A Golden Loaf

The Daily Reckoning PRESENTS: Today, The Mogambo Guru explains the true beauty of gold: buying power. How much gold does it take to buy one loaf of bread? To find out the answer, and other insights on gold, read on…

A Golden Loaf

I chose to start off the lecture by dryly saying, “The big news, to me, is that the dollar has started collapsing. There are so many ugly ramifications of this that I would not even know where to begin. So, let me merely say that the dollar falling is Unalloyed Bad News (UBN), which means that you and your family are all doomed to die horrible financial deaths, screaming in pain and anger, and let it go at that.”

The room erupted in panic and confusion until they finally remembered that I am an idiot, and I obviously don’t know what I am talking about. Then, they all felt better, until Doug Noland, he of the Credit Bubble Bulletin at the PrudentBear.com site, said, “Everyone wants to believe that an orderly decline in the dollar poses few problems.”

Mr. Noland, if I understand him correctly (and the chances of that are pretty slim, given my obvious cognitive limitations and deficits), is slightly less pessimistic than I am about the possibility of an “orderly decline” in the value of the dollar. I am so pessimistic (audience shouts out “How pessimistic, Mogambo?”) that security camera video footage reveals screaming in fear, actual foaming at the mouth, and I seem to have embarrassingly peed in my pants, too, out of the same fear. Now, that’s pessimistic!

Mr. Noland, because he is a real smart and classy guy, doesn’t even mention the dark stain on my pants, but presents, instead, a lot of tightly argued reasons why an “orderly decline” of the dollar seems improbable. I, on the other hand, am The Mogambo! And I am sure, absolutely sure, more sure than anything I have ever been sure of, and in fact, this is probably the single-most thing that I have been the most sure of in my whole horrible, wasted life, and that is that the decline of the dollar will not be “orderly.” It will be abrupt and ugly. A quote that comes to mind, although uttered as a comment on people’s lives, is “Nasty, brutish and short.”

My Infallible Mogambo Reasoning (IMR) is along the lines of: “Suppose I told you that your money would gradually and continuously lose a lot of its value – maybe half, or more. My intuition tells me that you would not be happy.”

I pause to gauge your reaction, which ranges between homicidal anger and paralyzing fear. Exactly so! Then, I go on to say, “But that same intuition tells me that you would be happy, very happy, if I told you that I knew of a way to let you keep all your wealth and you would not lose anything!” Ha! I can see by that smile on your face that I was right!

So, how to achieve this miracle of wealth-preservation? All you have to do is sell all your dollars and dollar-denominated assets today, before the dollar is devalued further! Then, you’d like to stick someone else with the whole loss!

Now you are ready for today’s Mogambo Daily Pop Quiz (MDPQ). The question is: “Would you stick around to take your share of financial lumps, of up to half of your net worth (or more), meted out month after month, year after year, in a promised ‘orderly decline’, or would you sell out now, and not take any lumps at all?”

Hahaha! Me neither! And neither will anybody else! So, it’s a trick question! At first, a few will say, “That Stupid Mogambo Moron (SMM) is right, for once in his miserable, pathetic life!” They will rush to the exits to get someplace to dump dollars, and then a few more will rush to get out, as little light bulbs blink “on” above their heads – and then a few more. Finally, more and more and more until it is a stampede!

Hahaha! A stampede! Maybe it will be an “orderly stampede!” Hahahaha! “Orderly decline, orderly stampede! You say to-may-to, and I say to-mah-to!” Hahaha!

If, on the other hand, you answered “yes” to the question, then I am sorry to tell you that you failed the test, but I will not record your failing grade in your permanent record if you write a little paragraph or two explaining what in the world is wrong with you, and then I will have pity on you.

And it is not just the same dreary story about too many prescription drugs, too many over-the-counter drugs, and too many illegal drugs – or even that all these people left in a rude rush to dump dollars and dollar-denominated assets. The more important point is: “Where did they go?” I’ll tell you where they went! They went home and quickly scanned the entire course of economic history to find out where all the other people in history went when their economic system started down the toilet, thanks to the same sorry stupid economic sins we have committed today.

I will save you the trouble of getting up off of your fat, lazy butt to find out, as I share your opinion about getting up off of my fat, lazy butt, and all the time, too. So, I will simply tell you what happened:  Those who bought gold and silver preserved all of their wealth as their currency and economy took a dump, and they actually ended up with a fortune in gold. Everybody else did not.

The reason may be contained in a witticism by reader Greg, who opines, “Gold acts as a magnet to draw in excess fiat money.”

Or, the answer may be contained in the new tune by Steve Dore, of Boogiewoogie.com, who posted his new tune “Purchase Power” at FMNN.com. It contains this perfectly true universal truth concerning price inflation vis-à-vis gold, in a handy sixteen-bar format:

“It’s not the metal that’s goin’ up, it’s the dollar goin’ down,
Printing presses print away, but no store of value’s found,
Over the years, as paper fails, as it will always do,
Gold endures the test of time, pure wealth, tried and true.”

But no matter what the reason, they made money by accumulating gold, and the guys who made a fortune in gold went on to make bigger fortunes when they traded the gold for stocks, bonds, houses and real estate at the lows of the economic collapse. They again prospered as the market values of all these things eventually went back up in the following decades after the collapse.

If you want to see the advantage of gold in real-life action, then listen to this, from an essay written by Eric N. Young entitled “The Hyperinflation of Germany, July 1922-November 1923”. He writes that in 1923, at roughly the height of the Weimar inflation and the end of Reichmark, “Although a loaf of bread cost $200 million marks in November 1923, it was possible to purchase an entire city block of prime commercial real estate in downtown Berlin for as little as $500 US dollars hard currency. The key was to have real money in the form of gold or silver, or currency backed by those metals.”

An entire city block of prime real estate! Thanks to a gold-backed money! Of course, it took a long time (made even longer by World War II, which was, in turn, caused by the German people rebelling against inflation and injustice), but what is an entire city block of commercial real estate in Berlin worth today? Hahaha! A very long time horizon, to be sure, but that’s how it works in real life!

So, from this fabulous bit of information we can generate one Fabulous Mogambo Market-Timing Tip (FMMTT) for those who are in the category of “Hyper-Aggressive Speculator,” and the sub-species “All-Or-Nothing Risk Tolerance.” At this stage of the cycle, the best advice to these people is to liquidate every dollar-denominated asset they have (like cash, houses, stocks and bonds and everything in their retirement accounts), and use the money to buy silver and gold and commodities.

The reason a lot of people don’t do that may be for the same reason quizzical reader Roberta R. wonders about when she writes, “I am writing to you about the paradigm of cashing in gold for fiat (money). I firmly believe in holding hard assets such as gold or silver; but what I have always had a hard time with is the concept of cashing in the gold. As you stated in your editorial, the Reichmark collapsed so far down that it took 87 trillion of them to buy an oz. of Au.

“This is where my brain begins to hurt. Now, I am the proud owner of 87 trillion Reichmarks (FRN’s) and maybe I can buy a couple loaves of bread. So, you cash out something with a real intrinsic value and you get fiat junk. But it just seems to me that you are back to square one the minute you sell.”

She finished with “Working on a headache, Roberta.”

I was happy to tell her that she was exactly right! She was back to square one! That’s the beauty of gold! The answer why is contained in the problem: How much gold does it take to buy one loaf of bread, which costs $2 a loaf when gold is at $700 an ounce? Answer: 1/350th of an ounce (You can buy 350 loaves of bread with one ounce of gold).

And then, how much gold does it take to buy a $200 million loaf of bread when gold is at $87 trillion per ounce? Answer: 1/435,000th of an ounce! You can buy 435,000 loaves of bread with one ounce of gold! Hahaha! A little tiny flake of your gold ounce ought to do it! Hahaha!

So, Roberta, thanks to gold, your buying power has been preserved. That is the beauty of the stuff! And in this particular example, you actually got wealthier, as bread became over 1,000 times cheaper in terms of gold! But notice that the bread cost 100 million times more, in terms of dollars!


The Mogambo Guru
for The Daily Reckoning
May 22, 2006

Mogambo sez: The recent $22 plunge in gold and $2 plunge in silver is just the death throes of the scumbags who have engineered the huge short interest in metals futures, and are now being choked to death by it. Every dip like that is Lady Fate smiling on you, letting you buy gold and silver at a temporary bargain! Whee! Lucky you!

Editor’s Note: Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter – an avocational exercise to heap disrespect on those who desperately deserve it.

“Much of the middle class was wiped out.”

So said our lawyer in Buenos Aires. He was speaking about the last financial crisis in Argentina.

“Those who understood what was going on didn’t lose a thing. We had our money in dollars or euros…with accounts in Switzerland or Miami. But when the government let the peso fall…and then put on controls to keep you from getting your money out of the bank while it was falling, you can imagine what that did to people. It’s always the middle classes who suffer.”

Argentina is now on the mend. People are working. The streets are crowded and the restaurants are full. The peso, which was once worth as much as a dollar, is worth only one third as much. But in the last year, the peso has gone up. It is the dollar that is falling now.

And who will get wiped out this time?

We have been wondering. The popular illusion is that the Fed will manage the dollar down gently. Little by little, the presses will roll at the U.S. Treasury, dollars will pile up overseas, and the greenback will fall against foreign currencies – and gold – in a landing so cushioned that no one will notice. The dumb foreigners will simply wake up one day and find their U.S. dollars and U.S. bonds worth only a fraction of what they thought they were worth. America’s debtors will get off scot free.

Could it be that easy and smooth, dear reader?

We venture a little analysis here. In the short run, as Warren Buffett puts it, the markets are a voting machine. People get any goofball result they want. Vox populi; vox dei. But in the long run, markets are weighing machines. The masses are left mute. Sola vox dei loquitur. Only God speaks. Only the fundamentals matter. Only the truth is heard.

America’s middle class has put their faith in various graven images: Ben Franklin, Andrew Jackson, George Washington – dead presidents printed on green paper. They have voted for more and more spending, more and more bread, more and more circuses, more and more foreign wars. They claim to be religious, but they put their faith in the princes and powers of this world – in jobs and credit…in the government. Their voodoo economy is built on magic paper money and directed by witch doctors. Everyone knows they make mistakes, but no one expects them to fall on their faces.

And most of all, America’s middle class counts on houses. Most have few assets beyond their own homes. They have no secrets accounts in Switzerland. They have no euros. They have no Picassos and no Bugattis – or Joe Camels. They have no gold. Even the little they do have – their own homes – are mortgaged more heavily than at any time in the past. A modest decline in prices would leave millions of people upside down – with mortgages higher than their house prices.

Americans used to pay off their mortgages during their working years and then live in their homes, free and clear of debt, during their retirements. Typically, houses were then passed along to the next generation. Now, the house serves a new role. It is supposed to pay the bills from the cradle to the grave. Rather than savings or pensions, people are counting on the rising value of their own homes, not only for current expenses, but for those in retirement, too. Many people take out mortgages on their primary residences, says USA Today, in order to buy vacation houses. When they retire, they intend to live in their second home year round, sell their primary house, and use the proceeds to fund their golden years. Who is going to pay for all those houses left behind? Illegal immigrants from Mexico? Maybe.

Don’t wait too long, is our advice. Remember, voting eventually yields to truth. The truth is, houses are already so expensive in many areas that few people can afford them. And the foreigners look like they could wise up at any moment.

Boom begets bust. A bust in housing would leave a lot of Americans broke at the worst possible time – just when their working years are coming to a close. A real collapse in the housing market would wipe out much of America’s middle class – no matter what happens to the dollar.

“Bay area home sales fall sharply,” says one of yesterday’s ominous headlines.

More news from our currency counselor…


Chuck Butler, back from his trip to Las Vegas:

“Overnight, there was some healing, with the euro trying to inch back toward 1.28. The Japanese yen, however, has been sent to the dark side of the moon by the Bank of Japan.”

Read more about the yen and the other global currencies in today’s Daily Pfennig


Back to Bill Bonner with more opinions, thoughts and obiter dicta…

*** “One Million in Britain Fear Bankruptcy,” is the headline story on today’s subway tabloid. Only a million? Surely the number will go up as the down cycle intensifies.

*** In America, two headlines suggest worry among top officials:  “Fed Chief Urges Caution on Mortgages,” says one, from the Financial Times. The other comes to us from the Wall Street Journal:  “Greenspan Expresses Concerns on Derivatives…” Fed chiefs, present and past, are covering their derrieres.

*** And in Afghanistan and Iraq, things seem to go from bad to worse…bombings, drugs, murders. We recalled our own words from four years ag  No one goes to war in Afghanistan or Mesopotamia without later regretting it.

*** Gold…gold…gold! Gold fever has not yet hit the world’s investors. This is still just the second stage of the bull market. As foretold in this space, gold seems to be in a correction. We looked at a chart this morning that made us think the price should drop between $650 and $545 before the correction was over. But what do we know?

All we know is that when the voting stops and the truth-telling begins, gold is likely to be a lot more valuable – in dollar terms – than it is now. We are hoping the price falls below $650. We will buy more.

*** Today’s the day. Addison and company are on a wild pork chase in Washington this afternoon with a documentary crew. Heh. Heh.

*** Finally, here at The Daily Reckoning we are always trying to connect the dots in order to see the big picture. Sometimes we see clearly, but most often, not. We thought we saw a few more connections on Sunday, when listening to our favorite Anglican priest, Peter Mullen, at St. Michaels.

Unlike other economists, we have no illusions about our trade. We cannot tell you how to get rich (other than the old fashioned way: work hard, save your money, get lucky), nor can we offer any new raz-ma-tazz formula for the U.S. economy. In fact, we are always amused when the question is put to us:  “What should the U.S. do to avoid the financial disaster you see coming?”

“Well, nothing,” is our stock reply.

Of course, there is a lot that could be done, but nothing that would actually eliminate the problems. People are too deeply in debt. They, and their elected representatives, have made promises that can’t be kept. To make matters worse, the world economy is evolving. The great advantage enjoyed by the West for the last 300 years is disappearing. The teeter-totter is teetering toward the East. Like it or not, the Western nations are destined – on a relative basis – to get poorer. And their creditors, foreign and domestic, are likely to be stiffed.

Still, government officials and private consumers could cease making the situation worse. They could stop spending money they don’t have, on things they don’t need. Of course, that would trigger the very crisis they hope to avoid. At least it would clear the air and prepare the way for genuine growth and prosperity in the future.

But don’t hold your breath, dear reader. It is not likely to happen. Success is a hard thing to recover from. The success of the American empire – and the American consumer economy – will not be corrected easily. It will, most likely, require full, frontal catastrophe. That is just the way things work. All of life grows, develops, matures, corrupts, degrades, degenerates…and eventually expires. At its peak, an organism – or an institution – is like a man in his 50s at the top of his success – a midlife crisis waiting to happen. It could be a pretty girl in the office, a war in a foreign country, architecture, booze, disease, or just the advancing years: something will bring him down.

“People make a fundamental mistake,” explained Mr. Mullen, or words to that effect. We don’t take notes during a sermon…perhaps we should. “They confuse themselves with God. They think that their own personalities are divine. So, when they do something wrong, and feel bad about it, they don’t think they need to stop doing it. No, they think they need to find a way to feel good about what they are doing.”

That is the problem with modern economics, too. Economists have given up trying to figure out what rules an economy follows. Few seem to have any interest in the rules and even fewer advise people to stick to them. Instead, they make up their own rules as they go along – helping to set interest rates, trade restrictions, fiscal policies, tax levels, all in the guise of managing and guiding the economy. There is no right and no wrong, they say, just technique. They admit that they cannot tell us what price oil will sell for next week…or even tomorrow. Still, they pretend that they can look into the future and improve it before it happens, by adjusting, jiggling, tuning, and manipulating whatever levers are available to them.

We don’t believe it will work. “As ye plant, so shall ye reap,” we recall. If ye cast your seed on barren rock, it will not grow – no matter how many levers ye yank. And if ye sow the wind, well, ye might end up getting a cyclone.