prior. Which just goes to show that old story about a fool and his/her money.

Short term corporate bonds are going for unheard of yields.  The search on my Scottrade account is showing annualized yields of 80.9% for National City Corp bonds maturing in April of next year, and that’s but one example. There are plenty others. Those National City Corp bonds have an A3/A- rating, but it seems no one is trusting the rating agencies anymore. And why should they. Washington Mutual bonds were rated as investment grade until just a couple of weeks before they became worthless. With events happening like that, April of next year can seem a long time away indeed. But it does represent a good opportunity for the Michael Millken’s of the world who can sift through the financial statements and sort out the goods bonds from the bad. Then again, with all the accounting shenanigans and off balance sheet Structured Investment Vehicles, who can really tell the junk from the gold anymore. 

That’s the problem with markets that aren’t transparent. No one knows what’s good, so they abandon everything. Until we start to see the yields on these bonds coming down, credit markets will continue to be frozen. That means capital is at a premium and stocks are going to have real trouble doing well. What the next market development is is anybody’s guess.

On Patriotism

My good friend Taylor recently posted this comment:

Not sure I would use predictions from Mahmoud Ahmadinejad to bolster my opinions. Actually that last graph was pretty unpatriotic. Why not put your efforts more into the “here is what I think we can do to see that this country remains/becomes great” instead of “I will enjoy watching you burn.” There are enough nay-sayers on the net already, I think people would rather read and contemplate ideas of salvation (for the economy and country) rather then have reiterated the doom and gloom they already are getting from the media (not to mention from their investment statements).

I see a trend on your blogs to gloat at the circumstances we are in. You do offer alternatives but few seem viable (i.e. returning to the gold standard). I guess what I am trying to convey here is that I want to read your opinion on what can actually be done to better the situations you comment on.

– How can we practically reduce entitlement program spending?
– How can we practically buy out our debt?
– How can we practically curb inflation, raise home value, bolster jobs and growth?

Anybody can tell me the situation is bad…put your efforts into educating us instead? If there is something to be learned from you I want to know it.

It’s not that I respect the words of Mahmoud Ahmadinejad that caused me to quote him. After all, how accurate can someone be when the claim that there are no homosexuals in their entire country? But when he is one of a chorus of voices saying that this is the end of the American Empire, it’s worth noting. 

In regards to your charges of my lack of patriotism, that would depend entirely on how you define it. If you define patriotism as the willingness to make sacrifices for your country, then I am clearly not a patriot. As far as I’m concerned, I think I’m getting a raw deal on the taxes I pay and I’ll be damned if I sacrifice anything more. But if you define patriotism more broadly to be acting in support of the ideals of liberty on which this nation was founded, then I feel I am being very patriotic. 

Our founding fathers, whom we consider paragons of patriotism, were clearly not patriotic to the causes of the British, the ruling government of the time. As Jefferson wrote

“The spirit of resistance to government is so valuable on certain occasions, that I wish it to be always kept alive. It will often be exercised when wrong, but better so than not to be exercised at all. I like a little rebellion now and then. It is like a storm in the atmosphere.” 

I feel Jefferson would be proud of the people speaking out against our government today. I feel he would call us patriots. This, of course, just reinforces the saying that “One man’s patriot is another man’s terrorist.” 

In regards to what can practically be done to improve our current situation, my answer is this: nothing. The American political system has rotted to its core. The realities of fiat money have combined with powerful corporations to ensure that what is in the best interests of the people will be hardly given any consideration at all. If that we’re enough, mass media and polling have enabled politicians to shift the political dialogue away from anything meaningful and towards such chestnuts as abortion, gay marriage, and the “War on Terror.” I watch in abject horror as every year our politicians seem to get dumber and more empty. Just when I though George Bush was as low as we could go, McCain dug up Sarah Palin. 

That’s not to say that there weren’t meaningful candidates running this year. One person was running for President who say this crisis coming a long time ago, and he was running as a Republican. But the Republican establishment was not ready for someone like Ron Paul. They distanced themselves from him and even went so far as to form a collation to deny him the delegates from the State of Louisiana

Since you work in the corporate world, here’s a corporate analogy for you. Pretend you were brought in as a consultant to clean up a failing company. The problems with the company were obvious, but when you proposed the obvious solutions, you were told none of them could be undertaken because management wouldn’t allow it. Would you not then call for the ousting of management?

You are asking for new insight into this problem. It seems to me almost as if you were asking for a magic bullet. “Please don’t talk to me about the gold standard and the dangers of fiat money.” you seem to say, “I just want to know what policies we can adopt that will fix this situation (and allow us to go on just as we have been).” Were there is no magic bullet. Nothing will fix what is so clearly broken. You can add all the fertilizer you want. the tree of our nation’s governance died long ago. 

The solutions to this problem are as simply as they are unpalatable. Take all powers to control money away from the government entirely and outlaw fractional reserve banking. The resulting monetary system will be run by private institutions who are closely audited by their depositors, and precious metals (or whatever the free market decides) will be the unit of accounting of commerce. Suddenly the government will have to raise in tax revenue all that it spends. When such a day comes, you will notice a sudden and drastic curtailing of government spending, including entitlement programs. Meaningless wars will suddenly shift from convenient exercises to gain public support to the truly horrible actions that should only be taken as a dire last resort that they really are. 

None of these ideas are new. Jefferson wrote about them in the late 1700s, as did Murray Rothbard in Man, Economy, and State in the late 1900s. If you’re looking for a sample of Dr. Rothbard’s work, check out his essay on “Taking Money Back.” Times may change, but our situation is not new. But then again I think you knew this. I suspect you’re now saying to yourself how impractical all of these hard money ideas are in our current environment. “There must be some other way to fix the system,” you might ask. 

Let me assure you, there is not. Attempts at fixing our current system is as meaningless as rearranging deck chairs on the Titanic. The system is broken, but few seem to realize it. Until the system is allowed to collapse, we are powerless to improve the situation. You yourself once ridiculed me for being a Libertarian as “wasting my vote.” So you now claim to think that there is some meaningful action that I can take? 

The system must be shown to be what it is: a failure; a sham; a tragic disaster. It is only from its ashes that we can meaningfully move forward. Only once people clearly understand the folly of the life that they have been leading can we make the hard decisions to take back our liberties from the all powerful nanny state we have built to take care of us all. That is why I am contently and excitedly watching the decay and collapse of the system. I believe I am going to outlive our current system, and it is what lies on the other side of it that excites me. 

 

 

 

 

The Central Banks Have Spoken

Four central banks acted in concert today to each lower their benchmark interest rates by 50 basis points (that’s half a percent to you and I). That leaves the Federal Reserve’s rate for overnight lending at just 1.5%. The central bank of Japan applauded the move, but couldn’t go along with a 50 basis point cut itself because to do so would be to return to an interest rate of zero. In a statement that seemed designed to both drive sales of my book and prove that Keynesianism was far from dead, chief economist at High Frequency Economic in Valhalla, New York, Carl Weinberg said, “We are now looking at the first page of the global- depression playbook. The only solution is to cut rates as close to zero as you dare… pump money into the banking system…hand over fist… and increase government spending.”

So there you have it folks. It turns out that the Vapors had it right all along. We really are turning Japanese– the whole world this time. I don’t suppose it occurred to Carl Weinberg or anyone in power that Keynesianism doesn’t work. Despite following the Keynesian playbook as closely as possible, Japan remained in a depression that still hasn’t really lifted to this day. Not to mention it didn’t do much for us when we faced our own depression. Never before have I seen a theory be so utterly disproved time and again, yet continually embraced as the truth.

It’s not like economists haven’t known. When Keynes first introduced his ideas he had a number of detractors. Keynesian theory was beautifully destroyed piece by piece in Henry Hazlitt’s Failure of the New Economics and that was originally published over 40 years ago. In that book, Hazlitt goes page by page through Keynes’s General Theory and points out the logical fallacies, the ever shifting definitions, and where he makes a prediction that flies in the face of what we know of the world. And yet here we are, decades later, ready to dust off Keynes’s playbook yet again to see if it can bail us out of this predicament. A predicament that was arrived at precisely through following Keynesianism to begin with.

It would seem that we are incapable of learning as a people. That somewhere in our genetic code we are hardwired with the desire to believe that we really can get something for nothing. Paper money systems have been tried many times without history and always ended in failure. Yet here we are trying it again. Convinced we can do it this time because we have a theory that, though flawed and easily disproved, contains enough math to choke a horse. Anything that is expressed in the form of calculus seems to escape our understanding, and when the professor gets finished filling up the black board with incomprehensible symbols and equations, he turns to us and says, “See. You can get something for nothing. Fiat money can be printed with no limit and interest rates lowered to make money cheap for everyone.” It’s a lie that we want to believe.

That we are faithfully following the road to the poorhouse is tragic, but there’s little we are do about it except prepare ourselves as individuals. Buy gold. Gold stocks were up 15% today alone. The market seems to know that when the world’s central banks are acting in concert to destroy their money together, gold is the logical place to turn. I’ve made a rather tidy sum on that move today, and I feel certain that this is just the beginning. As the system gets worse and more money gets printed and thrown at the problem, gold will just become increasingly attractive. The physical demand for it is already so intense that the gold coins are getting increasingly hard to find with bullion dealers. I believe that not only will the situation get worse, but that there is a very real possibility that the government may move to limit people going into gold. Get yours while you still can.

In terms of investment opportunities, I feel that the stock market is still a poor buy right now. It has further to fall when measured in real buying power. US government bonds are still yielding less than 2% for bonds under two years. That’s a rate that’s less than heavily doctored official inflation figure that the government has trotted out. The reason the yield is so low is that if investors with lots of money to protect are worried that the US banking system is so unstable that they can’t leave their money their. So they instead plow their money into short-term government bonds knowing that they are at least guaranteed to get their money back.

Other bonds can be attractive short term investments. I bought $20,000 worth of bonds in Citibank that are set to expire in one month. The effective annual yield on that purchase was over 27%. So there can be some profit opportunities in corporate bonds, but there is also some risk there- just ask the bondholders for Washington Mutual. On the investment front, gold is the only thing that I really feel strongly about. For a list of all the different ways you can invest in gold, I’d encourage you to pick up a copy of my book.

Till next time.

Restaurant at the End of the Empire

The American stock market is continuing to melt down. At one point yesterday the Nasdaq was down over 9% and the Dow was down over 8%. Stark numbers indeed. So far today both indexes are down over another 4%. Gold was up both days. This is turning into the mother of all bear markets, and I must confess I am enjoying watching the carnage unfold exactly how my book describes. We bears love nothing more than saying, I told you so.

Unfortunately, most Americans do not seem content to just let the collapse happen without doing something foolish and tragic. CNN reported yesterday that a man with an MBA in Finance killed himself, his wife, his mother-in-law, and their three children. A story which makes me miss the old days of the depression when husbands merely killed themselves so that their family would have the life insurance money. I would guess that the majority of Americans are not crazy enough to do something like that. Instead they suffer from a milder form of insanity that prompts them to look to the government to help them through this crisis. This seems strange to me because most Americans seem to realize, at a gut level anyway, that it was the government that got them into this mess in the first place. 

Without the government’s fiat money, further exacerbated by the government created Federal Reserve, and the cozy attitude of deregulation when it came to Wall Street firms (and their lobbyist’s money) this crisis simple could never have gotten this out of hand. But now the people are looking to the very culprit who caused the problem to fix it somehow. This scares me far worse than the collapse of our economy. “Desperate times calls for desperate measures” would seem to be the slogan of government intervention, and Obama, our next President, has been preaching all of the rhetoric of the next FDR. 

I sincerely believe that Barrack Obama is a good man. He seems honest, decent, and concerned. But he also seems to be operating out of the wrong tool-box. It seems to me that he looks at the mess we’re in and doesn’t see how the powers that were given to the government to solve the crises of yesteryear have simply made far bigger ones today. Instead he looks out at society and feels that the power has been held by the wrong hands. If only the power were taken from those hands and put into wiser ones, this crisis could be solved. I believe Obama’s administration will see a replay of many of the failed policies of The New Deal. The New New Deal. And that’s really got me worried. 

Obama will inherent a country that is overrun by inflation, but instead of return to sound money I expect to see laws passed that aim at price controls. Unemployment will be on the rise, so I expect Obama to embrace more public works programs. The prices of housing and the stock market will be falling, so I expect the government will attempt to enter into some sort of price maintenance program. I expect that each of these policies will be tried, and, just as always happens, each of these policies will fail. The situation will become even more desperate as angry mobs start to demand action. What happens next… I do not know.

One thing I do know, the American Empire will not survive this crisis. As has already been predicted by international voices as diverse as Iranian President Mahmoud Ahmadinejad to the German Minister of Finance. I can only hope that we allow our empire to go into that long good night gracefully and with dignity. Perhaps have a wake where we can sit around and talk about the good times: reminisce about when we saved the world from Fascism; speculate about how things might have been difference if we had taken different actions during the Cold War; laugh out loud at the absurdity of our “War on Terror.” That is a fitting end to an empire. Not going out in a blaze of glory as we muster up our military for one last hurray, but instead having a sense of good humor about the thing. To celebrate the event, and not fight it. I can only hope.

Peter Schiff’s Predictions for How the Bailout Will End

Peter Schiff, author of the book Crashproof, was recently interviewed on CNBC debating Stephen Leeb. Peter’s position was that the US economy was crashing just as he had predicted, but, in regards to the bailout, the cure would be far worse than the disease. Schiff correctly points out that the money for this bailout will have to come from somewhere, and that somewhere is going to be the Federal Reserve’s printing press. Schiff in further on target when he says that we got into these positions by bailing out the economy before, and that what we really need in this country is a recession. My favorite point of Schiff is how eleoquent he is in simply pointing out that “We’re broke.” That sums up our position pretty well. When you look at it, how can we bail ourselves out of the poor house? Isn’t it just going to take the long hard road of saving your earnings? That’s what household’s have to do. Shouldn’t it be that way for nations as well?

I had real problems with Stephen Leeb’s position, and I wanted to go through it point by point. First, he argues that at the cost of only $700 Billion, the US taxpayers would have the chance to make an investment in something that might just show a profit. He’s not specifying whether he’s talking about a nominal profit or a real one. Just showing a nominal profit (i.e. you receive more dollars than you purchased it for) means very little in a highly inflationary scenario. It’s only a real profit that counts, and how exactly are we going to show a real profit by using the printing press to go further into debt to buy other people’s debt?

Leeb’s main position was that this $700 billion bailout would somehow save trillions of dollars for the owners of real estate and equities. What Leeb doesn’t explain, is how $700 billion is going make up for the trillions lost. Is it really that easy to make money for everyone? Just throw some money into a bailout and far more than that will be made on secondary markets? How will that work? If it’s really that easy, why haven’t we been doing it all along? The truth is, it’s never that easy. You can’t predictably add some money to one side of the equation, and far more money to be made on the other side. And since that isn’t the case, the question becomes why exactly we the taxpayer need to share in the loses for foolish homeowners and bankers. I’m not even going to reply to Leeb saying that the market will be freer from government control by empowering the Treasury to directly intervene in it. 

Lastly, Leeb makes an open appeal to preserving the American Empire. When countries such as Russia have stopped backing down, it’s a sign that we need to… to… bailout Wall Street? Leeb’s position is very insightful here. We need to bail out the American markets so that our international competitors will continue to bow to our will. Should our markets fail, we won’t command the necessary stature on the world stage. All we’re missing here is Leeb making an empassioned plea with tear in eye as he looks to the camera and says that “We must bail out Wall Street… for America.”

But what is it that makes America so great? Why do we deserve to be able to command other nations of the world? If it’s because of our freedoms, as our President likes to say, then we shouldn’t worry about losing our stature so long as our freedom is not endangered. If it’s because of our society is the greatest bastion of capitalism ever, then let the participants in the market place learn that they need to be able to look after themselves and not count on handouts from the US taxpayer. 

On the other hand, if it’s just because we’re the biggest and strongest right now because we’ve used a stretched a fiat currency to its breaking point financing the largest military in the world, then we have no moral grounds upon which to command the rest of the world to do our bidding. And perhaps a bailout will help to prop up the empire as Leeb is arguing, but there can be little doubt that the ultimate fate of all this will be exactly as Schiff predicts. A total collapse of the US dollar and the economy that relies on it.

This Is Some Rescue

“This is some rescue. When you came in here didn’t you have a plan for getting out?”
– Princess Leia, Star Wars (1978)

And what a rescue it is. What started as a three-page plan to buy troubled assets has grown to a 451 page mess that includes everything from Indian Employment Credits to adding a Seven-Year Cost Recovery Period for Motorsports Racing Track Facility. I guess in the future we know how to get recalcitrant Republican Congressman to reverse course- include more pork. We should all remember for future reference that the government rides to our rescue by way of hurriedly passing a bill no one had a chance to read that includes more spending of money they don’t have.

I’m not sure if this was the kind of rescue that the American people were counting on, but given how they were reacting to this plan (about 90 to 1 against judging from people calling in), it was probably the one that they were expecting. And the thing that no one seems to want to being up is that the government caused this problem to begin with. If not for the government created entities of Fannie Mae and Freddie Mac, we would not have had so extreme a credit explosion in the housing market. If not for the government created entity of the Federal Reserve and it’s nasty habit of keeping interest rates low and solving every problem by throwing more fiat paper at it we would not have had this orgy of credit and speculation to begin with.

Each of these entities was created by the government to rescue the free market:

– the Federal Reserve was created by the government in response to the Panic of 1907 and the desire to have a “lender of last resort” with an “elastic currency” that could bailout any troubled bank.

– Fannie Mae was created by the Roosevelt Administration in an effort to provide credit to the housing market to stimulate the economy. Except that now that had created a government sponsored monopoly of sorts. So in order to fix the situation, they created yet another entity, Freddie Mac, in 1970. 

And here we are, now having to create more programs in order to save our would-be rescuers. Can there be any doubt of the wisdom of Ludwig von Mises in his Critique of Interventionism where he argues that all government interference in the operations of the free market will merely lead to bigger problems later, which the government must then solve with even more interference. According to Mises, all attempts at intervention lead to the same place, Socialism. And here we are.  Watching the Republicans, the champions of the “free market”, back the biggest interventionist step ever proposed. 

Life is full of ironies, but not greater than the ironies of the public sphere. Some hypocrisies are to be expected. After all, this is politics. But I’m sure that the Japanese, who were advised by the Americans to just let the chips fall where they may when their crisis hit, are noticing that we don’t take out own advice very well. But for me it goes beyond irony and hypocrisy that the Republicans continually berate the Democrat’s for being Socialist as they aggressively expand the size and scope of the federal government. To me it proves that the American people have lost the political will to force their politicians to own up to their promises. Thus we are left with people’s perceptions of their government and its actions determined not by the actions themselves but rather what the politicians tell the people their actions mean. According to the Republicans, bailing out a failure caused by three government created entities is merely what must be done to save the “free market” from itself. 

I started this piece with a quote from Star Wars. As a science fiction person I would like to close it with a quote from another piece of SciFi, George Orwell’s 1984. Orwell, like Mises, foresaw the government’s continual encroachment into our lives, just as he foresaw that the government would shape people’s perceptions by telling them that something was it’s opposite. And so I want you to keep in mind our “free market” Republicans, their “War on Terror”, and their often trumpeted habit of being fiscally responsible when you hear that:

WAR IS PEACE
FREEDOM IS SLAVERY
IGNORANCE IS STRENGTH

Answering Taylor’s Questions

My good friend Taylor asks three questions:

1. My point here was that while I agree there is much historical precedent for the value of gold there is no promise it will continue to be valued. In that regard gold is no more valuable than paper money. People have historically wanted gold, so it has value. People currently want cash, so it is valuable. The value is arbitrary; it is valued because people want it. The major difference seems to me to be that people have wanted gold longer than they have wanted dollars. The ” intrinsic value” is still a man-made convention, why does it matter what medium it applies to?

2. It is one thing for my dollars to become worthless from hyper-inflation a-la-Germany in the 20’s, it is quite another for my elected officials to vote to make my dollars worthless over night. Yes, I understand you point that they have been voting my dollar to be of less value for decades, but the marginal inflation we have experienced so far I can stomach, and plan for. Overnight worthlessness of everybody’s savings could cause riots.

3. This brings up another question I have had regarding the gold standard. How does it accommodate its inherent lack of elasticity? I. E., if a Spanish Galleon carrying billions in gold is sunk and unrecoverable there are sever consequences to the market and to commodity values. If one of the US Fed Banks is incinerated, and billions of paper dollars are lost the Fed can quite easily reprint those losses and the impact would seem to be minimal. Similarly, gold is a much more scarce commodity compared to paper. What happens when we have mined it all?

The question of whether and why gold is valuable seems to come up a lot. I’m not sure why; outside of land, I can think of nothing that humans have consistently held to be as valuable as gold and silver have proven to be. Humans have valued many things through each age of human development such as dyes during the Roman times, spices during the Middle Ages, and oil today, but precious metals have been held to be valuable during each and every age.

If we wanted to use a commodity based form of money, we could chose between many forms of wealth currently valued in today’s society. We could use oil reserves (for instance) as a basis for a currency. Oil is a scarce commodity whose value does not depend on the health of the government that is issuing the money and is available in standard units of accounting, but precious metals also have all of these quantities. In addition, precious metals have the further advantage in that they have: a much longer history of being held as valuable; a more dense form of wealth; easier to store; and far more resistant to destruction.

Now I do often hear the argument that humans could just decide that they don’t want gold anymore and it would lose it’s intrinsic value. I don’t really see how that’s possible given how many thousands of years we have favored the stuff, and, even in that highly unlikely scenario, it would still have a value as money so long as the nations of the world agreed to value it as such. Which is just my way of saying that it’s silly for us to worry that gold may one day lose all value given that right now our entire economy is based on something that inherently has no value at all!

Regarding Taylor’s second question, I must confess that I find it extremely unlikely that we could voluntarily go back to a gold standard. Today’s dollars are trading at a much higher level in terms of goods and services than they would based on the comparative fundamentals of our America’s assets compared to its liabilities. Were the US government, to enact a gold standard it would have to set the value of the dollar at a level where it could be faithfully backed by the assets at hand, in which case the dollar would have to be valued far lower.

Taylor is correct is saying that we risk revolt from the citizenry because they would perceive that the government had acted to reduce the value of their currency. This would actually be an misperception on their part, because a continued mismanagement of the currency will eventually make it worthless (hence the title of my book), but people don’t understand these things. In part that’s by design. Politicians obfuscate the real cause of inflation away from their own mismanagement of the currency and instead blame whoever is in reach- greedy merchants, speculators, and other nations attempts at currency manipulation. People seem to have gone along with these explanations, and the true is probably too painful for them to accept. 

This is why I have resigned myself to the eventual collapse of the American way of life. To attempt to adopt a more rational and sustainable economic policy is simply political suicide at this point. People can not willingly give themselves over to the hard discipline of a gold standard if they have any belief at all that they can continue to prosper under the gluttony of a fiat money system. I instead believe it my calling to simply educate those of us who are ready to listen and consider the simple truth of this situation so that the idea will have time to germinate in people’s minds. My hope is that, after the collapse of the American Empire, that we can return to the policies that made us a great people to start with.

Regarding Taylor’s last couple of questions, gold’s strength is in its inelasticity. If elasticity where the best path to prosperity, then Zimbabwe would be a world power by now. Inelasticity forces discipline on a society and a government. To pursue a policy of inflation with an inelastic currency means that eventually a correction must occur. The same is true in an inelastic currency really, but the correction can be delayed for a far longer time. The benefits of an inelastic currency is that there is a shorter period of time between monetary abuse and the painful correction that it more closely links cause and effect in the minds of the people. I consider this a good thing. 

Regarding Taylor’s last question, gold will still possess all of the appropriate qualities of money even if we were to take every last bit of it out of the ground. The money supply does not need to expand in accords with the populace. Indeed, as I point out in my book, one of the most prosperous times for us as a nation was after the Civil War. From 1870 to 1900 the population of the United States was expanding while the money supply was actually shrinking because of the retirement of “Greenbacks” (our first experiment with fiat money) from circulation. It was one of the only times in American history that the buying power of the common’s mans wages actually grew steadily and our GDP expanded at the most rapid pace in our history.

Is It Feasible to Return to a Gold Standard?

I’ve gotten a couple of questions from a couple of different readers regarding how feasible it would be to return to a gold standard. The argument goes something like, “If our national debt $9.6 Trillion dollars, and gold is $900 an ounce, how on Earth could we return to a gold standard since we don’t have nearly enough gold ounces.”

This question confuses the current market value of gold with what a gold standard is. A gold standard is merely a commitment that a currency is now redeemable at a set quantity of gold and does not have to in any way mirror the current market value of gold. The US government could return to a gold standard today if they wanted to by committing to redeem all US dollars into gold at the ratio of $1,000,000 per ounce. Under this standard, the US would now need $9.6 Million ounces or roughly 300 tons, which is easily done. Now a lot of you might be thinking, “But that’s way too high a value of gold,” but you’re again confusing the current market value of gold with a government’s commitment to support it. Setting a high value like $1M an ounce means the government has set a very low bar for itself in terms of gold redeem-ability; somewhat like an out of shape person deciding they can only manage five sit-ups a day to begin. 

Once the exchange rate would be set, the marketplace would adjust to reflect this new reality and probably soon reflect the new exchange rate. That means that, from that point forward, gold really would be $1M an ounce! “But that’s preposterous!” you want to blurt out, but be patient. You see, the entire exchange rate of goods and service would soon reflect this new information, and we’d pretty quickly start to see other prices rising to meet gold’s new price. That would mean you’d probably see oil selling for $100,000 a barrel, and the average rate of labor becoming somewhere around $10,000 an hour. Yes, the adjustment period would no doubt be a bit hairy, but once it was all done, the US would be on a gold standard once again. (Incidentally, if you’d like a more elaborate and gradual plan to implement the gold standard, I’d recommend you check out G. Edward Griffin’s The Creature from Jekyll Island.)

Now once this gold standard was in place and the market place had had time to adjust to the new reality, the government would have to start making some harder choices. If it wanted to implement a new entitlement program or conduct another war, it would have to ask itself “Where are we going to get the gold to do this?” And if it couldn’t? Well, no gold means no program.  No war.

You see, the reason for the confusion at the beginning is that the government has just been conducting whatever programs and wars it wanted to over the last few decades. They have had to face the same question of “Where are we going to get the money to pay for all of this?” but they have been able to answer with, “We’ll just print it.” That’s why the gold standard was eventually abandoned and why our liabilities are so far in excess of our ability to pay that the mere thought of entertaining a gold standard causes the mind to boggle at the discrepancies.

That gold is trading at such a low level in comparison to this nation’s liabilities is no accident. The US Treasury and the Federal Reserve have been working very closely to have the US Dollar maintain its value despite the fact that it continues to be printed at will. In essence, this exercise has allowed us to peek behind the curtain and see that the “Great and Powerful Dollar” is really a construct that is carefully maintained by a few people in the know. This is also why I’ve chosen to entitle my book, “What Do You Mean My Money’s Worthless?” There is simply no way this nation can afford to repay its liabilities and the value of the dollar is going to be the ultimate casualty.

Answering Nat’s Questions

Nat, good friend and now a blog reader, asks two questions:

BTW, Preston, I am about halfway through you book. It’s a good read, especially considering the recent economic catastrophe. I am curious why you think gold should be the standard of monetary policy as opposed to some other commodity. Though problem: If gold were still the standard and in the future we discovered gold on another planet…how would that affect the economy? Supply and demand would dictate that gold would immediately see a reduction in value because of increased supply. I am curious as to your opinion on owning land.

I just read an article that suggested that due to the U.S. making a deal with OPEC to only accept the dollar back in the day that technically, the U.S. dollar is backed by oil…i.e. the OIL STANDARD. What’s your take on that theory?

Let’s take gold first. A lot of what I’m going to say was already well argued by Dr. Murray Rothbard in What Has Government Done to Our Money. As Rothbard argues, the advantages regarding gold is that it has intrinsic value. To argue otherwise is to go against at least 4000 years of human history. Human’s like gold. Always have, always will. Now they also value a lot of other things (real estate, diamonds, art, oil) but the advantages of using gold as money is that it is reasonably easy to transport (unlike real estate), is a dense way to store wealth (unlike oil), can be stored for long periods of time without loss, and can be broken down into fundamental units of accounting to make exchange easy (unlike diamonds). There are few other forms of wealth that meet all of these requirements. 

Now how much people value gold changes over time. Some estimate put the “gold to dollar” exchange ration at about $3000 in the Middle Ages. The entire European What happened next should help to answer Nat’s next question about what if we suddenly found a source of gold that would drop gold’s value relative to everything else, because that’s exactly what happened. The New World was discovered and with it the vast golden wealth of the Incas and Aztecs. The value of gold suddenly dropped to roughly $800 or so. This caused inflation as the cost of goods and services went up in comparison to gold because of this sudden increase in supply, but after this happened the economy went right on about it’s business. There was no calamity. 

Now in regards to your other question, yes I do feel that the US government has made deal with Middle Eastern governments. In fact, John Perkins discusses exactly how the United States got third world governments to play along with our economic wishes in his two books, Confessions of an Economic Hitman and his followup book The Secret History of the American Empire. Perkins books are fascinating because they are basically an inside account of how the American empire was build coming from someone who was involved from the inside. I believe that the CIA engineered the Shah’s rise to power. Similarly, it is common knowledge that we the US government has long been an ally of the Saudi Royal family. That is why the so many of the 9/11 hijackers were Saudis: the Saudi citizens hate the ruling family but feel that they can not get rid of them unless the United States allows it.

Why It’s Worse Than You Think

Recently reader Bob Kraus wrote another comment to my blog which you can read here.

In essence, Bob is arguing that our policies regarding monetary inflation are to our benefit because we are trading the worthless commodity of paper for the very worthwhile commodity of (among other things) oil. Bob acknowledges that he we have “hosed” the rest of the world by perpetrating this sham but, as he puts it, “what else is new?” Bob also acknowledges that the American economy going forward “is going to be a very painful 3 or 4 years for most Americans.” Despite these acknowledgements, Bob remains a stalwart bull for the US economy because he feels that no other country is as innovative or works as hard as the United States. He feels certain that it will be the United States that innovates the next technology that will replace oil and that our manufacturing will return because the dollar has fallen so essentially the American consumer can not afford to buy imports anymore. 

Bob’s thoughts are not uncommon, so I wanted to address them here. Here’s the problem with Bob’s analysis. Currently the US government’s official debt is roughly $9.6 Trillion, but that doesn’t include the liabilities the government just took on with Fannie Mae and Freddie Mac (roughly another $5 Trillion) or the “unfunded” portions of Medicare (roughly $85.6 Trillion). If the US is to make good on its debt then the US is going to have to start seeing savings both on the government level as well as the consumer level, which would be a massive credit contraction over the next couple of decades. Basically we’d be seeing the opposite of what’s been happening over the last two decades where the US has gone deeper into debt. Now given that bull market projections for US stocks earning more going forward are assuming a continuation of the last twenty years, we’d be seeing a much lower level of earnings as the US consumer and government had to drastically rein in their spending. Furthermore, the holder’s of our foreign debt would actually have turn out to not be “hosed” because the dollars the debt would be paid for in a deflationary scenario would actually be worth more than they worth during the inflationary times. That’s assuming that the US actually choses to make good on its debt. 

Now what if it doesn’t? What if instead the US choses the easier path of just defaulting on its debt. Well in that case, I don’t see how gold would not be a far superior investment than the stock market. It’s tough to predict what would really happen were the US Dollar to be rendered worthless, but you could expect a great deal of societal chaos and upheaval as well as a flight of foreign capital from our shores. None of these things are particularly bullish for stocks. 

Regarding Bob’s longer term view of the US as being the best at innovation or working harder that most other nations, well I’d certainly like to hope so. I’m not nearly as confident as Bob is that the US is going to continue to be the source of all things economically good, but even if this is true, the fundamentals of the United States level of indebtedness are simply against any kind of scenario where stocks become strong investments over the next decade or so.