08/19/11 Poitou, France – Until August 15, 1971, wealth was tallied in units of a real and natural thing – gold. It measured out the world’s other real things – its resources and its output. Its main advantage was that it couldn’t be diddled. That turned the authorities against it; they couldn’t make more of it.
Nuestra Senora de Atocha, a Spanish galleon, sank in a storm off the Florida coast in 1622. When it was found in the 1970s, its treasure of gold doubloons was just as valuable as it was when the ship left Havana 350 years before.
But, post 1971, we have a new, avant-garde money system. Wealth is counted up in pieces of paper…or as electronic ‘information.’ Each unit has no real value of its own. It only represents a claim against real goods and services. And each year, it purchases fewer of them.
What is most remarkable about this freakish new money system is that it is always on the road to Hell but never seems to get there. Since 1971, paper currencies have lost value at a breakneck speed. You’d think their necks would be broken by now. In 1972, we bought a gallon of gasoline for 25 cents. Now, it is 16 times that much. Gold has gone up 50 times…for a 98% loss to the dollar holder. If this pattern continues for another 40 years, a gold doubloon will buy about what it does today. A dollar will buy nothing.
And then, along came S&P with more bad news: not only is the dollar disappearing, but if you lend money to the US government you might not get it back. The stock market took the news badly. But bond investors bought with even more lusty recklessness than before. It was as if they really didn’t want the money back anyway. Yields on US 10-year notes fell from around 3% to scarcely more than 2%, giving investors a negative real yield.
But the fall in yields should not come as a surprise. Japan’s government debt lost its Triple A status in 2002. Yields did not rise. Instead, they stayed between 1% and 2%. Then, last week, Japanese 10-year notes – IOUs of the most deeply indebted nation on earth – reached an all-time high. Yields fell below 1%, briefly.
You may think that investors have lost their minds. But no more than usual. It’s not the nominal rate that investors care about; it’s the real rate. For 20 years, stocks and property in Japan have gotten hammered. Bond buyers are the only ones who’ve made any money. Deflation takes prices down. Even a zero interest rate gives them a positive return. And it isn’t even taxable.
And now the US Fed follows in Japan’s footsteps. The Fed announced last week that it would continue to lend money for two more years, asking little more than a ‘thank you’ in return. Zero is the going rate at the Fed’s lending window – just as it is in Japan.
When Richard Nixon implemented his new monetary system, 4 decades ago, he set in motion a huge expansion in the world’s supply of cash and credit. Gold was limited. Paper money was left to run wild. Ben Bernanke famously announced how it worked in a 2002 speech, entitled “Deflation: Making Sure it Doesn’t Happen Here,” he explained:
…the US government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many US dollars as it wishes at essentially no cost. By increasing the number of US dollars in circulation, or even by credibly threatening to do so, the US government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.
Bernanke made it sound like a piece of cake. He should have appended a footnote. Inflating is easy when the credit cycle is expanding. When an economy transforms itself from grasshopper to ant, it gets harder. People switch from borrowing, spending and investing to exterminating debt and hoarding cash. That’s why none of the stimulus measures – fiscal or monetary – has done any significant good. And it is why no policy adjustment, short of debt cancellation or hyperinflation, will make any damned difference.
The whole situation is one for the history books. Four decades of paper money – with effectively no limit on credit expansion – have created mountains of debt in all the developed countries. Now, private sector debts are being sloughed off and asset prices wobble – making investors fearful and skittish. The more they sweat, the more they seek the safety of US Treasurys, and the lower interest rates go. Low rates delay Armageddon…if Japan is any indication…almost indefinitely. The economy continues on the road to Hell…and picks up speed. When it finally arrives, we don’t know. But we bet the price of gold will be higher when we find out.
Regards,
Bill Bonner
for The Daily Reckoning
Bill Bonner
Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill’s daily reckonings from more than a decade: 1999-2010.
The Daily Reckoning is your premier source for making sense of the news Washington and Wall Street generate. Each business day, The Daily Reckoning calls on its stable of world-class writers and thinkers to show you how to get ahead.
Start your 100% FREE subscription to The Daily Reckoning today and you’ll get a free research report, “How to Survive the Fall of Social Security.” Simply enter your email address below to get your free report and join over 495,000 worldwide Daily Reckoning subscribers!
We Respect Your Privacy and We will
Never Share or Sell Your Email Address
This is going to be the longest “Old Maid” card game in history except these “Old Maid”’s are denominated in $1, $5, $10, etc… – You don’t be the last person holding them.
If you can do an article about what is expected to happen if all hell breaks loose worldwide and they decide to bring back the “currencies like the dollar tied to gold” back like it was in 1971. What happens to the value of the gold we all hold? Government confiscation? How about silver? I’m trying to see where all this eventually leads. Obviously your gang likes gold, but what is the end game? Thanks!
Scott – the end game: the dollar is destroyed along with all western democratic governments and gold settles in at 100 acres of arable farmland per ounce.
and… silver goes to 100 ounces of weed per ounce
or…your gold will buy you “chits” at Intel’s general store…because you can’t eat, wear, or smoke gold…it can only be used for manufacturing electronics! after armageddon, gold will be as useful as a $20 bill…gold will be the second “Old Maid” game, where people trade it for useful stuff (like arable land) until nobody wants the useless metal…100 pounds of grain, or 100 pounds of gold, which is more directly useful to your family??? *can’t eat it, can’t build a house out of it, can’t smoke it…sure looks pretty tho!!*
N.Y. government pension accounts = stable funds & bond funds, any SDBA should be gold/silver (miners) mutual fund.
DrMindbender…you can only hoard food for a long time. Also after armageddon their will be peace and time will come people will have excess of something to trade and gold and silver or precious metals can again be used as an exchange. For instance if you like Jose’s cabbage for your tomato but Jose have no use of a tomato then perhaps you can offer a silver dime for the exchange.
“You can’t eat gold”, the silliest thought ever! And can you eat paper, Dr.? You wish to have real money when the day comes.
Dr. Mindbender:
your thoughts are poo-poo.
So you’re saying that THOUSANDS of years as using gold as an exchanging mechanism for good and services will be taken AWAY by an armageddon scenario!?
Wow…
I think you just made it plainly clear that you own no gold and silver and are trying to convince yourself why you shouldn’t buy it right now.
GOOD LUCK HOARDING TOMATOES!
I think somebody didn’t like what i posted:
http://www.nypost.com/p/news/local/mike_advice_is_to_stock_up_IvwPK91duhVaJR67fjwR1H
Armageddon only waits for those who are ready, prepared. It is too late for those …
Hoarding is for people who want too many cats or can’t throw anything away, silly! food is grown year over year over year…
What is “real” money, anyways? and no, I certainly don’t eat paper! After armageddon (I prefer to simply avoid it) the only way to trade in a sophisticated manner and specialize labor tasks, will be to use some form of currency…after all, Tom is much better at building IC chips than growing peas…but ultimately it will have to be a “fiat” currency of sorts, this time controlled by the truly benign intentions of very wise economy-trenders (I vote for the DR team to control this currency)or perhaps a computer controlled currency that is not “lent” for profit, so the governments and Rothchildren and Bilderburg WHO IMF Bernankes and other such enlaving entities and persons can’t suck the life out of us…and not a currency controlled by whoever is lucky enough to stumble upon (or shoot whoever comes near) the “mother lode” and mother nature and some cheap thugs controls our currency…haven’t you ever heard of BitCoin?? time for you fogeys that flamed me (poo poo???) to get with the times…
and when the day comes, I definitely won’t be accepting your gold for my tomatoes!!! I might let you wash dishes or weed the garden tho…;)
an armageddon isn’t what we need to take away our gold and silver, a TRUE and UNCORRUPTABLE agreement on what the value of labor and materials are is what will cause gold’s value to reflect it’s industrial uses and demand…
If ‘alls’ are well, everything is perfect and ideal we are in the land of Republic Of Utopia, ROU. History could be thrown out of the window. From time immemorial, man has denied the will power to overcome greed, corruption or delusion. I also dreamed of a day to live in fantasy; simply there is no ticket. It is timely for armageddon. It is time for doom.