I love reality TV and have been on some shows, but my favorite reality TV show is the drama played out in markets every day. Not only is it entertaining, but you can bet on it!
Tuesday, January 12, 2010
The Bubble continues to inflate!
The bubble continues to inflate as stocks, commodities, and gold continues to rise and faith in government loans remains strong.
Savvy Mr. Levine but I'm surprised at your enthusiasm for commodities including gold. As an entrepreneur I'd have thought you'd recognize that innovation ulitmately drives down the cost of all commodities. Here is a related article I think you'll enjoy: http://www.wired.com/wired/archive/5.02/ffsimon_pr.html
This is your friend from Japan Scott Schill and, incidentally, I recollect that you came to DC for a vending convention in the winter of 1992 and at that time asked me if I'd ever heard of the world wide web, which I hadn't.
Technology drives down the "cost" of commodities. But if the government prints too many dollars, then the "price" will go up.
Thus the decline in the value of paper fiat money is declining faster than technology decreases the cost of commodities.
further, during times of currency turmoil, technology company stocks may suffer from lower than normal P/E's while commodities which can't be debased by the government may hold their value more than stocks in the short run during a crisis.
Time will tell, but I think your certainty about the relationship between quantitative easing, inflation and commodities is misplaced. Look to our old stomping grounds Japan for proof that the relationship is not always and ever as simple and inevitable as you suggest. Here is the counter-argument stated better than I can present it:
But the Quantity Theory of Money is true only at full employment. If there is unused capacity in the economy, part of any increase in the quantity of money will be spent on increasing output rather than just buying existing output. This is only half the story, however. By “quantity of money,” experts normally mean M3, a broad measure that includes bank deposits. Flooding banks with central-bank money is no guarantee that deposits, which arise from spending or borrowing money, will increase in the same proportion. In the 1990’s, the Japanese central bank injected huge amounts of money into banks in an attempt to boost the money supply. At one time, central-bank money was up by 35% in one year, yet M3 was rose by only 7%. Data from Europe and the US show that M3 has been falling for most of 2009, despite exceptionally low interest rates and quantitative easing. What matters is not printing money, but spending it. It is when money is spent that it becomes more than an inert bundle of useless paper. A central bank can print money, but it cannot ensure that the money it prints is spent. It may pile up in bank reserves or savings accounts, or it may produce asset bubbles. But in such cases, little or no increase in the money supply occurs. The new money simply replaces the old money, which has been liquidated by economic collapse. That is why official data points to extremely low inflation rates over the next few years, despite the monetary and fiscal stimulus. But this should be a warning signal: to say that with unemployment now much higher, inflation is expected to remain low is really to say that there will be little recovery over the next five years. After all, when economies recover from recession, they usually grow above trend. This means that prices will rise above trend. The fact that there is no evidence of higher prices in the pipeline means that there is no real evidence of economic recovery.
High unemployment, falling housing prices, banks with bad CRE debts on their books. Not to mention the continuing anti-inflationary impact of globalization. Where are the inflationary forces in the intermediate term? The government spent billions taking bad mortgage-backed debt off of banks books. And what have the banks done with it along with the liquidity created by the Fed Funds rate? Where has that money flowed? Follow that trail and you'll find your bubble--in commodities!
in the 1970s we went off the gold standard in order to increase the money supply. then despite low employment inflation shot up.
I agree that much of the money now sits in banks and thus is not turning up in traditional "inflation" prices. Instead we have seen it go into things bank put it in, internet stocks, then homes, and now US gov debt.
That money left japan and went into international investments in stocks, US homes, and government bonds.
It is possible to keep prices steady by increasing supply in a slowing market. But in that case, gold and commodities would still out perform the currency because the value of money per economic value created would decline.
I should be more clear regarding my belief that the increase in the money supply will cause some sort of bubble or inflation. Not that it will specifically do the one thing the fed worries about which is rising consumer prices. Within the next year, US state governments will have to be rescued by printing more money. When that happens, that money will go to people and therefore higher prices rather than the past bank bailouts that only inflates stocks and other financial instruments.
The Fed Prints money and gives it to banks. Banks give it to the government and the government pays them interest. Not only is this easy money for banks. It is considered riskless. Famed investor Warren Buffet said February 28, 2009: "When the financial history of this decade is written, it will surely speak of the Internet bubble of the late 1990s and the housing bubble of the early 2000s," he went on. "But the U.S. Treasury bond bubble of late 2008 may be regarded as almost equally extraordinary."
the U.S. dollar has lost more than 90 percent of its purchasing power since 1913—41 percent in the 1934 revaluation alone—there were times previously when the dollar lost even more value. I find it hard to believe this trend will change anytime soon. It will continue until the dollar goes back to a gold standard or is abandoned completely.
First, how the heck are you doing? It brings a smile to my face to see you've accomplished exactly what you set out to do. Now to your comments. I agree with you that “the increase in the money supply will cause some sort of bubble[.]” I just think that commodities are among those bubbles where as you seem to believe they are protection against them. Warren Buffett, who you cite, also said about gold: "It gets dug out of the ground ... Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head."
Speaking of head scratchers, you write that "the U.S. dollar has lost more than 90 percent of its purchasing power since 1913—41 percent in the 1934 revaluation alone." Are you saying that the fact that the $2 cup of coffee I bought today would have cost me a 0.05$ in 1920 means an inevitable "[return to] the gold standard or [the dollar] is abandoned completely"? First, we seem to have had a pretty good run--the best in the history of the world--during that near century since 1913 in which the U.S. dollar "lost more than 90 percent of its purchasing power." If "loss of purchasing power" is so wrong, I don't want to be right. "Loss of purchasing power" is another way I guess of saying "inflation." Mild inflation is a very desirable state of affairs--the most desirable in fact to create a stable, growing world economy.
Let's take a look at the ebbs and flows of economic history over the last 30 years:
* 1979: Stagflation; malaise; the end of U.S. post WWII dominance. Party is over for the US of A. * 1980-1989: But wait! Morning in America. New vigor, power, economic vitality. * 1990: Japan is an unstoppable power about to leave behind the decadent and decaying American model. America's intractable budget deficits foretell chronic economic decay and decline. Party is over for the US of A. * 1992-2000: But wait! America's economy roars back on wings of an IT revolution. Government balances the budget and the decade ends with huge surpluses. * 2001-2009: Deficits, wars, 'decline of the empire w/o any clothes.' The degenerate gov't printing press undermining the always paper-thin pretense of a fiat currency. Party is over for the US of A.
What I take away from this: (1) people always project current conditions far out to the future. The biggest mistake people make is arguing "If things continue as they are the apocalypse is neigh." Because things never continue as they are; they always change. (2) despite the fact that by every objective measure life has and continues to improve: increased life expectancy, decreased poverty, better healthcare etc. humanity has some dark inclination to see only catastrophe in the future. The future is going to be great and prosperous.
first of all, I am doing great. for more info on my wonderful life, check out sextoydave.com. Living in hollywood is fun!!
I love warren, but his comment on gold is a bit silly. If aliens really had no concept of money then they would be confused, but don't you think they would see less value in pieces of paper or digits created by the government that we trade for valuable items? At least that "gold" is a rare material that aliens may even be familiar with on their planet and if not, may marvel at its beauty and weight. But yes, if they don't understand money, it will look weird, but not as weird as trading pieces of paper. I used to discount the value of gold for the same reasons, but currency is important and right now (and throughout history) currencies not based on gold have a short lifespan. As we enter a currency crisis, gold will hold more value than usual. Aliens may scratch their head, but I won't!
The US has had a great run because we created the democratic free market system. we also have inflated our current wealth with a lot of debt. If the government had not been stealing 3% a year from the economy (their stated inflation target) then we would have only had a greater run. I will reprint part of what I wrote in my essay on this blog on march 18. The original constitution had a provision that stated, "the legistature of the United States shall have the power to borrow money and emit bills of credit." Alexander Hamilton voiced the majority of the delegates who won the removal of that term from the constitution. Hamilton said,"to emit an unfunded paper as the sign of value ought not to continue a formal part of the constitution, nor ever hereafter to be employed; being in its nature, repugnant with abuses and liable to be made the engine of imposition and fraud." He was saying that currency backed by nothing more than a government promise is prone to corruption. Later Hamilton became the first Treasury secretary of the United States. He set up the first US Mint and backed US currency by gold and silver. This set off the greatest economic boom in world history.
Now I will respond to your points after the * * 1979: Stagflation; malaise; the end of U.S. post WWII dominance. Party is over for the US of A.
Nixon took us off the gold standard in 73 which created 7 years of stagflation
* 1980-1989: But wait! Morning in America. New vigor, power, economic vitality.
Fiat currencies do not have to die. The problem is politicians always debase them to keep themselves in power. Regan and Volker however raised interest rates dramatically and shrunk the money supply as well as cut taxes, this grew the economy and strengthened the dollar. This move ushered in another strong 8+ years of growth!
* 1990: Japan is an unstoppable power about to leave behind the decadent and decaying American model. America's intractable budget deficits foretell chronic economic decay and decline. Party is over for the US of A.
Japan real estate value was worth more than all the land in the US and the stock market PE was in the 50's. Clearly a bubble.
* 1992-2000: But wait! America's economy roars back on wings of an IT revolution. Government balances the budget and the decade ends with huge surpluses.
This was the start of our current crisis. Reagan strengthened the dollar, but politicians saw that they could buy time by lowering interest rates and inflating the economy. they got themselves out of the 1990 mess with a little of that, but it wasn't too bad. Then they did it again in 1997 when that hedge fund almost crashed on leverage. They saved that fund because if they didn't Lehman could have failed! Then after the internet bubble burst, to keep the party going they pushed home buying for people who could not afford it. Now we just moved all debt to the US gov and dropped rates to 0%.
* 2001-2009: Deficits, wars, 'decline of the empire w/o any clothes.' The degenerate gov't printing press undermining the always paper-thin pretense of a fiat currency. Party is over for the US of A.
the politicians tried to convince us that a real recession would have devastated the world so they convinced Fannie and Freddie to loan to people with no money to buy houses and borrow to keep the economy going. If we let the economy crash a bit harder in 2001 and didn't double down on inflation, we would have been OK. Since 2001, commodities and gold have taken off. Now they are doing the same thing but on a bigger scale with the current slowdown.
I am not apocalyptic and do not think the world will decline. In fact, i would think it would be great if the government went bankrupt and stopped stealing my money. It would also be better for the economy in the long run. Further, crooks like Barney Frank and other politicians need to go on trial for destroying our currency for their own profit and power. But the world will continue to prosper (especially in places that aren't saddled with debt) and I will continue to make money and be successful. China may have some trouble when they realize they are the biggest victim in our ponzi scheme, but Brazil and India will continue to roar and successful companies in any country will continue to perform. Transitions can be difficult and expensive in the short run, but if politicians can stop the losers from failing, these transitions will occur and growth will continue faster than if we let government prevent losers from failing and keep borrowing to keep themselves in power.
Most likely at some point there will be a digital currency who Visa accepts and is based on gold. Then thats it . . . no more theft from politicians, and prosperity can continue at an even faster pace than before.
I know Hollywood is fun, my brother lives there (well Studio City actually). But he clearly doesn’t have as much fun as you do. But who does?
I wholeheartedly agree with you that the system works only if failure is permitted—embraced in fact--and understood as the key predicate to new growth and a bright future. And OK, I get it, you are a hard-core gold bug who believes in a return to the gold standard following the inevitable upcoming hyper-inflation. Stepping away from the big picture for a moment, I still think you should be careful about going long gold. My argument is this:
1. We both agree that “the increase in the money supply will cause some sort of bubble or inflation.” 2. The overwhelming consensus of the financial world is that “increase money supply necessarily = inflation.” The financial world has placed its bets accordingly. In fact, over the last 10 years gold has risen more than 4x, from $255.
3. We have observed certain instances where the increase in money supply has not generated inflation over an extended period, e.g., Japan. 4. If everyone expects inflation, inflation is built in to the price. The move from $255 an ounce to $1,200 an ounce would seem to be consistent with that view. 5. The only surprise that would significantly change the price of gold is to the downside, eg, surprise that inflation has not taken hold. 6. Revisiting point #1, that “the increase in the money supply will cause some sort of bubble or inflation,” I think it is a distinct possibility that the MS increase has in fact caused a bubble . . . in gold. The bubble story built on investor certainty that “it is different this time” as we are heading toward hyper-inflation and gold is the best hedge. Of course investors did the same thing in 1976-79 when gold went from $100 per ounce to $750 per ounce—only to languish below that high for the next 28 years (with no dividends to boot).
So my friend, my advice is only to be careful.
As to the gold standard, whatever benefits you believe would accrue from a return to it, consider that world: Average inflation determined by gold mining. Under a gold standard, the long-run trajectory of the price level is determined by the pace at which gold is mined in South Africa and Russia. • For example, the discovery and exploitation of large gold reserves near present-day Johannesburg at the end of the nineteenth century was responsible for a four percentage point per year shift in the worldwide rate of inflation--from a deflation of roughly two percent per year before 1896 to an inflation of roughly two percent per year after 1896. • Thus any political factors that interrupted the pace of gold mining would have major effects on the long-run trend of the price level--send us into an era of slow deflation, with high unemployment. Conversely, significant advances in gold mining technology could provide a significant boost to the average rate of inflation over decades. • Under the gold standard, the average rate of inflation or deflation over decades becomes the result of the balance between growing world production and the pace of gold mining.
The Fed printed money, gave it to the banks and then the banks give that to the government for their 3% "riskless" return. Thus, the bubble is in treasuries. I am not sure where most of Japanese funds have gone, but it isn't gold or Japan . .. mostly overseas investments and certainly many treasuries. People talk about gold as "just a shiny rock that does nothing" . . . but actually it is a currency. A currency that has held value as a currency for 10,000 years. You can defend the fiat currencies of today, but to consider them infinitely more stable and reliable than gold is simply naive. With that said, holding 5-10% of your savings in gold (aka cash) is hardly what I would call a bubble, yet how many people do you know that own ANY gold? what percentage of bank capital reserves?, what percentage of government reserves?, etc. I understand the problems associated with prices fluctuating based on the changes in economic activity or the supply of gold, but I prefer that over the value of currency dependent on a politicians will to steal. You mentioned the 1970's which is a great example, nixon took us off gold which resulted in huge inflation, but when Regan stepped in and let interest rates go over 10% and stopped the increase in the money supply, the panic ended and faith in the dollar resumed. If Bernanke and Obama let interest rates go over 10% and they sell off 1 trillion from the fed balance sheet, then I will certainly sell my gold!
9 comments:
Savvy Mr. Levine but I'm surprised at your enthusiasm for commodities including gold. As an entrepreneur I'd have thought you'd recognize that innovation ulitmately drives down the cost of all commodities. Here is a related article I think you'll enjoy: http://www.wired.com/wired/archive/5.02/ffsimon_pr.html
This is your friend from Japan Scott Schill and, incidentally, I recollect that you came to DC for a vending convention in the winter of 1992 and at that time asked me if I'd ever heard of the world wide web, which I hadn't.
Technology drives down the "cost" of commodities. But if the government prints too many dollars, then the "price" will go up.
Thus the decline in the value of paper fiat money is declining faster than technology decreases the cost of commodities.
further, during times of currency turmoil, technology company stocks may suffer from lower than normal P/E's while commodities which can't be debased by the government may hold their value more than stocks in the short run during a crisis.
Great to hear from you Scott!
Dave,
Time will tell, but I think your certainty about the relationship between quantitative easing, inflation and commodities is misplaced. Look to our old stomping grounds Japan for proof that the relationship is not always and ever as simple and inevitable as you suggest. Here is the counter-argument stated better than I can present it:
But the Quantity Theory of Money is true only at full employment. If there is unused capacity in the economy, part of any increase in the quantity of money will be spent on increasing output rather than just buying existing output.
This is only half the story, however. By “quantity of money,” experts normally mean M3, a broad measure that includes bank deposits. Flooding banks with central-bank money is no guarantee that deposits, which arise from spending or borrowing money, will increase in the same proportion.
In the 1990’s, the Japanese central bank injected huge amounts of money into banks in an attempt to boost the money supply. At one time, central-bank money was up by 35% in one year, yet M3 was rose by only 7%. Data from Europe and the US show that M3 has been falling for most of 2009, despite exceptionally low interest rates and quantitative easing.
What matters is not printing money, but spending it. It is when money is spent that it becomes more than an inert bundle of useless paper. A central bank can print money, but it cannot ensure that the money it prints is spent. It may pile up in bank reserves or savings accounts, or it may produce asset bubbles. But in such cases, little or no increase in the money supply occurs. The new money simply replaces the old money, which has been liquidated by economic collapse.
That is why official data points to extremely low inflation rates over the next few years, despite the monetary and fiscal stimulus. But this should be a warning signal: to say that with unemployment now much higher, inflation is expected to remain low is really to say that there will be little recovery over the next five years. After all, when economies recover from recession, they usually grow above trend. This means that prices will rise above trend. The fact that there is no evidence of higher prices in the pipeline means that there is no real evidence of economic recovery.
High unemployment, falling housing prices, banks with bad CRE debts on their books. Not to mention the continuing anti-inflationary impact of globalization. Where are the inflationary forces in the intermediate term? The government spent billions taking bad mortgage-backed debt off of banks books. And what have the banks done with it along with the liquidity created by the Fed Funds rate? Where has that money flowed? Follow that trail and you'll find your bubble--in commodities!
in the 1970s we went off the gold standard in order to increase the money supply. then despite low employment inflation shot up.
I agree that much of the money now sits in banks and thus is not turning up in traditional "inflation" prices. Instead we have seen it go into things bank put it in, internet stocks, then homes, and now US gov debt.
That money left japan and went into international investments in stocks, US homes, and government bonds.
It is possible to keep prices steady by increasing supply in a slowing market. But in that case, gold and commodities would still out perform the currency because the value of money per economic value created would decline.
I should be more clear regarding my belief that the increase in the money supply will cause some sort of bubble or inflation. Not that it will specifically do the one thing the fed worries about which is rising consumer prices. Within the next year, US state governments will have to be rescued by printing more money. When that happens, that money will go to people and therefore higher prices rather than the past bank bailouts that only inflates stocks and other financial instruments.
The Fed Prints money and gives it to banks. Banks give it to the government and the government pays them interest. Not only is this easy money for banks. It is considered riskless.
Famed investor Warren Buffet said February 28, 2009: "When the financial history of this decade is written, it will surely speak of the Internet bubble of the late 1990s and the housing bubble of the early 2000s," he went on. "But the U.S. Treasury bond bubble of late 2008 may be regarded as almost equally extraordinary."
the U.S. dollar has lost more than 90 percent of its purchasing power since 1913—41 percent in the 1934 revaluation alone—there were times previously when the dollar lost even more value. I find it hard to believe this trend will change anytime soon. It will continue until the dollar goes back to a gold standard or is abandoned completely.
First, how the heck are you doing? It brings a smile to my face to see you've accomplished exactly what you set out to do. Now to your comments. I agree with you that “the increase in the money supply will cause some sort of bubble[.]” I just think that commodities are among those bubbles where as you seem to believe they are protection against them. Warren Buffett, who you cite, also said about gold: "It gets dug out of the ground ... Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head."
Speaking of head scratchers, you write that "the U.S. dollar has lost more than 90 percent of its purchasing power since 1913—41 percent in the 1934 revaluation alone." Are you saying that the fact that the $2 cup of coffee I bought today would have cost me a 0.05$ in 1920 means an inevitable "[return to] the gold standard or [the dollar] is abandoned completely"? First, we seem to have had a pretty good run--the best in the history of the world--during that near century since 1913 in which the U.S. dollar "lost more than 90 percent of its purchasing power." If "loss of purchasing power" is so wrong, I don't want to be right. "Loss of purchasing power" is another way I guess of saying "inflation." Mild inflation is a very desirable state of affairs--the most desirable in fact to create a stable, growing world economy.
Let's take a look at the ebbs and flows of economic history over the last 30 years:
* 1979: Stagflation; malaise; the end of U.S. post WWII dominance. Party is over for the US of A.
* 1980-1989: But wait! Morning in America. New vigor, power, economic vitality.
* 1990: Japan is an unstoppable power about to leave behind the decadent and decaying American model. America's intractable budget deficits foretell chronic economic decay and decline. Party is over for the US of A.
* 1992-2000: But wait! America's economy roars back on wings of an IT revolution. Government balances the budget and the decade ends with huge surpluses.
* 2001-2009: Deficits, wars, 'decline of the empire w/o any clothes.' The degenerate gov't printing press undermining the always paper-thin pretense of a fiat currency. Party is over for the US of A.
What I take away from this: (1) people always project current conditions far out to the future. The biggest mistake people make is arguing "If things continue as they are the apocalypse is neigh." Because things never continue as they are; they always change. (2) despite the fact that by every objective measure life has and continues to improve: increased life expectancy, decreased poverty, better healthcare etc. humanity has some dark inclination to see only catastrophe in the future. The future is going to be great and prosperous.
first of all, I am doing great. for more info on my wonderful life, check out sextoydave.com. Living in hollywood is fun!!
I love warren, but his comment on gold is a bit silly. If aliens really had no concept of money then they would be confused, but don't you think they would see less value in pieces of paper or digits created by the government that we trade for valuable items? At least that "gold" is a rare material that aliens may even be familiar with on their planet and if not, may marvel at its beauty and weight. But yes, if they don't understand money, it will look weird, but not as weird as trading pieces of paper. I used to discount the value of gold for the same reasons, but currency is important and right now (and throughout history) currencies not based on gold have a short lifespan. As we enter a currency crisis, gold will hold more value than usual. Aliens may scratch their head, but I won't!
The US has had a great run because we created the democratic free market system. we also have inflated our current wealth with a lot of debt. If the government had not been stealing 3% a year from the economy (their stated inflation target) then we would have only had a greater run. I will reprint part of what I wrote in my essay on this blog on march 18.
The original constitution had a provision that stated, "the legistature of the United States shall have the power to borrow money and emit bills of credit." Alexander Hamilton voiced the majority of the delegates who won the removal of that term from the constitution. Hamilton said,"to emit an unfunded paper as the sign of value ought not to continue a formal part of the constitution, nor ever hereafter to be employed; being in its nature, repugnant with abuses and liable to be made the engine of imposition and fraud." He was saying that currency backed by nothing more than a government promise is prone to corruption. Later Hamilton became the first Treasury secretary of the United States. He set up the first US Mint and backed US currency by gold and silver. This set off the greatest economic boom in world history.
Now I will respond to your points after the *
* 1979: Stagflation; malaise; the end of U.S. post WWII dominance. Party is over for the US of A.
Nixon took us off the gold standard in 73 which created 7 years of stagflation
* 1980-1989: But wait! Morning in America. New vigor, power, economic vitality.
Fiat currencies do not have to die. The problem is politicians always debase them to keep themselves in power. Regan and Volker however raised interest rates dramatically and shrunk the money supply as well as cut taxes, this grew the economy and strengthened the dollar. This move ushered in another strong 8+ years of growth!
* 1990: Japan is an unstoppable power about to leave behind the decadent and decaying American model. America's intractable budget deficits foretell chronic economic decay and decline. Party is over for the US of A.
Japan real estate value was worth more than all the land in the US and the stock market PE was in the 50's. Clearly a bubble.
* 1992-2000: But wait! America's economy roars back on wings of an IT revolution. Government balances the budget and the decade ends with huge surpluses.
This was the start of our current crisis. Reagan strengthened the dollar, but politicians saw that they could buy time by lowering interest rates and inflating the economy. they got themselves out of the 1990 mess with a little of that, but it wasn't too bad. Then they did it again in 1997 when that hedge fund almost crashed on leverage. They saved that fund because if they didn't Lehman could have failed! Then after the internet bubble burst, to keep the party going they pushed home buying for people who could not afford it. Now we just moved all debt to the US gov and dropped rates to 0%.
* 2001-2009: Deficits, wars, 'decline of the empire w/o any clothes.' The degenerate gov't printing press undermining the always paper-thin pretense of a fiat currency. Party is over for the US of A.
the politicians tried to convince us that a real recession would have devastated the world so they convinced Fannie and Freddie to loan to people with no money to buy houses and borrow to keep the economy going. If we let the economy crash a bit harder in 2001 and didn't double down on inflation, we would have been OK. Since 2001, commodities and gold have taken off. Now they are doing the same thing but on a bigger scale with the current slowdown.
I am not apocalyptic and do not think the world will decline. In fact, i would think it would be great if the government went bankrupt and stopped stealing my money. It would also be better for the economy in the long run. Further, crooks like Barney Frank and other politicians need to go on trial for destroying our currency for their own profit and power. But the world will continue to prosper (especially in places that aren't saddled with debt) and I will continue to make money and be successful. China may have some trouble when they realize they are the biggest victim in our ponzi scheme, but Brazil and India will continue to roar and successful companies in any country will continue to perform. Transitions can be difficult and expensive in the short run, but if politicians can stop the losers from failing, these transitions will occur and growth will continue faster than if we let government prevent losers from failing and keep borrowing to keep themselves in power.
Most likely at some point there will be a digital currency who Visa accepts and is based on gold. Then thats it . . . no more theft from politicians, and prosperity can continue at an even faster pace than before.
Dave,
I know Hollywood is fun, my brother lives there (well Studio City actually). But he clearly doesn’t have as much fun as you do. But who does?
I wholeheartedly agree with you that the system works only if failure is permitted—embraced in fact--and understood as the key predicate to new growth and a bright future. And OK, I get it, you are a hard-core gold bug who believes in a return to the gold standard following the inevitable upcoming hyper-inflation. Stepping away from the big picture for a moment, I still think you should be careful about going long gold. My argument is this:
1. We both agree that “the increase in the money supply will cause some sort of bubble or inflation.”
2. The overwhelming consensus of the financial world is that “increase money supply necessarily = inflation.” The financial world has placed its bets accordingly. In fact, over the last 10 years gold has risen more than 4x, from $255.
3. We have observed certain instances where the increase in money supply has not generated inflation over an extended period, e.g., Japan.
4. If everyone expects inflation, inflation is built in to the price. The move from $255 an ounce to $1,200 an ounce would seem to be consistent with that view.
5. The only surprise that would significantly change the price of gold is to the downside, eg, surprise that inflation has not taken hold.
6. Revisiting point #1, that “the increase in the money supply will cause some sort of bubble or inflation,” I think it is a distinct possibility that the MS increase has in fact caused a bubble . . . in gold. The bubble story built on investor certainty that “it is different this time” as we are heading toward hyper-inflation and gold is the best hedge. Of course investors did the same thing in 1976-79 when gold went from $100 per ounce to $750 per ounce—only to languish below that high for the next 28 years (with no dividends to boot).
So my friend, my advice is only to be careful.
As to the gold standard, whatever benefits you believe would accrue from a return to it, consider that world:
Average inflation determined by gold mining. Under a gold standard, the long-run trajectory of the price level is determined by the pace at which gold is mined in South Africa and Russia.
• For example, the discovery and exploitation of large gold reserves near present-day Johannesburg at the end of the nineteenth century was responsible for a four percentage point per year shift in the worldwide rate of inflation--from a deflation of roughly two percent per year before 1896 to an inflation of roughly two percent per year after 1896.
• Thus any political factors that interrupted the pace of gold mining would have major effects on the long-run trend of the price level--send us into an era of slow deflation, with high unemployment. Conversely, significant advances in gold mining technology could provide a significant boost to the average rate of inflation over decades.
• Under the gold standard, the average rate of inflation or deflation over decades becomes the result of the balance between growing world production and the pace of gold mining.
The Fed printed money, gave it to the banks and then the banks give that to the government for their 3% "riskless" return. Thus, the bubble is in treasuries. I am not sure where most of Japanese funds have gone, but it isn't gold or Japan . .. mostly overseas investments and certainly many treasuries.
People talk about gold as "just a shiny rock that does nothing" . . . but actually it is a currency. A currency that has held value as a currency for 10,000 years. You can defend the fiat currencies of today, but to consider them infinitely more stable and reliable than gold is simply naive.
With that said, holding 5-10% of your savings in gold (aka cash) is hardly what I would call a bubble, yet how many people do you know that own ANY gold? what percentage of bank capital reserves?, what percentage of government reserves?, etc.
I understand the problems associated with prices fluctuating based on the changes in economic activity or the supply of gold, but I prefer that over the value of currency dependent on a politicians will to steal.
You mentioned the 1970's which is a great example, nixon took us off gold which resulted in huge inflation, but when Regan stepped in and let interest rates go over 10% and stopped the increase in the money supply, the panic ended and faith in the dollar resumed.
If Bernanke and Obama let interest rates go over 10% and they sell off 1 trillion from the fed balance sheet, then I will certainly sell my gold!
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