Tuesday, March 31, 2009

More on the Gold Standard

I encountered another good article about the gold standard and investing in gold. I commend the piece to you.

I've been harping on this for a couple weeks now, but this is serious business. Our current fiat currency is at the heart of our economic collapse and the government's intrusion over all aspects of our lives.

Fiat currency is the tool of tyrants.

Collateralized Mortgage Obligations

New York Magazine has a fascinating article about one of the computer programmers that designed the software that allowed investment banks to create bonds from mortgages. I highly recommend it.

Here is a great excerpt that has meaning far beyond our present financial crisis:

"The drive to simplify the user’s contact with the machine has an inherent side effect of disguising the complexity of a given task. Over time, the users of any software are inured to the intricate nature of what they are doing. Also, as the software does more of the “thinking,” the user does less."


"The other day, Professor Gesiak brought me a pitcher of his basement-brewed beer, bartering for oysters. He mused that the U.S. government would, like Poland’s, make the currency worthless. What do we have, I wonder, that like the vodka in communist Poland, can be counted on to hold its value in this age?"

That is the problem, isn't it? Nothing really holds value when currency is not backed by anything. What can hold value under such circumstances?

More on Gold

The UK Telegraph reports that Russia has recently said they would "favour the inclusion of gold bullion in the basket-weighting of a new world currency based on Special Drawing Rights issued by the International Monetary Fund."

The article is a helpful introduction to the idea of a gold standard. Here are a few helpful excerpts:

"The Gold Standard was the anchor of world finance in the 19th Century but began breaking down during the First World War as governments engaged in unprecedented spending. It collapsed in the 1930s when the British Empire, the US, and France all abandoned their parities."

"It is widely argued that the financial excesses and extreme debt leverage of the last quarter century would have been impossible - or less likely - under the discipline of gold."

I also recommend watching the video on gold investing from the Telegraph site.

Tuesday, March 24, 2009

"Fixing" the Banks

Treasury Secretary Timothy Geithner has released his plan to fix the banks. You can read about it here.

Clearly the Obama administration doesn't "get it" and has completely misdiagnosed the problem. This reminds me of the practice of "bleeding" a sick patient with the expectation that the bad blood would come out and the patient would heal. Of course this practice did more harm than good, often leading to the untimely death of the patient.

For all those who said that Obama better understood the crisis facing us during the presidential campaign, here is the counterevidence to that claim:

From Mish's Global Economic Blog:

"... Geithner is suffering from five fundamental misconceptions about what is wrong with the economy."
  • The trouble with the economy is that the banks aren't lending. The reality: The economy is in trouble because American consumers and businesses took on way too much debt and are now collapsing under the weight of it.
  • The banks aren't lending because their balance sheets are loaded with "bad assets" that the market has temporarily mispriced. The reality: The banks aren't lending (much) because they have decided to stop making loans to people and companies who can't pay them back.
  • Bad assets are "bad" because the market doesn't understand how much they are really worth. The reality: The bad assets are bad because they are worth less than the banks say they are.
  • Once we get the "bad assets" off bank balance sheets, the banks will start lending again. The reality: The banks will remain cautious about lending, because the housing market and economy are still deteriorating. So they'll sit there and say they are lending while waiting for the economy to bottom.
  • Once the banks start lending, the economy will recover. The reality: American consumers still have debt coming out of their ears, and they'll be working it off for years.

Wednesday, March 18, 2009

Peter Schiff on The Meltdown

Peter Schiff spoke at the Mises Institute this past weekend on how we got into this mess and why its going to get much worse before it gets better. Here is a YouTube video of it below. You can also listen to it in mp3 format here.

Tuesday, March 17, 2009


Republican Senator Charles Grassley of Iowa recently made some remarks regarding the AIG executives set to receive massive bonuses. The comments are beyond the pale of public discourse and should be strongly rebuked by his colleagues in the senate.

He said:

"... I would suggest the first thing that would make me feel a little bit better toward them if they'd follow the Japanese example and come before the American people and take that deep bow and say, I'm sorry, and then either do one of two things: resign or go commit suicide. And in the case of the Japanese, they usually commit suicide before they make any apology."

This kind of comment is unbecoming a senator and be off-limits. Senator Grassley should apologize for this remark just as he believes the AIG executives should.

Monday, March 16, 2009

Friday, March 13, 2009

Silver and Gold

I used to be the kind of person to look upon gold investors and proponents of the "gold standard" as loony conspiracy theorists. I thought, surely we're past that, right? You can't be serious? Gold? Real money is found in the stock market, and what good is gold sitting in a vault in Fort Knox? We so often build our understandings upon faulty foundations—trusting the source of information uncritically, and I wonder if we haven't done this in accepting the role of the Fed in monetary policy.

I've heard enough about gold in the past couple of months that I began a serious investigation into the merits of investing in gold. The investigation has been eye opening. Before I begin, look at these two charts. The first graph represents gold, silver, and how they compare against the Dow Jones Industrial Average since 1970 (Note Nixon took us off the gold standard in 1971). I used data from Wikipedia to determine how much gold and silver one could purchase based on the DJI index in 1970 and then carried that amount of gold (22.43oz) and silver (524.31oz) forward for each five year period up to today.

Clearly if one had invested $838.90 in gold in 1970 one would have been far, far ahead of the Dow. Silver has had a different path, though the two are very close together again now.

The second graph is a little more applicable to my own situation, since it begins in 2000, just before I began investing in a Roth IRA for the first time and then a 401k. Look what 10,786.90 in gold in 2000 would be worth today. It is astounding compared to the Dow.

It almost makes me want to cry. But we mustn't dwell on what might have been; we must think about now and future investments—that is what matters now. These graphs don't prove or even necessarily indicate that gold is the better investment now. What we must understand is why gold has trended ahead of the Dow and if there is good reason to believe this will persist.

It is hard to imagine now, but Alan Greenspan was once a proponent of the gold standard and wrote an excellent article defending its purpose in 1966. I commend it to you. Here is a highlight:

Under a gold standard, the amount of credit that an economy can support is determined by the economy's tangible assets, since every credit instrument is ultimately a claim on some tangible asset. But government bonds are not backed by tangible wealth, only by the government's promise to pay out of future tax revenues, and cannot easily be absorbed by the financial markets. A large volume of new government bonds can be sold to the public only at progressively higher interest rates. Thus, government deficit spending under a gold standard is severely limited. The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds which-through a complex series of steps-the banks accept in place of tangible assets and treat as if they were an actual deposit, i.e., as the equivalent of what was formerly a deposit of gold. The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is that there are now more claims outstanding than real assets. The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods. When the economy's books are finally balanced, one finds that this loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds financed by bank credit expansion.

Is it not telling concerning our woes today? In this excerpt Greenspan argues the following points:

  • Credit is inherently limited under a gold standard.
  • Deficit spending is "severely limited" on the gold standard.
  • The welfare state is only made possible off the gold standard.
  • Inflation erodes "the earnings saved by the productive members of the society…"

That list reads like a diagnosis of what is wrong with our current economic situation, does it not? We had too much credit, our deficit spending has been out of control for decades, government spending is reaching unwieldy proportions as the welfare state expands, and our savings have been destroyed through inflationary forces.

I haven't studied these matters enough to say anything definitely, but there seems to be a link between the end of the gold standard and economic bubbles that we have been experiencing.

Greenspan's conclusion is a very serious indictment of fiat currency and the consequent deficit spending:

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.

This is a remarkable statement. Greenspan is essentially stating that the end of the gold standard (which hadn't yet occurred when he wrote this) marked a turning point when our government chose to be against the people, rather than for the people. It is no wonder that proponents of the gold standard began calling our government fascist. Statist control of the monetary system subjects the money of the people to the whims of politicians, bureaucrats, and recently mortgage companies, insurance companies, and sub-prime homebuyers.

Look at this chart and notice the correspondence between the price of gold and the national debt beginning in 2000. While it is dangerous to draw a correlation in only eight years worth of history, it seems as though the price of gold may be proportional to the size of our debt. If this is true, gold will prove to be an excellent source of protecting value.

It should probably not surprise us to see how well gold has performed since we've moved off the gold standard. What few will tell you, is that it is not gold that is performing well, as much as the market has gold priced correctly to the dollar. If this is true, it shows that our money is eroding in value, and traditional investments in the stock market cannot keep pace with inflationary forces, while only a metal like gold will retain its value.

My study of gold has provoked many questions that I think others must wrestle with to gain a proper perspective on understanding money. But perhaps the ones I thought were loonies have been right all along?

Monday, March 09, 2009

Hindsight Hilarity

I came across a clip from FoxNews toward the end of 2006 where one man, Peter Schiff is a lone voice predicting a housing market collapse. The rest of the panel mocks him and puffs up the housing bubble. It is hilarious in a way, but also saddening to see how blind most of us all were to reality.

Friday, March 06, 2009

The Decline of the West

I continue my recent Niall Ferguson fascination with an article he wrote in Vanity Fair in 2006, entitled Empire Falls. Ferguson uses Edward Gibbon's The Decline and Fall of the Roman Empire as a benchmark against which he measures current western civilization.

I encourage you to read the whole thing, but here is his conclusion:

"Gibbon called the decline and fall of the Roman Empire "the greatest, perhaps, and most awful scene in the history of mankind." Could a still more awful scene be unfolding in the form of the West's decline and fall? For Gibbon, Rome's decline was the result of military overstretch, inner decadence, religious conversion, and barbarian invasion. To my mind, all of these are operating today to undermine what remains of Western dominance in the world. If the United States suffers mainly from the first and second, the European Union seems even more afflicted by the third and fourth."

As I wroteto in my post The Soft Generation, "have taken for granted that modern capitalism and western democratic values have made the world a stable, idyllic place." The idea of a decline of western civilization in decline, has been an absurd position held by cranks like Pat Buchanan. Sure, we have been able to observe real problems, but we of the soft generation must realize that empires and nations come and go--and always have. How can we presume that America, and the west in general can survive the massive decline that we are witnessing? The world is changing and the future belongs to the east--India, China, and Muslim Eurasia.

How We Got Into This Mess

After reading that last Niall Ferguson link, I noticed he has his own website. I went to it and read one of his (long) articles entitled Wallstreet Lays Another Egg. It is a fascinating history of economics and evaluation of how we got ourselves into this mess. Ferguson takes us, step-by-step over the conditions and decisions that set the stage and then through how bubble was blown up, where the money went, and how it popped. This is a must read if you want to learn more about what has happened.

In a nutshell, the article demonstrates how the federal government created the home mortgage business and has had to deal with numerous challenges to the system, private enterprise capitalizing on the opportunities, and all of it with the government "ready to pick up the tab in a crisis."

Wednesday, March 04, 2009

Some Good Reading

Here is a good article worth reading, regarding the financial crisis. The more I read about what is going on, the more depressed I get. This is a much bigger mess than most people realize. When you hear "global financial crisis" you get one idea in your head, but not the ugly one you should get.

Read this article by Niall Ferguson.

Monday, March 02, 2009

The Soft Generation

Those of my generation, raised in the age of Reagan, and reaching maturity in the Clinton administration, have taken for granted that modern capitalism and western democratic values have made the world a stable, idyllic place. We are too young to recall the economic turbulence of the Carter years, and we recall our triumphant defeat of communism. For years we have watched, from afar, the violence in other parts of the world. We have understood that if only the rest of the world had democratic self-government and were capitalism allowed to rule economies, that the rest of the world would be as peaceful and pleasant as the western world.

We have not faced something like the Great Depression, the drafts of World War II, Korea, or Vietnam. We have enjoyed peace, stability, prosperity, and the globalization of American values. We were taught that if we did our part in the economy—worked hard, saved money in our 401k, bought a home, and had children that the prosperity, the peace would persist. What we had we would always have—what we wanted, could always be ours. The world was ours for the taking.

We knew there were always hiccups along the way, but recessions never last long—do they? They didn't for us. We remember the recession at the end of the first George Bush's presidency and into the early years of the Clinton's first term. We also remember the recession that began at the end of Clinton's second term and the beginning of the second George Bush's first term. Neither recession lasted long. The unemployment never became unmanageable and though many preached doom and gloom, we never experienced it ourselves—economic suffering was something others had—not us. We saw real suffering on television—not in our own lives.

The promise that things always got better seemed true enough to our experience—why would one think otherwise? We bought houses as big as our parents, knowing that in a few years they would be worth much more than we had paid. We put money in our 401k plans knowing that we would have large nest eggs for retirement. We spent more than we had, knowing we would have a larger income in future years. This was all normal—it was the way things were, and we played along.

Now, as we have at least begun to learn, our way of life was a mirage—one that could not last—it never did before us. We have seen twenty-five years of prosperity and decadence crumble before our eyes. The homes many of us bought are worth less than our mortgages, and our 401ks have dwindled, even as we've continued investing in them. We've seen our jobs taken from us, and we're now told that even more of us will lose our jobs. We now see that years worth of labor and investment has vanished along with seven-thousand points on the Dow Jones Industrial average. We've been spending fake money for a decade or more.

And now, as Niall Ferguson argues, the world is ripe for global conflict and upheaval. He writes,

"…the resources available for policing the world are certain to be reduced for the foreseeable future. That will be especially true if foreign investors start demanding higher yields on the bonds they buy from the United States or simply begin dumping dollars in exchange for other currencies.

Economic volatility, plus ethnic disintegration, plus an empire in decline: That combination is about the most lethal in geopolitics. We now have all three. The age of upheaval starts now."

We've had it good for a long time and we've now gotten the tab and it is more than we can afford. We've lived on debt without knowing it and we don't have the wherewithal to get ourselves out of this mess. Economics have repercussions, and we may be on the cusp of another major conflict.

So the question now, of course, is whether or not we're up to the challenge. Are the circumstances greater than our spirits? It is our time to rebuild what was lost. It is time to act like men, time to rise above and time to excel.

But the point of this lament is that we ought never put our faith in the things of this world. The world and the people in it will always disappoint, will always fail, and will ultimately fade. Our faith is to be in the creator and sustainer of the world. My generation has deceived by the gods of democracy and capitalism, and are naturally disillusioned. Life is hard and we ought not deceive ourselves into thinking that life is easy that we are not entitled to peace and prosperity. These are blessings that come from God, to turn the blessings into the god is idolatry.