Been stockpiling the following for comment:
Silver shortage vs coin shortage
I’ve been on this issue for a long time, now I have backup from David Morgan: In 2008 there was no shortage of all silver per se, but there was a shortage of coins, bars and other retail “investment” items. The evidence: Much higher premiums back then for small silver products on the street versus the commercial price for average 1,000 ounce commercial good delivery bars in late 2008 and early 2009, since then corrected. I also note that he says it is a myth that silver is currently in shortage.
India’s love of gold
Here in the West the average person (and Buffett) has no idea of how pervasive gold is in East society. Mineweb notes loans against gold as collateral was one of the country’s fastest growing businesses. Though many Indians continue to use the glittering metal to flaunt their family wealth, most working in the informal sector, have few choices to borrow money and resort to pawning their family jewels rather than taking the longer route of bank loans. and By the end of November this fiscal, total credit issued by banks grew at around 20%, while organised gold loans grew at 50%, making it an increasingly important source of liquidity. Typically, most loans are repaid within four months, since most Indians prefer to hoard their gold.
Need to watch that word “hoard”, which can become a dirty word. See this The government had raised the import duty of gold and silver to curb import of precious metals which result in huge outflow of dollars outside the country. Much better you save by giving your money to bankers and if you won’t then Vietnam again leads the way with plans to “mobilize” Gold Bullion held by Vietnamese citizens “in service of the national socio-economic development”.
Gata reports WSJ as saying Venezuelan officials completed a two-month process of repatriating 160 tons of the country’s gold holdings Monday, by welcoming home the final shipment of the precious metal from Europe. Where are those excited gold bulls with the thought that the withdrawal of some 150-200 tonnes of gold from the Bank of England and bullion banks will force a squeeze on traditional stockpiles of gold?
Did Bankers Deliberately Crash MF Global to Crash Gold and Silver Prices? I can’t split between JS Kim and Jeff Neilson for people who have come out of nowhere to be sudden gold market experts. Short answer to JS Kim – no.
When I see Newt Gingrich calling for a gold standard I start to get worried. How much different is a gold standard under the control of a central bank from fiat? When I see mainstream articles discussing the issue, I wonder if the central bank gold standard is put up to sideline the Ron Paul open currency approach?
In many ways the monetary policy issue is even more important, simply because we are running out of rope on our national debt-addiction rappelling adventure and the floor is still 100′ down. That’s a serious problem — and “gold standards” do not (in fact cannot!) fix it. The only fix that works is to demand and enforce a zero-CPI standard with honest statistics, along with an end to federal government borrowing — period. “Hard money” .vs. “Fiat money” is immaterial; if you permit fraud in the monetary and credit system, as we have, the rest simply does not matter and yet if you put a cork in the frauds and lock up the scammers then you quickly come to the conclusion that allowing a handful of producers of some metal, the majority of which are foreign entities, is the last group you want running your monetary policy!
The Paulites get this wrong and so does Ron Paul himself despite the historical fact that the United States had massive inflationary bubbles and detonations of them during the time it was on the Gold Standard. 1873 anyone (as just one example.)
The real problem in 1873 as with all other similar blowups was the issuance of bogus debt instruments unbacked by anything. In the case of 1873 concentration was in railroads and related construction all financed by long-duration bonds (and therefore subject to high degrees of price risk due to their duration) but which were entirely-speculative and in fact for which there was no actual demand in the economy for the services (transportation to be provided by said railroads) at a level sufficient to meet the intended expense. It didn’t help that we were playing games with our exports (and Europe with its imports) much as China and the US are today, effectively hiding the bubble’s impact for a period of time and allowing it to inflate to ridiculous size. When the over-leveraged positions became exposed the game collapsed and the Long Depression followed. [Emphasis original.]
Denninger correctly notes that a gold standard, in and of itself, is not enough to prevent a bubble of any sort. He also correctly notes that enforcing a zero-CPI standard would fix the current currency mess. However, what he seems to neglect in his analysis is that the real problem is not with the proposed solutions, but the fact that the government has to enact and enforce them.
This then begs the obvious question: given the government’s obvious failures to prevent bubbles by keeping money honest, regardless of the money is metal or digital, why then even bother to put the government in charge of the money supply? They can’t manage it properly when gold is money, and they certainly can’t manage it properly when paper is used as money. Why then trust them with it?
The better solution is to simply allow currencies to freely compete with each other, which will have a strong tendency to ensure that currencies remain sound, strong, and free from inflation. By the way, there is one presidential candidate who has proposed legislation that would do exactly this. We all know who he is.
Digital Gold Currency Magazine is reporting
that GoldMoney is suspending the ability to make and receive payments in precious metals to or from other GoldMoney customers due to the “global increase of compliance requirements for payment service providers.”
This capability was the key differentiator of GoldMoney to other online precious metal storage businesses. It is an unfortunate development for gold standard advocates.
The decision was not entirely driven by increased regulations as GoldMoney also indicate that “our customers’ use of the metal payments and currency exchange services is not significant.” Looks like a case of disporportionate compliance effort for GoldMoney on something that didn’t drive business.
Interesting then that customers have voted and said they aren’t really interested in gold as money. Possibly this may change if those customers are faced with high inflation or banking system instability, but it will be hard for GoldMoney to restart the functionality and catch up with any regulatory requirements in place at the time (assuming there is any regulatory tolerance for alternative payment systems at that time).
He is known, of course, for his work on money and inflation. But he did not propose, as Hayek did, competition in currency production. He thought the reality of our times is that governments are in control of the money supply, so the question is simply how to sustain them. He thought a gold standard impractical – inevitably, rather than using the metal itself as money, people would use paper (or electronic) receipts for it, so you have the same problem of potential over-printing of that paper as you do today. So he thought the best thing was to have a monetary rule, preventing politicians from over-producing the paper money we have today.
While having a consistent ideology is important, it is always tempered by pragmatism. This is due to the very simple fact that humans are finite beings and cannot possibly fight every possible ideological battle that could possibly be fought. There are limits to what one person can do. Therefore, every person usually compromises his ideals at some point in life. Sometimes this leads to regret, sometimes this leads to relief.
Milton Friedman is no exception to this. Though he was very much a libertarian, he thought monetary policy to be a point of pragmatism. I’m not sure it’s wise to fault him for this, given the setting in which he made his decision. Government interference in all aspects of the economy was pretty rampant, and the general trend towards statism was ramping up when he hit it big. He had respect and was listened to by many people. But even Friedman had to pick his battles. It’s easy to criticize his decisions ex post, but it’s helpful to remember that he could not foresee most of the consequences.
Now, one can credibly argue that it’s foolish to trust the government to arbitrary rules about money policy. This assertion is true. One could also argue that “sound” money forces the government to be honest. This is also true, assuming you can keep the money sound. See, the United States used to be on a gold standard, then it left it. Going back to a gold standard, though desirable, was no guarantee against this happening again. As such, from a practical standpoint, it didn’t really matter what rules the government constrained the government; the government was going to look for ways to get around them and inflate the currency, one way or another.
It is certainly legitimate to criticize Friedman for his failure to harp on sound money, given the scope of his influence. Perhaps then much of the mess the United States face today would have been headed off earlier. Perhaps not; we can’t be sure. However, it is unfair to paint Friedman as a statist when his record is clearly libertarian. He may have been unnecessarily pragmatic on monetary policy, which is a matter with plenty of room for reasonable disagreement, but he certainly worked to advance the cause of freedom, and for that he should be thanked.
The money supply increases naturally by exactly the amount of increases in productivity in a healthy economy, notes Stansberry & Associates Investment Research Founder Porter Stansberry. He doesn’t have to point out that the economy isn’t healthy, nor that the money supply expands every time the printing presses run to bail out a failing business and bring on a new iteration of quantitative easing. The solution is a simple (albeit not necessarily easy) one, Porter tells us in this exclusive Gold Report interview: Return to the gold standard. That will happen, he says, when the people say, “Enough!”
The Gold Report: You’ve written a lot about the gold standard recently, and an article in your S&A Digest argues that we should greatly prefer gold-backed money because it would limit the ability to increase the money supply. It goes on to point out that increasing the money supply essentially causes inflation. If regulations prohibited governments from expanding the money supply, would fiat currency be as good as the gold standard?
Porter Stansberry: In theory, it could be, but in practice that’s never happened. I suspect that the market wouldn’t have much faith in such rules, and they’d be abused eventually. During the Volcker and Greenspan Federal Reserve periods, from roughly 1981– 2006, two central bankers created a de facto gold standard because they remained relatively consistent vis-à-vis money supply targets.
Volcker absolutely targeted money supply, as did Greenspan up until about 1999. He moved away from that stance due to Y2K fears and then the 2001–2002 recession. So we’ve seen long periods in fiat systems where money supply growth was targeted and fairly reliable.
The problem, of course, is that the gold-standard rules don’t apply across the banking systems. When the Fed was targeting money supply, bankers lobbied for all kinds of changes related to reserve ratios, which allowed them to massively increase the leverage on their balance sheets. Famously, the investment banks—Bear Stearns, Lehman Brothers and others—went from, say, 15:1 to 50:1. That had a tremendous impact on the amount of credit in the economy, which ultimately led to the collapse we well remember. Then the Fed started to radically increase the money supply to help reduce the impact of those bad loans.
That’s a long way of saying that efforts to mirror a gold standard by rule have never been effectual in history, and they haven’t worked in America over the past 40 years.
TGR: So changing the reserve requirements, in essence, increased the money supply.
PS: Let’s talk definitions. When I’m talking about the monetary base, I’m talking about the size of the Fed’s balance sheet, which is the foundation of the U.S. fractional reserve banking system. When you increase the size of the Fed’s balance sheet, you can have multiple increases of the actual money supply from that base. By targeting that base, Volcker restrained credit growth in the economy. Greenspan was less successful at that because he chose to expand the monetary base for political reasons.
In any case, just controlling the monetary base did not control the impact of increases to banks’ balance sheets and leverage ratios, simply because they lobbied successfully to change the rules. They got permission to increase their leverage. The monetary base didn’t change, but the money supply increased due to the actions of the banks. It would have been impossible under a gold standard for the simple reason that the banks would be subject to runs on their gold. That doesn’t happen in a paper system.
I’m not saying that there would never be another run on a bank, but bankers would have a palpable fear of losing control under a gold standard because the market discipline is so much fiercer now. They never would have leveraged 50:1 under a gold standard. It would have been completely implausible.
But as long as there’s this notion that they can get a bailout of any size by turning on the printing press, maybe the discipline isn’t quite so sound. That’s exactly what we’re seeing. So rather than allowing runs on the bank or rather than allowing banks to default and for depositors to lose, the government is printing as much money as is required and is giving it to the banks.
TGR: Is expanding the money supply actually a bad thing?
PS: In a healthy economy, the money supply would increase naturally by exactly the amount of increases in productivity. In fact, one of the main features of the gold standard is that it creates a balance between creditors and debtors. Creditors are more willing to lend money because they know the money they’re going to be repaid will be sound. Likewise, borrowers are more reluctant to take on debt because they know there’s not an easy way to repay it.
One of the main reasons you should prefer a gold standard is that it limits increases in the money supply to real increases in productivity. A second reason is that it simultaneously limits the availability of credit. Those limits mean that powerful interests in the economy and/or the government can’t simply create whatever credit they need to buy whatever assets they want. In a true free market, credit is relatively difficult to come by and can’t be manipulated by the various interest groups.
But in a free market that uses paper currency, it’s very difficult to actually maintain ownership of key assets because competitors in the marketplace may have access to political capital that allows them to buy whatever they want. You see this all the time in various industries, particularly those influenced by the government. In media, for instance, a very small number of vested interests end up owning and controlling all media properties because they have access to credit that their competitors don’t. That’s very difficult to pull off in a gold-standard system.
TGR: When you say they have access to credit that their competitors don’t, are you talking about on a worldwide basis?
PS: I’m talking particularly about the U.S. system, where the well-connected, money center banks—J.P. Morgan, Bank of America, etc.—essentially have access to unlimited amounts of credit, and they can finance almost any kind of takeover they choose, especially if it’s favored by the government that they do so. They can do that because, again, there’s so much flexibility in the monetary base, and credit is so easy to come by. It can be printed. You can’t print gold, so under a gold standard, the government wouldn’t allow the banks to have that much credit because it wouldn’t be able to bail them out.
TGR: So if the U.S. went to a gold standard, wouldn’t international companies have an advantage over those based in the U.S?
PS: No, not at all. If our currency were backed by gold, it would be very difficult for foreign investors to buy U.S. assets. One of the big calamities of our current situation is that by devaluing the dollar by 20% over the last three years—which is what’s happened—our government has made everything in the U.S. 20% cheaper for foreign investors. We’re burning the family furniture to keep the heat on in this country.
It doesn’t make any sense to devalue an economy the size of the U.S. by 20% merely in the hopes of making the stock market or employment go up a couple of percentage points. Giving away your country by devaluing your currency in order to produce economic activity is madness. That couldn’t happen under a gold standard.
TGR: One of your articles drew the link between devaluing the currency and calling it what it is: inflation. Your great chart, the CRB Futures Index Growth since 1955, shows a spike in 1971 when the U.S. went off the gold standard, and then bounces around rather wildly, never going back to the ‘71 levels. Presumably, that shows how the dollar’s purchasing power has declined, and you relate it to inflation. Interestingly, you also wrote that well-known economists—including some at Stansberry & Associates—continue insisting that there’s no inflation. What arguments do they use to support their viewpoints, and why are those arguments flawed?
PS: The most well-known person in the deflationist camp is Robert Prechter, but there are many others, including some who work for me who are persuaded by those arguments. We have a running debate because I think these people are foolish to be able to look at any long-term chart of the dollar’s purchasing power and claim any deflation’s going on.
TGR: When did this trend in decreasing purchasing power begin?
PS: Pick your date, and the dollar has lost 90% of its purchasing power from that day. A good way of thinking about this is to think about being a millionaire in 1900. To be a millionaire in 1900 was just unheard-of rich. At the time, gold was worth $20 an ounce, so to be a millionaire then, you’d have been worth 50,000 ounces of gold. And today? That amount of gold is worth about $100 million.
So gold’s supply-and-demand dynamics haven’t changed that much, and its intrinsic value, I would argue, hasn’t changed at all. What has changed, of course, is that the value of our dollar has collapsed by almost 100%. If you go through history and you realize that in 1971 gold was worth $35 per ounce, you can see that it’s declined 97% since then.
Just during the time Greenspan was at the Federal Reserve, the purchasing power of the dollar fell by about 50%. There’s no deflation in our money supply, and therefore no real lasting decline in prices. For people to say otherwise, I think, is incredibly stupid. No evidence whatsoever suggests that a fiat-backed currency system will ever cause a lasting deflation. And to believe that a short-term decline in prices in one market or another is tantamount to deflation is simply bad economics. It’s not true at all.
You have to look at broader measures of prices to see the impact of inflation, and you have to understand the impact of increasing the monetary base. If you increase the monetary base threefold, over time you’re going to see a very large increase in prices. Then, beyond all these nuts-and-bolts aspects, just look at history. Where is the fiat currency that collapsed because it became too valuable?
TGR: Part of the logic in going to a gold standard is to eliminate the inflation or eliminate the devaluation of the dollar. Isn’t some level of inflation a good thing?
PS: Why? Why should the monetary system favor one party over another? Why should debtors have an advantage over creditors? Doesn’t that retard lending? Doesn’t it retard economic growth when creditors constantly worry what the inflation rate’s going to be?
TGR: Speaking of economic growth . . .
PS: The fastest period of wealth creation in American history happened in the decade of the 1880s, during which the U.S. was on the gold standard. If you go back all through history, you find that economies do better with sound money. It’s no mystery why. You can’t make long-term investments without stability in the money. The instability does nothing but increase the prestige and power of the vested interests who control money supply, interest rates and the inflation rate. It makes it impossible for everyone else to do business.
Why isn’t a gold standard automatically the status quo in a democracy? Why would anyone ever want to get away from that, allowing the government to have both the swords of justice and the scales of money under its control? The outcome is always the same disaster. Credit grows uncontrollably and eventually the printing presses have to get turned on to pay back all the debt. Needless to say, we’re in the midst of one of those scenarios now.
TGR: Were any economists in 1971 warning that at some point down the road, abandoning the gold standard would trigger these credit problems and massive inflation?
PS: Absolutely, and some great economists were raising these issues as early as 1933, when FDR began to really move the U.S. away from the gold standard by making gold inconvertible, meaning that you couldn’t go exchange your dollars for gold at the bank. From that point forward, we were really on a pseudo-gold standard. All the economists who warned about what would happen were right.
TGR: And people apparently didn’t know the history of fiat currencies.
PS: True. Also, of course, it takes a lot longer for paper systems to break down than people expect because they’re completely reliant upon the confidence of the people using the system, and it’s in everybody’s best interest to play “hear no evil, see no evil”—nobody wants to see the whole house of cards crumble. But eventually it does crumble and people hedge their potential inflationary losses by buying gold and silver. That’s happening now.
TGR: A common argument is that there isn’t enough gold either in vaults or in the ground to return to the gold standard. The amount of gold above the ground was estimated at 158,000 tons in 2008, or 5 billion ounces. The nominal gross domestic product (GDP) in the U.S. is $14 trillion.
PS: The nominal GDP has nothing to do with the monetary base, which is where to look in terms of understanding a healthy ratio between gold and the dollar. The monetary base in the U.S. is a fraction of the GDP—about $2.865 trillion. Even so, if you tried to back every single dollar with an ounce of gold, you’d have an astronomical price of gold—that won’t work.
You want a gold standard that you can get to without taking 50 years or without greatly reducing the amount of money in circulation in your economy—a sensible transitional period that isn’t so deflationary that everyone goes bankrupt. Going from a situation in which we’d had inflation of 4–6% a year over the last 40 years to a period where you’re actually having deflation of the monetary base by 4–6% a year in order to get back on the gold standard would devastate debtors. You want a transition that treats creditors and debtors fairly and gets the economy back on a fixed standard, from which point we can move forward.
But you don’t need an ounce of gold backing every single dollar to maintain the standard in the vault. You need good lines of credit so that demand can be met. That was done over long periods of time, hundreds of years, very safely, very effectively, with relatively small amounts of gold in reserve.
Obviously, you need more reserves during times of crisis when people are nervous about the system. But what makes the system work is that the price at which people can demand gold remains unchanged. And people need faith that balance will return even if there’s a disruption in the demand system. After the Civil War, for instance, it was important that the greenback returned to its prewar value, that the gold standard was reinstated at the same price. And that price remained in effect all the way until 1933. So it’s not important to have an ounce of gold to back every single dollar; it is important, however, to have a reserve system that works, confidence that it works, and the political will to stick to the price to ensure that it keeps working.
TGR: That good credit you mentioned, especially when you hit economic bumps—where does that credit come from?
PS: The various large bullion banks would have swap lines with one another. If there’s an economic problem in Germany, for example, the Fed might lend gold to the German Central Bank to meet requests for the redemption. You can do it any way you want.
TGR: Would other countries also have to return to the gold standard to have that international credit option?
PS: The U.S. could do it alone, but it would certainly work a lot better if more of our trade partners agreed to the same standard. The economic area would be larger, too, so there would be more diversification of labor and more economic growth.
TGR: You’ve suggested that we could return to a gold standard by setting a target date 10 years in the future and then allowing the market to reach the appropriate price level. Taking only 10 years to get it back in balance sounds optimistic.
PS: It really depends on what you want the price to be. After the Civil War, it took 14 years because it was important to the bankers at the time that we return to the right price.
You probably could set the price easily between, let’s say, $5,000 and $8,000 per ounce of gold, and have the reserves necessary to make the system work today at the Treasury. People could go exchange dollars for gold as much as they wanted, and have confidence in the system at that price. You could do it right now.
TGR: What would be the catalysts to spark the move to return to the gold standard?
PS: I think the catalysts will be the destruction of the dollar and the ongoing inflation. Look at corn prices. When people around the world can’t afford food because the U.S. dollar has lost its purchasing power, it leads to revolutions, unrest, violence, people abandoning the dollar, failures of banks, collapsing markets and all these volatilities that we see. In my mind, returning to the gold standard is inevitable because nothing in human nature has changed in 4,000 years. As long as there is paper currency, it will be debased, and it will cause problems. Sooner or later, people will tire of it and return to gold. I think we’re in the middle of that transition as we speak.
TGR: If we’re in the middle of it, when do you suppose we’ll actually have a plan to go back to a gold standard? Steve Forbes says it’ll happen within the next five years.
PS: I think it’ll happen during the next Administration. At some point, to get people back to work, to get the country moving in the right direction, we’ll have to make a big economic readjustment. We’re going to have to get rid of the large overhead costs of government, return to lower taxes, and return to sound money.
TGR: Do you really think anything like that can happen, considering the recent debacle over the debt ceiling in Congress?
PS: I personally think we’re going to have an enormous dollar crisis, and that we’re only in the very beginning of it. The dollar has lost 20% of its value since 2008. I think it will lose another 20% over the next 12 months, and the population in America will get really tired of that very quickly. I expect a big political change in this country when people are fed up and say, “We’ve had enough—enough bank bailouts, enough of the money printing, enough of our wages being stolen by inflation. We want a system that doesn’t depend upon the good graces of politicians for its value. We want to use gold as money so that our savings are protected.”
TGR: So the people rather than the politicians will provide the political will needed to return to the gold standard?
PS: Absolutely. Politicians are never leaders in political thought. They follow the polls.
TGR: You’ve made it pretty clear that had we been on the gold standard we wouldn’t be struggling with this economic crisis. You mentioned people’s wages being stolen by inflation. Millions of Americans aren’t even making wages these days because they’ve lost their jobs. And we still have that tremendous debt load hanging over us.
PS: There’s no doubt at all that if we had been on a gold standard we would have never seen a credit bubble the size of the one we have now. It would have been very difficult for us to have the kind of economic problems we’re having.
As for the debt, there’s 400% of debt-to-GDP in the U.S. right now—not future liabilities, not Medicare out to 100 years from now. We can’t get people back to work and jumpstart our economy because we cannot afford to pay these debts. These debts are also the reason why we have to keep printing more money. We’re absolutely drowning in debt, and the only way out is to paper those debts over by printing enormous amounts of money that will devalue people’s wages through inflation and also, of course, diminish their net worth by lowering the value of everything they own.
The total debt in our country right now is $56 trillion, and the Fed has monetized roughly only $3 trillion of it through quantitative easing (QE) so far. We haven’t even begun to see this happen yet. We’re going to see QE3, then QE4, and on and on. And, in general, each level will be larger than the previous, so the numbers will get bigger and bigger as the Fed races against the market to devalue these debts.
TGR: Then how do we get back on the gold standard?
PS: Sooner or later people will say, “Enough!” I can’t tell you when that day will arrive, but I’d be surprised if the next Administration comes and goes without a return to gold.
TGR: This has been a pretty compelling conversation, Porter, and a lot of our readers will want to watch your video/read your essay that goes beyond what we’ve talked about today.
But before we let you go, you’ve said that unless investors are willing to speculate and start shorting equities, they probably should stay out of the equity market because you’re looking at a long, serious bear market. You advise these people to put 50% of their money into short-term Treasuries and 50% into gold. What’s the logic of the Treasuries if you expect the dollar to be devalued?
PS: One-year Treasury bills offer some protection from inflation because they have such a short-term duration. You won’t lose a lot to inflation with such instruments. They pay you something to hold them, too—although not very much.
The reason for holding these instruments is to reduce the volatility of the gold holdings. If you’re not going to hold other securities, all you want is to keep the value of your account stable. Taking half of the uptick in gold over the last year—a gain of maybe 20% and there’s no way that price inflation has been 20% in the last year—you’ve made a net gain in real terms.
If people are simply able to retain the purchasing power of their savings in the midst of this massive global monetary crisis, they’ll have done a great job. The thing to do now is not to lose, and the safest way not to lose is to go half gold, half cash.
On the other hand, investors who are in a position to be able to speculate can look at my newsletter’s portfolio and see that we’re long certain stocks that are positioned to profit from these problems and we’re short the stocks that are positioned to suffer from them.
After serving a stint as the first American editor of the Fleet Street Letter, the oldest English-language financial newsletter, Porter Stansberry began Stansberry & Associates Investment Research, a private publishing company, 11 years ago. S&A has subscribers in more than 130 countries and employs some 60 research analysts, investment experts and assistants at its headquarters in Baltimore, Maryland, as well as satellite offices in Florida, Oregon and California. They’ve come to S&A from positions as stockbrokers, professional traders, mutual fund executives, hedge fund managers and equity analysts at some of the most influential money-management and financial firms in the world. Porter and his team do exhaustive amounts of real world, independent research and cover the gamut from value investing to insider trading to short selling. Porter’s monthly newsletter Porter Stansberry’s Investment Advisory, deals with safe value investments poised to give subscribers years of exceptional returns. You can learn more about Porter and his ideas by clicking here.
Prevailing practitioners of economics tell us that inflation stimulates exports. They get this inverted. Otherwise, pray tell, why wouldn’t Zimbabwe be the world’s leading exporter? Inflation inflicts injury upon the manufacturing base, engendering capital outflow and the destruction of jobs.
Contrary to prevailing economic orthodoxy, inflation is not export-friendly. Inflation nurtures dependence upon cheaper foreign markets to supply us with production (i.e. begets capital outflow). Capital outflow can be reversed by compelling the Fed to tighten. If the Fed tightens, interest rates rise, prices caollapse to reflect wages, the market clears (only then does the economic recovery begin), dollars that have accumulated in foreign reserves will coming flowing back into the domestic loan market, thus lowering the natural rate of interest.
“The dollar rose against most major currencies on Thursday as a latest report showed U.S. trade deficit plunged in February,” pursuant to one news source. (1)
“The contraction in the deficit came with a big recession-driven fall in imports and an unexpected rebound in exports, the Commerce Department said overnight in the US,” pursuant to another news source. (2)
In July of 2008, the dollar went through a rally – albeit, a pseudo-rally – marked by falling nominal prices. Although falling nominal prices is not deflation (i.e. the contraction of the money supply, which would be a healthy thing), that’s the definition of deflation pursuant to prevailing orthodoxy. When the dollar rally began, the trade deficit declined, due to both falling imports and increasing exports. In other words: the fall in the trade deficit had been accompanied by a dollar rally. What prevailing economic orthodoxy teaches regarding the international cycle of trade betrays this possibility.
In November of 2007, Ben Bernanke put on an exhibition of his confusion when he said that inflation is inconsequential for everything but imports. (3) He literally said that dollar devaluation raises prices of everything not denominated in….dollars! Apparently, Bernanke has been blinded by prevailing orthodoxy, which tells us that inflation mitigates a negative balance of trade – another Keynesian apologia for inflation that needs to be buried.
On a peripheral note, Bernanke’s argument runs slightly afoul of prevailing orthodoxy. Prevailing orthodoxy tells us that inflation does raise prices for Americans, and that this magically lowers real prices for foreigners. If Bernanke can’t figure out that increasing the supply of dollars raises dollar denominated prices, then the average person is hopeless for understanding the international cycle of trade and how capital flows.
The decline in imports and rise in exports in juxtaposition with the short-lived dollar rally were not a fluke, nor is this inexplicable. The trade “deficit” is but a symptom of monetary policy. A trade “deficit” isn’t bad per se. A trade “deficit” between two countries is no worse than a trade “deficit” between two towns. The consequential part is if the trade “deficit” is due to something other than comparative advantage (e.g. inflation).
“Again, suppose, that all the money of GREAT BRITAIN were multiplied fivefold in a night, must not the contrary effect follow? Must not all labour and commodities rise to such an exorbitant height, that no neighbouring nations could afford to buy from us; while their commodities, on the other hand, became comparatively so cheap, that, in spite of all the laws which could be formed, they would be run in upon us, and our money flow out; till we fall to a level with foreigners, and lose that great superiority of riches, which had laid us under such disadvantages?” –David Hume, Essays, Moral, Political, and Literary, 1752
What mainstream economists teach runs contrary to what David Hume taught us in 1752. Prevailing economic orthodoxy inverts the international cycle of trade. We are told that inflation mitigates the trade “deficit”. By inflating the money supply, dollars will become less attractive to foreigners. Thus, runs the argument, foreigners will follow by curtailing exports to the U.S. Somehow, domestic productivity will magically be increased, stimulating exports.
The genesis of this error is begotten by the underlying macroeconomic assumptions. Rather than using microeconomic principles to understand macroeconomic phenomenon, mainstream economics fragments microeconomics and macroeconomics into separate compartments. Macroeconomics then becomes myopic, by lopping individuals out of its paradigm. Myopic macroeconomics doesn’t consider individuals; it only considers aggregates.
Translated, the macroeconomic analysis is this: the country has dollars. If the country, or nation – or whatever aggregate you wish to use – decides to print more dollars, the country, or nation, isn’t going to refuse to use its own dollars. However, the country, or nation, of, say, France, being a different country, won’t like very much the devalued American dollar.
I guess we aren’t supposed to ask why both inflation and the trade “deficit” have risen in juxtaposition with one another. Sound economics gives us that answer. If inflation did mitigate a trade “deficit”, then one is boxed into the position of currency devaluation wars. Inflation vs. counter-inflation vs. hyperinflation.
The economy is made up of individuals making choices in exchanges. When the government devalues the currency, this doesn’t only make dollars less attractive to individuals abroad, but also to individuals right here at home. This is reflected with higher prices. It isn’t about aggregates printing more money for use by aggregates.
Consequently, inflationary stimulus interferes with the price mechanism preventing prices from falling to reflect wages. The market fails to clear, thus derailing an economic recovery. With mass unemployment, the last thing that will rise will be wages. The domestic cost of production goes up. Thus, to reduce costs, capital flight takes place. Inflation actually increases the dependence upon cheaper foreign markets to supply us with production.
As David Hume saliently articulated in 1752, inflation makes not only the currency less attractive abroad, but also the higher-priced goods. It also makes the higher-priced goods less attractive right here at home. Using inflation to remedy a trade “deficit” is akin to breaking a leg to make yourself more competitive.
The short-lived dollar rally in 2008 – thanks to central bank policy – was not the consequence of the declining trade deficit; it was the cause of the declining trade deficit. Everything denominated in dollars becomes cheaper. It shouldn’t take a genius to figure out that one doesn’t become more competitive by raising prices.
If inflation actually mitigated a trade deficit, Zimbabwe would be one of the world’s leading exporters. Inflation doesn’t lower real prices for anybody. But even if inflation did mitigate a trade deficit by lowering real prices for foreigners, while making things more expensive for Americans, why would that be a good thing? Why should American economic policy be calculated to make things cheaper for foreigners and more expensive for Americans? Economic growth – which is not measured by the GDP – engenders falling prices, which is a good thing.
Pro-inflationary stimulus has served one purpose: preventing prices from falling to reflect wages. The market then fails to clear. The real issue isn’t even the direction of nominal prices, but what prices would otherwise be absent central bank manipulation. Even if prices fall in nominal terms while wages fall much faster, then we’re still suffering from the consequences of inflation. We can be suffering from lost price deflation. Falling nominal prices engenders rising real wages.
Inflationary policy by the FOMC suppresses nominal interest rates by increasing the supply of loanable funds, but without a genuine expansion of savings to fund investment. Investment can only come out of savings since producers must be able to consume in order to sustain the process of production. Deploying printing press money (i.e. unearned income) transfers money away from producers and the process of production to consumers. Inflationary stimulus disconnects consumption from production, turning Say’s Law upside down. Thus inflation not only drives capital overseas, but begets capital consumption. Inflation is injurious to the process of production.
Increasing the money supply tricks the loan market into consummating unjustifiable loans to non-credit worthy projects. That’s why malinvestment occurs and projects are halted midstream with the revelation of malinvestment. By allowing debtors to pay back creditors with devalued dollars, real interest rates are suppressed. There’s no right way for the loan market to extend credit at negative real rates, which is a negative ROR in real terms. That’s a calculus for the loan market to go bust as it did in 2008. See: http://www.federalreserve.gov/releases/h3/hist/h3hist1.htm Check out the early months of 2008. That’s not psychological and that’s not a matter of consumer confidence.
The long end of the curve is most sensitive to market forces while the short end of the curve is most sensitive to FOMC policy. If the Fed stays loose to prop up the bond market, this will undermine the very bond market the Fed is trying to prop up. Investors/lenders will account for the inflation risk by tacking an inflation agio onto the curve. Eventually, the Fed will lose control over the short end, too. Under the scenario where the Fed stays loose, there will be no floor underneath the dollar nor any roof on interest rates. If the Fed tightens, the short end will collapse instantaneously, bringing the long end down, too.
Under the scenario where the Fed props up the bond market indefinitely, both the bond market and the dollar collapse. Dollars will hit par value with the par value of bonds. The Fed will be left with $15 trillion plus – in nominal terms – worth of bonds on its balance sheet, and we will be left with both junk bonds and junk dollars. The dollar itself will go bankrupt. What’s the par value of bonds? We don’t know, because the Fed has been propping up the bond market.
Under the scenario where the Fed tightens, the bond market will collapse, but the dollar will be saved. Dollars won’t hit par value with the par value of bonds. The only way to save the dollar is at the expense of the bond market.
Until the Fed is compelled to tighten, we won’t have an economic recovery. The loan market has to set interest rates pursuant to the true supply of savings. If interest rates were to hit, say, ten percent on the two-year with a $15 trillion national debt, do the math. The longer interest rates are artificially suppressed, the higher they will have to go in order to correct the imbalances in the economy.
By tightening sooner rather than later, this will not only allow the market to discover the natural rate of interest by letting interest rates rise, this will encourage capital inflow. Capital naturally gravitates towards cheaper, higher-yielding, more efficient economies. It’s called arbitrage. The Fed is waging an eternal struggle against…arbitrage. People naturally gravitate towards where capital gravitates. We should be talking about repatriating dollars to the domestic loan market rather than repatriating immigrants to their native land.
It makes no sense to close down the borders considering the fact that welfare states engender capital outflow and the natural flow of people is to follow capital. (4) Thus it’s hard for me to not imagine that closing down the borders could be used to trap people in rather keep keep people out. Interfering with the flow of capital will necessarily lodge capital where it ought not be. Interfering with the flow of people will necessarily lodge people where they ought not be.
If a person, firm, or institution is dependent upon inflationary credit expansion – as opposed to non-inflationary – for sustenance, that person, firm, or institution is – by definition – insolvent. Somebody or some institution (e.g. the government) is spending beyond their/its means. As a nation, we have spent beyond our means. Expenditures exceed earnings and we depend on foreign markets to supply us with production.
Inflation (i.e. the creation of money ex nihilo) is no substitute for income-generating investment, which inflicts further injury upon an already precarious economy. There’s no right way to invest in the U.S. economy. It’s error to conflate trading with investing. Buying real estate is not investment. I’ll draw the distinction between trading and investing. A trader buys and sells a particular asset class based on nominal price movements. An investor buys and holds a particular asset class based on returns from the underlying asset class itself. In the case of real estate, that would be rents.
The problem isn’t a lack of regulatory oversight. One can’t regulate away past mistakes. Insolvency can’t be regulated away. The only solution is to force up interest rates, prices fall, dollars that have accumulated in foreign reserves will flow back into the domestic loan market, which will then beget a lower natural rate of interest. Any other solution will lead to the destruction of the currency, in which case everybody’s savings get wiped out. Loose monetary policy to prop up a spending orgy engenders capital outflow (i.e. begets outsourcing).
Inflation is a tax. There’s no objective difference between the government taking the money you have in your pocket and duplicating the money you have in your pocket, thus devaluing the purchasing power of what you have in your pocket. Even if prices don’t rise in nominal terms, the real issue is what prices would otherwise be absent central bank manipulation.
Furthermore, if one is going to hold the position that inflation is synonymous with economic growth, then they’re boxed into advocating skyrocketing prices in order to have a fast economic recovery. The way to have a fast economic recovery under such a scenario would be to have prices rise fast. I believe there’s a term for that. It’s called hyperinflation. Who supports hyperinflation?
The only path to an economic recovery runs through monetary tightening by the Fed. Waiting until we have an economic recovery before tightening is a calculus to destroy the currency and the economy. Absent dealing with monetary policy, no candidate can pretend to offer economic solutions. The only candidate who offers real solutions is Ron Paul.
The consequential portion of the video is around the 5:00 minute mark. Inflation is not rising prices. To say so implies that rising prices are caused by…rising prices. That contorts Irving Fisher’s own Quantity Theory of Money. Rising prices are the consequence of inflation, which is an expansion of the supply of money not redeemable in a fixed amount of specie. Prices could drop in nominal terms, yet prices could be too high in real terms. Falling nominal prices engenders rising real wages. We can still be suffering from inflation due to contortions in the price mechanism since prices remain higher than what they otherwise would be absent central bank policy.
Economic cycles, like weather, run in seasons. Longwave Group Founder Ian Gordon explains why he believes the world economy is in the “winter” portion of an approximate 80-year cycle and how the financial excesses of the past 60 years are now being wrung out of the system. Ian also explains how investors can prepare to profit from the coming financial storm by positioning themselves in gold and junior gold stocks in this exclusive interview with The Gold Report.
The Gold Report: Good morning Ian. Thanks for taking the time to bring us up to date with your current thoughts about the economic situation and on specific companies you think our readers might be interested in learning about today. When you spoke with The Gold Report in January, you expressed your thoughts on where things were headed. Can you give us an idea of what you think people should do with their financial investments now in order to protect their assets? What changes do you see, and what do you think now in light of what’s happened since January?
Ian Gordon: I think things are actually getting worse. Basically, the currencies of the world are under fire right now. I’m not sure that the euro will even survive this year. All it will take will be one country, like Greece, to leave it, and then the whole thing will probably collapse like a house of cards. Of course, the U.S. dollar, as the reserve currency, has been under fire, as well. So, I think things are coming to a head here, which is something we anticipated in our own work because it’s based on the Long (Kondratiev) Wave Theory.
In 2011, we see parallels to 1931 because we’re 80 years beyond that time. We believe 20-year cycles are important anniversaries, and this is just four twenties. In 1931, the whole world monetary system effectively collapsed. We’ve been long anticipating a collapse in the current world monetary system based on the collapse of 1931. However, we see that the current collapse is going to have far more significant and devastating implications than the collapse between 1931 and 1933 simply because it’s the collapse of the paper-money system now. Essentially, paper money is credit money. When paper money fails, credit fails. Effectively, the economy will fail on credit.
TGR: So, given what could be a major upheaval in the way the global economic cycle works, if this all comes to pass, what sort of system will we end up with? Are we going back to the gold standard or something similar to it? How is this going to happen, how long is it going to take and what are the implications for investors?
IG: I’m pretty sure that we will go back to a gold standard system. Paper-money systems have never survived throughout history. Generally, they’ve been set around a one-country experiment. And when those have failed, as in France after John Law’s paper-money scheme failed in 1720 or the Assignat failed in about 1798, there was tremendous upheaval. And, following these failures, the country resumed gold as the backing for its currency. So, I think we have to go back to something like that because, in essence, gold enforces discipline on governments. We’ve seen a complete lack of discipline in the paper-money system that’s been ongoing since the 1931 collapse of the world monetary system. Paper-money printing has just gotten out of control; and now, parallel to the paper-money printing is the debt. They go hand in hand.
We’ve built massive debt worldwide, which, in total, is probably well in excess of $100 trillion. In the U.S. alone, the total debt is something like $57 trillion. So, that debt is starting to be wrung out of the world’s economies and everybody is facing a pretty frightening depression.
As investors, we have to protect ourselves as best we can. We’ve long been advocating positions in gold and gold stocks. In fact, we’ve been 100% positioned in both of those—physical and gold stocks—since 2000 because our cycle told us that that’s where we should put our assets. So, that’s what we’ve done. I think investors have to do that and they have to be out of the general stock market because, eventually, the stock market has to reflect the realities of the economy. The current U.S. stock market has been propped up by quantitative easing (QE) with massive amounts of money injected into the banking system. That banking system is not putting that money back into the economy because consumers are completely tapped out; they can’t borrow any more money. So, much of the money the Federal Reserve is putting into the banks is being used for speculation.
TGR: Can we pursue the mechanics of this a bit further before we get into more-specific investing ideas? Given the internationalization of the world economy and money being just electronic numbers on computer systems, how does the world get back on some sort of a hard-money standard without years of turmoil?
IG: When the global monetary system started to collapse in 1931, it began with the failure of the Austrian Creditanstalt Bank in Europe. Everyone was trying to bail out this large bank. The Fed was trying to bail it out, the Bank of England was trying to bail it out and JP Morgan also was in there trying to bail it out. They all knew the implications of the failure of this one bank would cause the bankruptcy of Austria and the failure of many other banks plagued with rotten paper money on their books. So, when this bank collapsed in May 1931, it was the beginning of the end of the world monetary system. A bankrupted Austria was forced out of the gold exchange standard system and was soon followed by Germany. Great Britain was forced out of the monetary system in September 1931, which effectively brought down the entire world monetary system. A new monetary system didn’t evolve until 1944 when the Bretton Woods system was signed into law. It was a long hiatus. The parallels with the current evolving monetary system collapse are pretty plain to see.
After 1931, America was pretty self-sufficient, had all the oil and food it needed and became very isolationist. Great Britain traded within its then-empire. World trade collapsed following 1931 and 2011 may well be a repeat of that tragic year, with the collapse of the euro and the unraveling of the entire global monetary system. It could be a long hiatus before a new system is developed. It goes back to that 20-year anniversary cycle I mentioned. The pure gold standard system that had evolved initially in Great Britain in 1821 collapsed in 1914 because the combatants in World War I couldn’t remain on a gold standard system and print the money they needed to fight the war. So, I would say that we will likely return to a gold standard in 2014—100 years after the gold standard collapsed in 1914.
TGR: So, you’re saying investors have a two- to three-year window to position themselves and their investments to profit from what’s going to happen when this is all turns around.
TGR: We’ve had all this volatility in the metals prices over the past year and some substantial gains. How is this affecting companies in the mining business?
IG: For the main part, I’ve positioned myself in either new producing companies or companies that have gold assets in the ground. I’m principally more disposed to investing in gold than I am in silver. I think these assets are going to be extremely valuable. I met with one of my website subscribers just yesterday and said it’s quite possible that there won’t be enough physical gold available on the market to supply the demand. We produce only 80 million ounces (Moz.) of gold a year from existing mines. I think, eventually, the demand for gold will become so extreme that the producers won’t want to be paid in paper money because the paper system is collapsing. So, gold may well be taken out of the market, that’s why it is important to get the physical bullion now rather than later. Of course, gold company stocks that produce physical gold are going to be extremely valuable, as well.
TGR: Obviously, you’re quite selective about which companies you decide to invest your own money in and suggest that other people do the same with their money. What criteria do you use in selecting companies for your portfolios?
IG: First, I have to meet with management before I ever put my money into a company. I realize that a lot of investors can’t do that, but they can certainly talk to management. On the junior side, management is usually very disposed to talking with perspective shareholders. It’s just a matter of picking up the phone and asking the president of a company why it is a good investment, and then listening to the answers. I have to feel confident that a company’s management will be able to produce what they say they’re going to produce on behalf of the shareholders.
Another criterion that I use is geopolitical risk. I want to invest only in companies that I am confident are in politically secure jurisdictions. I have been bitten in the past by investing in companies in countries that I thought were politically secure, which became insecure. In Ecuador, the rules changed and mining almost ceased to function in that country. So, I particularly like companies that have assets in Canada, which I think is a very safe jurisdiction. Many of the companies that I’ve selected for my own portfolio have assets in Canada. I also like Mexico.
I think the U.S. is ok, but I’m a bit worried about what might happen when the whole system starts to collapse. After 9/11, I remember when an unnamed Federal Reserve spokesman said in an interview that it looked at many ways to avert a panic. One of the things he mentioned was buying gold mines. If the U.S. doesn’t have the gold it purports to have, it could well be that the country could nationalize gold companies. I do have investments in companies that are exploring for gold in the U.S., but not a lot. I particularly like companies in Canada.
TGR: There was a little fear recently about the possibility that the New Democratic Party (NDP) may be coming back into power in British Columbia. Its administration had a devastating effect a generation ago, when it caused the whole BC mining industry to retrench. I guess that’s probably not going to happen at this point; but if something like that was to happen, would that possibly have a negative effect at least on BC?
IG: Well, it might. If the NDP does win in British Columbia, I think it probably learned from past experience. Under recent governments, there’s been a tremendous amount of exploration and a lot of companies going into production in the Province. It’s going to be very hard to shut those down because they’re all permitted under present mining laws. So, if the NDP was to win in BC, it’s not something that I would be in favor of because I live in the Province and know what negative effect it had on the region’s mining not long ago. I think most of the companies in BC now are sufficiently advanced in terms of their exploration, and some have gone into production like Barkerville Gold Mines Ltd. (TSX.V:BGM). So, all the permitting is in place and it’s going to be very difficult to rescind it.
TGR: Can you bring us up to date on some of the companies you’ve talked about with us previously and give us some ideas on others you’re looking at?
IG: I own shares of Fire River Gold Corp. (TSX.V:FAU; OTCQX:FVGCF). I think the company’s put together an extremely strong management team in order to put the Nixon Fork gold mine back into production, and I’m confident that Fire River is going to succeed. Right now, on the basis of the reserves the company’s put together through exploration, it probably has only a three-year mine life. The company is going to continue drilling to expand that resource and will be able to produce 50,000 ounces (Koz.) gold per year.
Barkerville Gold Mines is probably my favorite gold-company investment at this time; I think it’s very undervalued. The company currently produces about 50 Koz./year and will probably more than double that when it brings the second mill onstream. It’s a very large property, which I’ve been on, and I think it has the potential to host a 5 Moz. gold resource. So, I’m very excited about Barkerville, and I think it’s going to do extremely well. I have about 15% of my portfolio invested in BGM.
TGR: Obviously, you’re voting with your money.
IG: What I tend to do, and also advise for my subscribers, is to take large positions in companies that I think are going to do very well and smaller positions in companies where I’m not as confident. But, if those companies really do well, they’ll boost the value of my portfolio. If they don’t, they won’t hurt it that badly either. So, by taking a large investment position in Barkerville, I am confident that the share price will perform very well.
Premier Gold Mines Ltd. (TSX:PG) is another great company building an expanding resource. I like the company very much. But I don’t own it because I think it’s expensive and that’s due to CEO Ewan Downey’s past record and reputation. He’s the CEO, president and director of the company and is a real mine finder. I think he’s repeating his past success with Premier.
I like Millrock Resources Inc. (TSX.V:MRO) because I have the utmost respect for Greg Beischer, its CEO and president. He’s put some great properties in Alaska and Arizona into the company, most of which he’s been able to joint venture (JVs) with major companies. Big companies just don’t do JVs on properties that don’t have big potential. So, I think Millrock is a company that, at these prices, is probably undervalued. But it’s a little more grassroots than my other investments.
Timmins Gold Corp. (TSX.V:TMM) is in production at its San Francisco Gold Mine in northern Mexico. I think it will meet the objectives the management team set out for the company, which was producing about 100 Koz. gold/year. Drilling results near the mine show an expanding resource. This company has always been an absolute standout in achieving the objectives its management sets. I still own TMM shares and have done very well.
Another little company I particularly like right now, and own almost 10% of, is called Colibri Resource Corp. (TSX.V:CBI), which has all of its properties in northern Mexico. The company just completed a JV deal with Agnico-Eagle Mines Ltd. (TSX:AEM; NYSE:AEM) on a big gold property where the geology is fairly complex and very similar to La Herradura, which is a Newmont Mining Corp. (NYSE:NEM)/Fresnillo PLC (LSE:FRES) JV property. The La Herradura property hosts roughly 12 Moz. gold and is only about 12 km. away. Colibri also has a silver property that looks extremely attractive. The company did some percussion drilling in 2006 and got great results, so it’s drilling it again. I’ve got just under 10% of the company. Sprott has just under 20% and Agnico-Eagle has just under 20%. With Sprott and Agnico, Colibri has some very important shareholders.
Another company I really like and own a lot of, and whose share price doesn’t reflect what I think it’s worth, is called Temex Resources Corp. (TSX.V:TME; FSE:TQ1). All of the company’s assets are in Ontario, Canada. It has about 1.2 Moz. gold at surface on its Shining Tree property averaging about 1.5 grams per ton (g/t), so it’s certainly mineable. You’re really only paying maybe $40 per ounce of gold in the ground for this company. So, I think Temex is extremely undervalued. I own a lot of the stock and think it will do very well for shareholders.
Another one I like and have been buying lately is a company called PC Gold Inc. (TSX:PKL). Between my wife and me, we’ve probably accumulated about 1 million shares. PC’s main asset is a past-producing, very high-grade mine on Pickle Lake in Northwestern Ontario. The company has been drilling and producing exceptionally good drill results and probably now has a resource of more than 1 Moz. I think it’s extremely undervalued. I’ve been buying it in the open market and believe it can do very well for investors. So, there are a few more ideas.
TGR: Thank you for those great ideas. Did you have any last thoughts about the future of the economy you’d like to share?
IG: Unfortunately, I’m very pessimistic about the economy. If paper money, which is credit money, collapses, then, essentially, credit collapses and the economy grinds to a halt. Quite a scary scenario could evolve from a collapse in the paper-money system. We almost had a major credit failure in 2008. What happens if credit does that again? Everything stops—trucking stops, the movement of goods stops and it becomes a very difficult time for everyone. I think people have to prepare for the worst.
TGR: We’ve certainly gotten used to a system that is automated and electronic. People press buttons and expect results. If things start falling apart as you predict, we could see some real turmoil—financial and possibly even physical.
IG: Investors need to keep those possibilities in mind and protect their assets as best as they can. I’m a little reluctant to admit it, but one of the things I keep on hand is a one-year supply of food. It’s a relatively inexpensive way of protecting your food source. If the system falls apart, as it could, you won’t be able to run down to the store and get what you want when you need it.
TGR: Thank you very much, Ian, for your valuable insights and recommendations.
IG: Thank you very much.
A globally renowned economic forecaster, author and speaker, Ian Gordon is founder and chairman of the Longwave Group, comprising two companies—Longwave Analytics and Longwave Strategies. The former specializes in Ian’s ongoing study and analysis of the Longwave Principle originally expounded by Nikolai Kondratiev. With Longwave Strategies, Ian assists select precious metal companies in financings. Educated in England, Ian graduated from the Royal Military Academy, Sandhurst. After a few years serving as a platoon commander in a Scottish regiment, Ian moved to Canada in 1967 and entered the University of Manitoba’s History Department. Taking that step has had a profound impact because, during this period, he began to study the historical trends that ultimately provided the foundation for his Long Wave theory. Ian has been publishing his Long Wave Analyst website since 1998. Eric Sprott, chairman, CEO and portfolio manager at Sprott Asset Management, describes Ian as “a rare breed in the investment-advisor arena.” He notes that Ian’s forecasts “have taken on a life force of their own and if you care to listen, Ian will tell you how it will all end.”
The price of gold has gone over $1,400 an ounce recently. In addition to the raft of stories and questions about investing in gold, I get questions about whether we should return to the gold standard. Blogger confession – I’m going to use the opportunity to organize my own thoughts on the issue.
The quick answer comes from John Maynard Keynes (written in 1924) “In truth, the gold standard is already a barbarous relic.” I lack Keynes’ vivid parsimony, so it will take many more words for me to explain why I agree with him.
First, a general definition. When we talk about monetary policy and the gold standard we mean that a country promises to keep a stable relationship between gold and the country’s currency. This often has two consequences. First, the country needs to hold/own enough gold in proportion to the money in circulation. This proportion need not be 100%. During the period between World War I and the Great Depression economically healthy countries had enough gold to represent about 40% of the currency in circulation. Whatever the proportion, a country on the gold standard is obliged to ease or constrain credit to keep the value of currency in circulation in line with gold reserves. No gold – no economic growth.
The second consequence is that the government often needs to promise to redeem its currency for gold, at a price within an established range. This promise reinforces the government’s commitment to a stable currency value.
Many (most?) industrial governments sought to stay on the gold standard during the first half of the 20th century. The three major exceptions were during the two world wars and during the Great Depression. The wartime pressures on government spending usually required the creation of more money and easier credit. and governments had to set aside the promises inherent in the gold standard. The Depression had similar and additional pressures. Towards the end of WWII the Allies met and agreed on a stable international currency system, focused on the U.S. dollar, with the U.S. government also committing to maintaining a stable relationship, in terms of value, between the dollar and gold. This agreement lasted from 1944 until 1973. Since 1973 the U.S. currency, and most other first world currencies have floated in value and are not linked to gold.
One interesting conclusion reached by researchers, including Ben Bernanke when he was an academic, was that nations that stayed on the gold standard longer in the early part of the Depression had slower recoveries. Those nations that abandoned the constraints of the gold standard recovered more quickly.
Gold bugs are people who advocate for a return to the gold standard. Actually, originally (and more correctly) the term referred to investors who were bullish on gold. They prefer that money creation by the central bank (Federal Reserve in the case of the United States) be limited to the amount of gold reserves held by the country. They also prefer the implicit global currency exchange stability that could occur if our trading partners were also on the gold standard. Sticking with gold would constrain economic growth – limited by the discovery and availability of this precious metal.
Their faith in the gold standard is misplaced. There are numerous times when central bankers, with the support of their governments, have abandoned the standard under stressful conditions. The strength of a limited standard is based on everyone believing that the standard will prevail permanently. Unfortunately, political history doesn’t give us any confidence that we could stick to a standard indefinitely, and the markets and businesses will be quick to spot any weakening in resolve. Once that happens, a spiral of inflation expectations, accompanied by reduced investments, will cripple economies.
To grossly over-simplify Keynes’ objections to the gold standard – he wanted governments to have flexibility to react to adverse economic conditions, easing or tightening credit, influencing the value of their currency, and building or reducing debt. He argued that temporary fixes were necessary, and that remedial action after the crisis was also necessary. Strict adherence to a gold standard removes the flexibility he wanted.
There are dangers in letting a central bank print/create money with abandon; this invites dangerous inflation. It is crucial that central bankers have a plan in place to reduce the money supply when the economic crisis is over, and to do it in a way that allows the economy to anticipate and adjust. Adopting a gold standard doesn’t automatically make central bankers and politicians wise. It is a flimsy framework and no replacement for thoughtful monetary policy.
From Prosperity and Depression: A Theoretical Analysis of Cyclical Movements, G Von Haberler, rev ed., 1939, published by League of Nations:
Prosperity comes to an end when credit expansion is discontinued. Since the process of expansion, after it has been allowed to gain a certain speed, can be stopped only by a jolt, theere is always the danger that expansion will be not merely stopped but reversed, and will be followed by a process of contraction which is itself cumulative.
If the restriction of credit did not occur, the active phase of the trade cycle could be indefinitely prolonged, at the cost, no doubt, of an indefinite rise of prices and an abandonment of the gold standard.
Well, we abandoned the gold standard, had unrestricted credit, so now we wait for an indefinite rise of prices?
Bookkeeping is more or less based on the assumption of a constant value of money. Periods of major inflations have shown that this tradition is very deeply rooted and that long and disagreeable experiences are necessary to change the habit. One of the consequences is that durable means of production – such as machines and factory buildings – figure in cost accounts at the actual cost of acquisition, and are written off on that basis. If prices rise, this procedure is illegitimate. The enhanced replacement cost should be substituted for the original cost of acquisition. This, however, is not done, or is done only to an insufficient extent and only after prices have risen considerably. The consequence is that too little is written off, paper profits appear, and the entrepreneur is temptted to increase his consumption. Capital in such case is treated as income.
The paper profits are also likely to add to the cumulative force of the upswing, because they stimulate borrowers and lenders to borrow and lend more. The foster the optimistic spirit prevailing during the upswing, and so the credit expansion is likely to be accelerated. This phenomenon has its exact counterpart during the downswing of the cycle.
Those interested in the above may also find Professor Fekete’s paper Is Our Accounting System Flawed? of interest.
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On 4 March 2009 the Armenian Dram went poof, on 6 February 2009 the Kazakhstan Tenge went poof, in October 2008 the Iceland Krona went poof, during 2008 the British Pound went poof and the Continental Dollar went poof prompting the Founding Fathers to craft particular monetary powers and disabilities in the United States Constitution.
Nevertheless, the United States Dollar or Federal Reserve Note Dollar went poof multiple times last century including on 5 April 1933, 4 June, 1963, 24 June 1968 when silver certificate redemption was completely ceased, and 15 August 1971 during the Nixon shock. The current Federal Reserve Note United States Dollar, an illusion issued by an entity engaged in quantitative easing, will eventually go poof as the Treasury Bill bubble bursts.
FIJI DOLLAR ILLUSION EVAPORATES
On 15 April 2009 Bloomberg reported, “The Reserve Bank of Fiji said today it has devalued the Fiji dollar by 20 percent with immediate effect.”
Currency illusions, like the Fiji Dollar, can be summoned and evaporated by hairless monkeys pounding buttons on a keyboard resulting in someone’s lifetime of savings or pension purchasing 20% less bananas. This theft amounts to immoral taxation without representation being a form of confiscation through inflation and is a taking of property without due process of law.
WHAT IS GOLD AND SILVER
Gold, aurum in Latin, is a chemical element with the symbol Au and atomic number 79. Gold’s melting point is 1,337.33 Kelvin, 1,064.18 °Celsius and 1,947.52 °Fahrenheit.
Silver, argentum in Latin, is a chemical element with the symbol Ag and atomic number 47. Silver’s melting point is 961.78 °C or 1,763.2 °F.
WHAT IS A DOLLAR
The term ‘dollar’ is found in Article 1 Section 9 and the Seventh Amendment. Like the terms ‘day’ or ‘year’ the term dollar has a specific definition.
Dr. Veiera, J.D., the preeminent legal expert on the monetary jurisprudence, addresses the issue What Is A Dollar? Under the Coinage Act of 1792 the definition of a Dollar is found in Section Nine: ”DOLLARS or UNITS - each to be of the value of a Spanish milled dollar as the same is now current, and to contain three hundred and seventy one grains and four sixteenth parts of a grain of pure, or four hundred and sixteen grains of standard silver.”
GOLD AND SILVER CANNOT EVAPORATE
Water’s boiling point is 99.974 °C or 211.95 °F. The average temperature on the surface of the earth is 15 °C or 59 °F.
Gold’s boiling point is 2,856 °C or 5,173 °F. Silver’s boiling point is 2,162 °C or 3,924 °F. The temperature on the surface of the sun is 5,400 ºC or 9,800 ºF. Additionally, gold is extremely resistant to corrosion and can sit at the bottom of the corrosive ocean for centuries and still retain its luster.
I suppose gold could poof on the surface of the sun but on earth physical gold cannot evaporate when used as a currency in ordinary daily transactions or when hoarded safely in vaults. At all times and in all circumstances gold remains money. You can always trade gold for bread.
On 20 May 1999, Alan Greenspan testified before Congress, “Gold is always accepted and is the ultimate means of payment and is perceived to be an element of stability in the currency and in the ultimate value of the currency and that historically has always been the reason why governments hold gold.”
ACCOUNTS RECEIVABLES FOR GOLD AND SILVER CAN EVAPORATE
During the 1990’s Mr. Rubin had devised the gold leasing scheme with the intent being elucidated by Dr. Greenspan’s testimony in 1998 that, ”Nor can private counterparties restrict supplies of gold, another commodity whose derivatives are often traded over-the-counter, where central banks stand ready to lease gold in increasing quantities should the price rise.”
The Gold Anti-Trust Action Committee, GATA, has alleged that central banks are engaged in a gold price suppression scheme. This scheme may include the COMEX’s participation along with Deutsche Bank, the European Central Bank and many others. Mr. Robert Landis, a graduate of Princeton University, Harvard Law School and member of the New York Bar, asserted in August of 2005 that “Any rational person who continues to dispute the existence of the rig after exposure to the evidence is either in denial or is complicit.”
GATA alleges that the central banks have less than half the gold claimed. The bullion bank agents like JP Morgan and Goldman Sachs, who is threatening legal action against the owner of investigative financial journalism site GoldmanSachs666.com, may face large amounts of liability from dealing in these types of derivatives.
The recent nine weeks of silver backwardation along with the problematic ETFs GLD and SLV show the feigned value of financial instruments subject to counter-party risk in contrast to tangible assets. Fractional reserve banking, which Murray Rothbard argues is a form of embezzlement in The Case Against The Fed, and other types of Ponzi scams always end causing financial, economic, social and political damage.
GATA’S PRESCIENT WARNING
On 31 January 2008 GATA’s Wall Street Journal full-page advertisement presciently warned, “The objective of this manipulation is to conceal the mismanagement of the U.S. dollar so that it might retain its function as the world’s reserve currency. But to suppress the price of gold is to disable to baromter of the international financial system so that all markets may be more easily manipulated. This manipulation has been the primary cause of the catastrophic excesses in the markets that now threaten the whole world.”
Not only mere commodities gold and silver are essential checks and balances in the American political machinery.
Article 1 Section 8 Clause 5 states that Congress has the power “To coin money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures.” Article 1 Section 10 Clause 1 states that ‘No State shall … coin Money; emit Bills of Credit; make any Thing but gold and silver a Coin a Tender in Payment of Debts.” The Ninth Amendment states “The enumeration in the Constitution, of certain rights, shall not be construed to deny or disparage others retain by the people.” The Tenth Amendment states “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.”
While the constitution does not define money it does specify that it is coined rather than printed. What the constitution is silent on is often as important as what it pronounces because every power exercised by government must have a core authorization in the constitution. If an action is not expressly authorized then it is prohibited.
TENTH AMENDMENT ASSERTIONS
A majority of states have begun formally asserting their Tenth Amendment rights.
For example, Governor Rick Perry issued a press release declaring, “I believe that our federal government has become oppressive in its size, its intrusion into the lives of our citizens, and its interference with the affairs of our state. That is why I am here today to express my unwavering support for efforts all across our country to reaffirm the states’ rights affirmed by the Tenth Amendment to the U.S. Constitution. I believe that returning to the letter and spirit of the U.S. Constitution and its essential 10th Amendment will free our state from undue regulations, and ultimately strengthen our Union.”
An interesting historical and tangential point is that the 1836 Texas Constitution explicitly reserved the right to secession which as Lysander Spooner explained was “a right that was embodied in the American Revolution.”
CRIMINAL ACTION IN PLAIN SIGHT
But these facts are a small subset of a gargantuan truth: the gold price suppression scheme sustains a monetary system that is immoral and in conflict with the foundational law of the United States.
Because there is no root authorization in the constitution for the Federal government to make anything legal tender and because the States are prohibited from making anything but gold and silver legal tender, even some illusion issued by the Federal government or a privately owned Federal Reserve, therefore the FRN$, an illusion, is in conflict with the supreme law of the land.
Both the French and Founding Fathers of America knew how to deal with this type of treason from criminal gangs costumed in government regalia and their enablers the lying and embezzling bankers.
While the Coinage Act of 1792 has been superceded by additional legislation Section 19 provided, “That if any of the gold or silver coins which shall be struck or coined at the said mint shall be debased or made worse as to the proportion of fine gold or fine silver therein contained … shall embezzle any of the metals which shall at any time be committed to their charge … every such officer or person who shall commit any or either of the said offences, shall be deemed guilty of felony, and shall suffer death.”
The immoral and unethical world’s reserve currency, in conflict with the supreme law of the land, is an inherently unstable and unsustainable illusion. The monetary, economic, social and political system built upon this illusion does not collapse but evaporates.
President Obama appoints known tax evaders, such as Treasury Secretary Timothy Geithner, to high tax eater posts to bailout their friends in an attempt to prevent the consequences of basic economic law. On the other hand, today the 15th of April ‘We The People’, the tax eater’s bosses, are threatened with death if we fail and resist paying homage using little irredeemable legal tender tickets.
As the FRN$ political currency illusion continues evaporating there will most likely be a deflationary implosion coupled with a hyper-inflationary explosion. The Great Credit Contraction has begun and is unstoppable as capital, both real and fictitious, either burrows down the liquidity pyramid to safety and liquidity or evaporates.
Disclosures: Long physical gold and silver with no position in US Treasury Bills (TLT), JPM or GS.