08/05/99 Just as the euro is the Esperanto currency, the Soviet Union was an Esperanto country. Esperanto, DR readers will recall, is an ersatz language invented by a Polish professor with a German surname — Zamenhof. It arose about the same time as the Soviet dream seized the minds of the German intellectuals who invented communism. Both were bad inventions. The first was relatively harmless. The second, monstrous.
Both were attempts to replace things that had arisen more or less organically — with something that was purpose-built and hyper rational. Natural languages resisted the competition. Esperanto never really caught on. Communism, however, proved more robust. And the fate of the euro is unknown.
When the Soviet Union finally threw off the ball and chain of communism, many people expected that this would bring about a New Era of global capitalism, growth and profits. This expectation was then supported by several other bits of good news, some related, some not. The peace dividend. The U.S. budget surplus. Low commodity prices. Baby Boomers investing for retirement. The Internet revolution. Examined separately, each of these pillars can be shown to have no more tensile strength than a Republican politician. The peace dividend, if there ever was one, has now completely disappeared. The budget surplus — to the extent that it actually exists — is a result of the rising stock market…not a cause of it. The Internet revolution is more likely to destroy existing wealth than enhance it (granted, it will create new wealth…but that is wealth that is not currently represented by existing public companies or cannot yet be attributed to them.)
So, now we look a little more closely at the collapse of communism and the end of the Soviet Union. Wednesday, I mentioned that Strategic Investment editors had predicted this event and also forecast that it would be a cause of deflation. That prediction has proven correct…as higher export levels of Russian raw materials have helped drive down prices. This, in turn, has helped hold down interest rates….made the dollar look good…and held inflation in check.
But is this a genuine new era? You decide. The figures I cited Wednesday showed increasing exports of raw materials from the former Soviet Union. But they did not show greater output. You can’t dig more metals out of the ground with computer software. And Priceline.com won’t help you turn ore into aluminum. For that you need big machines. Big, expensive machines. And people don’t buy big, expensive machines to dig in the dirt unless the price of what they’re digging for makes it worthwhile. Since most commodities have been in a bear market since even before Hillary Clinton took up cattle trading, little in the way of new investment has been made in producing them. Yet, additional amounts were brought onto world markets simply because the Russians stopped wasting their production internally. Is this a new era? Or is it merely a temporary adjustment? Demand for raw materials has continued to rise. Soon, prices will rise too…which will give producers the incentive they need to actually put out more of the stuff. The cycle will continue, in other words. No new paradigm required.
The real new era began in 1971. That’s when Nixon “closed the gold window”– where foreign bondholders could redeem their dollars for gold. Now, gold is just another commodity. And it’s acted just like any other commodity. It has gone down. This has had a lasting effect on stocks and bonds. Bonds, which are more dependent on the value of the currency in which they are denominated, now carry much higher yields than stocks. This is new. And important. We know what it has meant so far. But what will it mean in the future? I’ll try to figure that out before tomorrow.
But, for the moment, consider this: gold is not Esperanto money. It is money when Esperanto money fails. It is real money. Not created by anyone…is has no dead president’s picture on it…it is not even backed by anyone or anything…gold is what people turn to when they lose faith in Esperanto paper and the countries that issue them.
When will that be? Tune in tomorrow.
Bill Bonner
August 5, 1999
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.
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