A Goldbug's Life

Mr. James Surowiecki wrote a wise and moronic piece on gold in the New Yorker. His wisdom is centered on the insight that neither gold, nor paper money are true wealth, but only relative measures, subject to adjustment.

“Gold or not, we’re always just running on air,” he wrote. “You can’t be rich unless everyone agrees you’re rich.”

In other words, there is no law that guarantees gold at $450 an ounce. It might just as well be priced at $266 an ounce, as it was when George W. Bush took office for the first time. That was just four years ago. Since then, a man who counted his wealth in Kruggerands has become 70% richer.

But gold wasn’t born yesterday…or four years ago. Mr. Surowiecki noticed that the metal has a past, just as it has a present. He turned his head around and looked back a quarter of a century. The yellow metal was not a great way to preserve wealth during that period, he notes. As a result, he sees no difference between a paper dollar and a gold doubloon, or between a bull market in gold and a bubble in technology shares.

“In the end, our trust in gold is no different from our trust in a piece of paper with ‘one dollar’ written on it,” he believes. And when you buy gold, “you’re buying into a collective hallucination – exactly what those dot-com investors did in the late nineties.”

Goldbugs: The Moronic Part

Pity he did not bother to look back a little further. This is, of course, the moronic part. While Mr. Surowiecki has looked at a bit of gold’s past, he has not seen enough of it. Both gold and paper dollars have history, but gold has far more of it. Both gold and dollars have a future too. But, and this is the important part, gold is likely to have more of that, too.

The expression, “as rich as Croesus,” is of ancient origin. The king of historic Lydia is remembered, even today, for his great wealth. Croesus was not rich because he had stacks of dollar bills. Instead, he measured his richness in gold. No one says “as poor as Croesus,” do they? We have also heard the expression, “not worth a continental,” referring to America’s Revolutionary-era paper money. We have never heard the expression, “not worth a Kruggerand.”

Likewise, when Jesus said, “Render unto Caesar that which is Caesar’s,” he referred to a denarius, a coin of gold or silver, not a paper currency. The coin had Caesar’s image on it, just as today’s American money has pictures of Lincoln, Washington or Jackson on them. Dead presidents were golden back then. Even today, a gold denarius is still about at least as valuable as it was then. America’s dead presidents, whose images on printed in green ink on special paper, lose 2% to 5% of their purchasing power every year. What do you think they will be worth 2,000 years from now?

A few years before Jesus, Crassus, who had made his fortune on real estate speculation in Rome, decided to put together an army to hustle the east. Alas, such projects almost always meet with disaster; Crassus’s was no exception. He was captured by the Parthians and was put to death in an unusually cruel and costly way. But he did not end his days with paper money stuffed down his throat…and certainly not dollar bills. No, they poured molten gold down his gullet – or so the story has it.

Goldbugs: Long History

Gold has a long history. And during its history, many was the time that humans were tempted to replace it with other forms of money – which they believed would be more convenient, more modern, and most importantly, more accommodating. After all, gold is hard to find and hard to bring up out of the earth. As a result, its quantity is always limited – by nature herself. Paper money, by contrast, offered irresistible possibilities. The list of bright paper rivals is long and colorful. You will find hundreds of examples, from assignats to zlotys. But the story of paper money is short and always sad. Since the invention of the printing press, a new paper dollar or franc can be brought out at negligible cost. Nor does it cost much to increase the money supply by a factor of 10 or 100 – simply add zeros. It may seem obvious, but adding zeros does not add value.

Still, the attraction of being able to get something for nothing has been too great to resist. That is what makes goldbugs so irritating: They are always pointing it out. Even worse, they seem to enjoy saying that “there ain’t no such thing as a free lunch,” which comes as a big disappointment to most people.

Once people were able to create “money” at virtually no expense, no one ever resisted doing it to excess. No paper currency has ever held its value for very long. Most are ruined within a few years. Some take longer. Even the world’s two most successful paper currencies – the American dollar and the British pound – have each lost more than 95% of their value in the last century, with is especially remarkable since both were linked by law and custom to gold for most of those years. For the dollar, the final link to real money was not cut until August 15, 1971. That was when the world found out what the greenback was really worth – nothing much.

Whatever promises the Feds made with regard to the dollar, they could unmake whenever they wanted.

Some paper currencies are destroyed almost absent-mindedly. Others are ruined intentionally.

But all go away eventually. By contrast, every gold coin (and silver, for that matter) that was ever struck is still valuable today – and the coins almost always have more value than when they first came out of the mint.


Bill Bonner
Delray Beach, Florida
December 10, 2004


The price of gold got hit, as the technical analysts thought it would. We thought it might, too…but only because it had run quite a bit without taking a breather.

Does it mean the bull market in gold is over? Is it time to sell – taking advantage of the 40% gain since George W. Bush took over the White House?

Here at the Daily Reckoning, we wish we knew. We have tried to foresee the future, but have never quite got the hang of it. Nobody sends us tomorrow’s newspapers. We know of no websites that report next week’s news. Nor have we discovered any history books that report the world’s great affairs before they happen.

We know little about the past, less about the present, and nothing at all about the future. Our ignorance is nearly complete.

So what can we do?

If only we were as smart as the newspaper columnists! Not only can they peek around the corner and see what is coming, they always seem to have a plan for improving the future before it actually gets here. Two columnists in yesterday’s International Herald Tribune explained, with a straight face, what will happen in the Middle East. Another gives a hint of tomorrow’s news from Southeast Asia. Earlier in the week, on the same page, Thomas L. Friedman described how the world would evolve if the Bush Administration took up the cause of energy independence.

We deeply appreciate Friedman’s whole oeuvre; there is always a temptation to take the editorial pages seriously. Friedman reminds us that it’s just entertainment.

Yesterday’s IHT included two additional hoots, both on the dollar and both imbecilic in its own way. First, Jeffrey E. Garten, dean of the Yale School of Management and former factotum in several administrations, tells us that even a collapsing dollar is unlikely to balance out the trade deficit. Americans will still buy oil, he says. And they will still buy gidgets and gazmos from Asia, he adds, because “TVs and toys are essential to our work and lifetstyle.” It seems never to have occurred to him that they might buy fewer of them if they had less money to spend. (See Paul Kasriel, below…)

No, don’t expect Mr. Market to set things straight, says the former Nixon, Ford, Carter and Clinton-era bureaucrat; this is a job for Mr. Public Official. This is not a time for short selling and hedging, he maintains, but for “statesmanship.”

Mr. Garten believes a good model for U.S. economic policy wonks is the Plaza Accord of 1985 – in which Japan agreed to raise the yen in order to help the United States out of a similar trade deficit jam. “It worked,” he says. Where he has been for the subsequent 19 years, we do not know. But somehow, he must have missed the news: The Plaza Accord forced Japan to lower interest rates, which set off a capital spending bubble in Japan, which led to a stock market bubble, which in turn occasioned a devastating bust in Japan, which then resulted in the 14-year slump from which Japan has yet to recover. In America, meanwhile, the Plaza Accords set the stage for the Reagan-era boom…which evolved into the Clinton-era bubble…which led to the Bush-era bust, to which the administration and the Fed probably overreacted. It was as if you had called a plumber to fix a leaky faucet and he ended up by blowing up the whole water main. All of a sudden, there was liquidity all over the place.

Never before have so many people have so much money that they have not earned. The most recent figures show houses rising at nearly a 20% rate. If you live in a $200,000 house – that’s $40,000 of new “wealth” without lifting a finger. Hallelujah. It is hardly surprising that so many people “took out” a little of the free money and spent it. Nor is it surprising that they spent it on products from Asia – which is, of course, why the U.S. has such a trade deficit problem.

But Garten thinks getting another bunch of hacks together in another expensive hotel can solve the problem. We suggest The Plaza in New York…why not?

Meanwhile, lower on the page, Robert Kuttner lays the blame squarely on the Bush administration. “[S]hort-sightedness by a selfish financial elite,” he says, will sink the U.S. economy. Why the financial elite has become suddenly so shortsighted is apparently not something that interests him. Of course, he is right; the Bushmen have done all they could to make a bad situation worse. That was to be expected. But that they actually created the problem is an unfounded calumny. The trends that led to the brink of the present crisis were already underway, even before the future president gave up drunk driving. America ceased running trade surpluses nearly two decades ago. Almost every year since then, saving rates have declined, debt has increased, and trade deficits have gotten larger – no matter which party what in power.

On the other hand, Mr. Bush’s contribution is not negligible; he added a huge public deficit nearly as big as the trade deficit. But someone was bound to do it.

Like Mr. Garten, Mr. Kuttner has a smart answer for today’s dollar crisis. And like Mr. Garten, he hallucinates that civil servants can manage the situation. It is merely a policy problem, he implies. “The U.S. trade deficit has been a problem for more than a decade, but the responsible fiscal policies of the Clinton years helped moderate it and also led to a healthier dollar, which in turn allowed for lower interest rates. In this virtuous circle, we enjoyed a period of sustained and balanced growth.”

We still cannot look into the future, but at least we can read yesterday’s news. The period of “sustained and balanced growth” was the same period in which Americans were mortgaging their homes to buy goofy tech stocks…while Mr. Greenspan’s EZ credit created a mock boom all over the world. Americans spent so much and earned so little, that it took 80% of the entire planet’s savings to keep the thing running. The Chinese, for example, earn an average of 61 cents an hour. Americans earn 25 times as much. But it is still not enough to keep them living in the style to which they have become accustomed; they have to borrow from the Chinese just to keep going.

Again, we don’t have access to tomorrow’s news. So, we don’t know what the smart thing to do would be. But we suspect there will be Hell to pay. And in the furnace of Hell, gold is likely to hold up better than paper dollars. Always has.

More news, from our friends at The Rude Awakening:


Eric Fry, reporting from New York City…

“The world’s central banks still hold more dollars than they can comfortably retain. Individual investors still distrust a reserve currency that its own sponsors refuse to defend. The U.S. economy is still running a staggeringly large current account deficit that continuously undermines the greenback’s value.”


Bill Bonner, back in sunny Florida…

*** Paul Kasriel: “The free lunch for the U.S. is nearing an end. In 2005, the rest of the world will revolt against sending us cars, big-screen televisions and appliances in return for IOUs denominated in U.S. dollars. The revolt will take the form of a plunging dollar, which will curtail the growth in our standard of living – we have to give up more goods and services to get th4e same amount from the rest of the world as before – and our interest rates will continue to rise…” Seems like a fair guess. Paul Volcker, meanwhile, puts the odds of a real currency crisis at 75%.

*** Ooh la la…now the Chinese are getting into the computer business in a big way. They bought out the local IBM branch business…giving them nearly 30% of the Chinese market.

“You know, we don’t really understand why the West grew as fast as it did after the beginning of the Industrial Revolution,” said colleague Dan Denning, as we walked along. “Maybe it was just an accident of history. But now the trend seems to be running in a different direction. Things are leveling out. The Asians are catching up very quickly.”

“I think it will take only 15 years,” said a Vietnamese taxi driver, taking up the same subject on the way to the airport. “The Chinese are very smart. And they work very hard. And now they have a lot of money. It won’t take them long.”

Over on page five of the French newspaper, Liberation, an editor wonders where this leveling will leave Europe…and America. “In 10 years, China will pass the United States and Europe as the planet’s most important economic power,” he writes. Europe will still be able to sell things to Asians; rich Japanese already line up to buy French perfumes, wines, handbags, and fashions. The streets of Shanghai are said to be full of Mercedes and BMWs. And Paris, in the summer, is full of tourists from the Far East.

But what about America? What is it that America produces that the Chinese cannot or will not? Hmmmm…

*** We had lunch at the House of Lords on Monday.

“You can spot the Lords,” said a friend. “They always look more relaxed and confident than everyone else.”

There are fewer Lords than there used to be. A few years ago, the Blair government figured it had more than enough of them. Many were sent home.

We were disappointed that the Lords didn’t put up more of a fight. They seemed to believe the bad press, which told them that since they had not been elected, they were not fit to serve. But not facing the voters is the Lord’s greatest quality. It is why they are so confident and self-assured; they owe their positions to the luck of birth rather than the humbug of the ballot box. They don’t have to pander to the sweaty masses, nor pucker-up to the elites.

Modern national elections have very little to do with democracy as it was practiced in ancient Greece or in the New England meeting of today. Elections are more like advertising campaigns, in which candidates merely try to position themselves with the slogans that will win them favor. Candidates will say almost anything if they think it will get them elected. Which is why politicians are such scoundrels. A man with any integrity would be disqualified; he could lie well enough or fast enough.

That is the charm of Lords. They have it made, so they don’t have to be “on the make.” They can say what they like, what they really think…and only fear the wrath of family, friends…and the Lord Himself.

*** Ever wanted to enhance your brain’s capacity?

Jonathan Kolber, editor of Vantage Point Investment Advisory, and self-professed lover of futuristic technology, sends us this note…[Ed. Note: Or is it a suggestion, Jonathan?]

“Now there’s research that says you can electrically supercharge your brain.

“In addition to thousands of peer-reviewed university studies showing that specific meditations and breathing techniques enhance intellectual functioning, lately science is finding ways to do so directly through electrical stimulation.

“I predict that within 10 years, researchers will discover ways to raise specific kinds of mental function by as much as 50%, thereby enabling the ordinary person to function at a genius level while performing specific kinds of tasks for limited periods of time…”

Editor’s comment: Aren’t there already enough geniuses in this world?

Even though Jonathan’s current issue reads more like an extract from “Forbidden Planet,” his research is no science fiction…his latest recommendation is already up 253%. And that’s not all; Jonathan fully expects this one to trade all the way up to $10, a gain of 1500% from today’s levels! Learn more about VPI…

*** My poor little Edward, who is 11, has gotten into trouble. Again. “I’m still not sure exactly how serious it is,” his mother explained over the phone, “but they gave him a whole day of detention.” It was really nothing, as it turned out – just forgery, perjury, and plagiarism. “I think he was doing homework with Philippe. And since he was so eager to go out and play on his stunt bike, Philippe just gave him his homework to copy. But Philippe didn’t have a clue and the teacher saw that the two had exactly the same dumb mistakes. So she confronted them. On the plus side, Edward confessed right away. But on the minus side, he was ashamed of what he had done and didn’t want me to read the note the teacher wrote in his notebook. I was supposed to put my initials by the note so the teacher would be sure I had read it. So Edward forged my initials on the note. “I think you need to talk to him…and by the way…it doesn’t help that you’re not home…”

The Daily Reckoning