The naughty boy who blurts out unpleasant truths
“In the first place, the ‘classic’ writers, without neglecting other cases, reasoned primarily in terms of an unfettered international gold standard. There were several reasons for this but one of them merits our attention in particular. An unfettered international gold standard will keep (normally) foreign-exchange rates within specie points and impose an ‘automatic’ link between national price levels and interest rates. The modern mind dislikes this automatism, as much for political as for economic reasons: it dislikes the fetters this automatism clasps on government management of the economic process – dislikes gold, the naughty boy who blurts out unpleasant truths. But most of the economists of the period under survey liked it for precisely the same reasons. Though they compromised in practice as in theory and though they admitted central-bank management, the automatism – a phrase beloved by Lord Overstone [Samuel Jones Loyd, 1st Baron Overstone] – was for them, who are neither nationalists nor etatistes, a moral as well as an economic ideal.” –– Joseph Schumpeter, History of Economic Analysis (1954) Published posthumously
Dr. MoneyWise says. . . .And to Dr. Schumpeter’s well-considered discourse on the practical merits of the gold standard, I will add a simple thought of my own: Absent the gold standard, the prudent investor who stores gold benefits in concert with the blurting of those unpleasant truths.
Gold – Past, present and future
Dr. Moneywise says: Gold has a past. I suspect it has a future. We live in a time when currencies and financial markets have become political enterprises – creations of the world’s governments and central banks. Since we have never seen times like these, when so much depends on the monetary largesse of the policy-makers, no one really knows where the future might lead us. Uncertainty reigns and, when that is the case, history teaches us that gold demand rises proportionally and at times impressively so.
“Why is it,” asks Nathan Lewis in a Forbes magazine article, “that the collective intelligence (let’s be generous) of today’s central bankers, and indeed all the central bankers since 1971, cannot outperform a yellow rock? This probably strikes some as bizarre, but it has always been thus. Way back in 1928, in a book called The Intelligent Woman’s Guide to Socialism and Capitalism, George Bernard Shaw declared: “You have to choose … between trusting to the natural stability of gold and the natural stability of the honesty and intelligence of the members of the Government. And, with due respect for these gentlemen, I advise you, as long as the Capitalist system lasts, to vote for gold.”
Whether or not gold is the best basis for money may be a moot point. On the other hand, whether or not private investors should own it because the money is not gold-backed remains a vital question. The gift of gold – the one passed from generation to generation from ancient times to present – is the protection it offers against a profligate government, an unpredictable economy, unstable financial markets and a myriad of additional threats to private wealth. The gift of gold, in short, is peace of mind.
The road to confetti is long and winding
“Does the deployment of helicopter money not entail some meaningful risk of the loss of confidence in a currency that is, after all, undefined, uncollateralized and infinitely replicable at exactly zero cost? Might trust be shattered by the visible act of infusing the government with invisible monetary pixels and by the subsequent exchange of those images for real goods and services? . . . To us, it is the great question. Pondering it, as we say, we are bearish on the money of overextended governments. We are bullish on the alternatives enumerated in the Periodic table. It would be nice to know when the rest of the world will come around to the gold-friendly view that central bankers have lost their marbles. We have no such timetable. The road to confetti is long and winding.” – James Grant, Grant’s Interest Rate Observer
Dr. MoneyWise says. . . .Some think it takes an advanced degree in economics to understand the merits of a diversification in gold and silver when all it takes is a little common sense. Common sense ownership of unencumbered metal saved the skeptical saver in the time of the French assignat inflation in 1789, the nightmare German inflation in 1923, the global bank collapses in 1932, the American stagflationary breakdown in the 1974 and Venezuela’s inflation in 2018 – even though those episodes span almost 250 years. As old Ben Franklin once said: “A change of fortune hurts a wise Man no more than a change of the Moon.”
When in Rome. . .
“The coins’ excellent condition indicated that the owner systematically stashed them away shortly after they were made, the archaeologists said. For some reason that person had buried them shortly after 294 and never retrieved them. Some of the coins, made mainly of bronze but with a 5% silver content were buried in small leather pouches. The archaeologists said it was impossible to determine the original value of the money due to rampant inflation at the time, but said they would have been worth at least a year or two of wages.” – The Guardian (11-19-2015) on a find of 4000 Roman silver coins buried in a Swiss orchard
“Salvian tells us, and I don’t think he’s exaggerating, that one of the reasons why the Roman state collapsed in the 5th century was that the Roman people, the mass of the population, had but one wish after being captured by the barbarians: to never again fall under the rule of the Roman bureaucracy. In other words, the Roman state was the enemy; the barbarians were the liberators. And this undoubtedly was due to the inflation of the 3rd century.” – Joseph Peden, Inflation and the Fall of the Roman Empire
“Now one interesting thing with all this inflation should be a great comfort to us: historians of prices in the Roman Empire have come to the conclusion that despite all of this inflation — or perhaps we should say, because of all of this inflation — the price of gold, in terms of its purchasing power, remained stable from the first through the fourth century. In other words, gold remained, in terms of its purchasing power, a stable value whereas all this other coinage just became increasingly worthless.” – Joseph Peden, Inflation and the Fall of the Roman Empire
Dr. MoneyWise says. . . .”In the wealth game, emphasize defense when you need to and offense when it makes sense. At all times, though, no matter how tempting the prospects for speculative gain, remain fully and judiciously diversified.
Chart image courtesy of Nicolas Perrault III [CC0], from Wikimedia Commons
What money ought to be
“Oresme wrote that it is ‘disgraceful and everywhere foreign to the nobility of a prince to prohibit the circulation of good money in his country, and, for the sake of gain, to order and even compel his subjects to use his own which is poorer, as if to say that good is bad and his bad is good.’ He was flexible in case of emergencies, such as during periods of war, or to pay ransoms with ‘bad’ or debased money, or to help liberate a kidnapped king. But the bishop added, ‘If the community should in any way make such an alteration, the money ought to be restored to its proper basis as soon as possible, and the making of gain in that way should cease.’” – Alejandro Chaufen, Forbes
Dr. MoneyWise says. . . This essay cites notables on the subject of money – Aristotle, Thomas Aquinas and Copernicus – to name a few. All had similar views. It talks about what money ought to be, the right and wrong of it, and ends up with a couple words on Bitcoin – caveat emptor. We academics do love our Latin.
That isn’t how it works
“Simple, compelling language describing cause and effect is both comforting and reassuring. The alternative to this soothing narrative is an unimaginable world of random disconcerting events. This stands in stark contrast to how we prefer to see the world around us: orderly, predictable, subject to expert management and prediction. Sorry, to say, but that isn’t how it works.” – Barry Ritholtz, Bloomberg
Dr. Moneywise says. . . . . .It is precisely because of the ‘random disconcerting events’ of life, economy and markets that shrewd investors are always on the lookout and why they include gold and silver in their portfolio plan. Barry Ritholtz, I might add, is the author of the book, Bailout Nation. We recommend a visit to the article linked for more of Mr. Ritholtz’ deep-thinking.
“Apoplithorismosphobia (ay-pope-lit-horris-mos-foe-be-ah) is the fear of deflation. Or, more correctly, the fear that an economy would ‘suffer’ from falling prices, or a general decline in the prices of goods and services. It is a fear that has gripped some economists, journalists, and policymakers with a blinding strength as powerful as faith. Evidence seems to suggest that the phobia develops from the inability to understand the causes of the Great Depression and a more general failure to distinguish between what Bastiat called “the seen” (e.g., deflation) from ‘the unseen’ (e.g., the causes of contraction and unemployment). Under the influence of this phobia, victims develop an unfounded faith in the ability of monetary and fiscal policy. In extreme cases it leads to the support of powerful policy ‘weapons’ to combat deflation—the equivalent of using economic weapons of mass destruction. As shown in the case of Japan, this behavior is counterproductive and should be considered a danger to society. The purpose of this paper is to describe and diagnose this phobia and to present a treatment to counteract its effects.” – Dr. Mark Thornton, Senior Fellow, Mises Institute
Dr. MoneyWise says. . . . . . .Deflation, believe it or not, can have its positive effects, according to Dr. Thorton, an Austrian economist and a clever writer. He argues to let-the-economy-be-the-economy. Unfortunately, as history amply illustrates, deflation (or even severe disinflation) brings with it a whole of host of systemic risks – dangers that elevate the role of precious metals as a safe-haven.
Market cycles will endure as long as humans exist
“Four of the most dangerous words in the investment world are ‘It’s different this time.’ When people use them, what they’re saying is that the norms of the past no longer apply. . .Both these notions were soon shown to have been erroneous, and the market bubbles abetted by that optimistic thinking were popped, bringing on painful market crashes.”
Dr. MoneyWise says. . . . Old Ben Franklin said it best. “By failing to prepare, you are preparing to fail.” And I will add, we know not when the next crisis will begin, but begin it will. And when it does, only two kinds of investors will be there to greet it: Those who prepared and those who did not.
Let them go bankrupt!
“Without a lay-friendly book like [Dr. Mark Thornton’s] The Skyscraper Curse, millions more Americans will be duped by the next crash. They won’t understand the historically unprecedented and bizarre Fed program of quantitative easing, they won’t understand the impact of manipulated interest rates, and they sure won’t understand the gross malinvestment that levered up trillions of dollars in new business debt. Instead, we’ll hear about ‘unbridled capitalism’ and ‘unregulated markets’ as culprits. We’ll be told that extraordinary new measures are needed. More industries, and maybe even the banks again, will be bailed out.
Worst of all, the press will focus on what the Fed and Congress should do, rather than what they shouldn’t. The only real cure for too much debt is an orderly process of liquidation: let insolvent banks and debt-ridden firms go bankrupt, let their shareholders take a haircut, and let new entrepreneurs and firms buy the assets out of bankruptcy. No bailouts. No subsidies. No taxpayer involvement.”
Dr. MoneyWise says. . . . Anna Schwartz, who co-authored A Monetary History of the United States with Milton Friedman, very publicly recommended exactly the same remedy in 2008. Such comeuppance never occurred. The banks were bailed out, and we ended up where we are today – in a deeper hole than ever with the threat of an even more dangerous crisis than the last hanging over us.
Jeff Deist is the president of the Mises Institute.
Where are we in Tyler’s historical cycle?
“A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves money from the public treasury. From that moment on the majority always votes for the candidates promising the most money from the public treasury, with the result that a democracy always collapses over loose fiscal policy followed by a dictatorship. The average age of the world’s great civilizations has been two hundred years. These nations have progressed through the following sequence: from bondage to spiritual faith, from spiritual faith to great courage, from courage to liberty, from liberty to abundance, from abundance to selfishness, from selfishness to complacency from complacency to apathy, from apathy to dependency, from dependency back to bondage.” – Alexander Tyler, 18th century historian and jurist
Dr. MoneyWise says: I always keep in mind Alexander Tyler’s historical cycle. I estimate that we are now somewhere between the “complacency” and “apathy” stages with “dependency” –if recent political rumblings can be taken at face value – knocking on the door. History is replete with examples of a rapid debasement of the currency accompanying the latter stages of Tyler’s cycle and that is why I own gold.