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Unintended Consequences! Part 3
by Professor von Braun

July 17th, 2005

Productivity and Cashflow

Whatever happened to good old fashioned cashflow, cashflow derived from producing something which was sold at a profit? Today it is estimated that profits from the manufacturing sector account for 10% of corporate profits, while in excess of 50% comes from financial transactions or money shuffling. This is a complete reversal from the early 1950's when manufacturing accounted for 55% of corporate profits. Obviously productivity has declined over the last fifty years and the production of goods has been replaced by the 'click the ticket' brigade.

The manufacturing base that provided the bulk of US corporate profits has gone, having been moved offshore, first to Japan, now to China, two countries which today are effectively the largest creditors of the US. Productivity, the key to wealth, is now located in foreign lands, while money shuffling still appears to be centered in the US. Obviously when a country has the designated world's reserve currency, the US dollar, the source of this 'wealth' the ultimate paper gold mine, then it can dictate the terms and conditions to all players, especially as the currency in question has no redemptive value.

In the quest to provide ever more gadgets and widgets at a lower cost, US retail giants like Wal-Mart have nearly all of what they sell manufactured in these low labor cost communities. Meanwhile the American consumer continues to be able to purchase more and more distractions such as cell phones, hi resolution TV screens, computers, sound systems, etc, while at the same time, now having nothing to do other than be distracted, (an interesting development, one which seems to have replaced the notion of being productive), productivity decreases.

It may be coincidental but I suspect that the increase in size (by that I mean being a tad overweight) of the average US consumer maybe indirectly proportionate to the decline in the manufacturing base. Evidence suggests that the younger generation, or the 'entitlement' generation, as they have been referred to, are less productive than their peers and expect the same treatment as those that have been in senior positions for many years. Now this is hardly surprising since, as another unintended consequence of current monetary policy, the work ethic, the one that comes from and is actively maintained by actually doing something productive, may itself have inadvertently moved offshore as well.

The concept of having to work (as in be productive) for a living has been overtaken by the concept of clipping the ticket of others that do work for a living, as in the Chinese.

The Chinese and others providing low cost goods and services are of course dependent upon the US to keep their game going, dependant enough it seems to be willing to extend to the US consumer the credit they need to keep consuming.

It certainly is a funny world we live in. In some ways the humor of the situation is something that Charlie Chaplin, the Marx brothers, John Cleese and Jay Leno combined could not parody. Who could write such a plot? China, a country that was not so long ago quite poor and not known for its ability to produce anything of quality, is now holding US Treasuries and effectively subsidizing the American way of life -- while the American way of life, built on a strong manufacturing base, has atrophied into a consumer society, dependant upon credit extended by other countries who have no choice but to promote consumerism. All of this is happening while the key ingredient, the US dollar, is not redeemable for anything other than more of the same and the continuation of the fiat system is dependant upon the willingness of the players to hold these dollars and accumulate more.

Meanwhile, within the US, money shuffling is now the dominant game. How long can it last? Is it sustainable? Can increasing real estate prices replace the now depleted manufacturing base and allow the money shuffling game to continue? While the stock market is holding at levels comparable to six years ago, that's all it's doing and interest rates are low so where is the money coming from? What's a productive investment these days? How many times can the ticket be clipped before it becomes so full of holes that it is unrecognizable?

Is there a fallback position? That's the key question right there. Genuine investors, those with an understanding of money and markets, as opposed to speculators such as hedge funds, need to be looking at the question of income if, or when, the current game ends. Ever rising asset values may not be the source of future income by way of paper profits and if they are not, where is the income going to come from?

There has been enough economic analysis done on records dating back the last two hundred years to identify the occurrence of a cycle of rising commodity prices, when paper assets don't do well and a cycle of declining commodity prices, when paper assets do well. This cycle runs approximately every 30 years, with a (+ or - 2 yrs) 10 year period of rising commodity prices followed by a 20 year period of paper asset inflation. We are currently at the early stages of the rising commodity price cycle, which is evidenced by the double bottom in the CRB index, once in 1999 and again in late 2001. Since then the commodity index has increased by 70% returning to levels not seen since late 1979. Stocks essentially topped out during this double bottom period and are unlikely to gain momentum from here. Rising commodity prices tend to eat into corporate profits, not to mention people's pockets, and asset inflation such as real estate begins to become more difficult to maintain as income available for debt servicing goes to the gas pump instead.

It is estimated that with oil at $60 per barrel about one third of that cost is an opportunity cost, one brought about by speculators as in hedge funds, playing a rising market. The last commodities boom (1972 1980) did not have either the hedge funds or a world community awash with US $'s to contend with, nor was there the demand for commodities there is today, so historical data may only be an indicator of things to come.

Recognition of the dilemma enhanced by the Federal Reserve monopoly is beginning to appear in some circles within the US financial community. But collapsing real estate markets, stock markets that no longer go up and 18% interest rates in US Treasuries are a dim memory to most and unheard of when it comes to the entitlement generation.

The monetization of all goods and services, some which should never have been monetized to begin with, including health care, health insurance, medical services and education has seen costs increase (raised by a cost accountant) while the quality of the service provided has declined.

The recognition of the need to diversify out of 'money shuffling' assets into those that either produce or support production of commodities, is slowly becoming apparent. Jim Rodgers was one of the earliest investors to identify commodities as the place to be and his commodity indexed fund ( which has given impressive returns since its inception in 1998. In March, '05, Barry B Bannister at Legg Mason, ( wrote an excellent piece entitled "Paying for the peace" which looks at portfolio strategy for the next ten years with rising commodity prices as a major component.

Direct ownership of hard assets may well be the new vogue. Jeffrey Knight, of Putnam Investments ( was quoted in the Boston Herald, 7/14/05, ( as saying: "I think gold is a buy. I think it's a long term buy. Nobody wants a strong currency any more. It could happen that all 'fiat' (i.e. paper) currencies will try to compete lower. That undermines 'fiat' currencies as a store of value."

Wow, that's an interesting statement coming from a fund manager, when compared to the rah-rah that still appears on CNBC. Notice this gentleman is not saying buy real estate, he is saying that long term ownership of gold may be prudent. We could not agree more, having recommended buying gold at $280 back in 2001. Once again it is important to actually own what you purchase, and taking delivery of the metal completes the transaction.

For those that are fortunate enough to have exited paper assets and are sitting in cash (liquid debt,) transferring this into something that is not debt, but is tangible and can not be erased with a stroke of a pen, is wise. No debt, exposure to commodities, ownership of gold and if possible, direct and indirect exposure to commodity production, including gold, may well become the hallmark of financially surviving the next ten years.

The Prof can be contacted by email at

Copyright by Professor von Braun. All Rights Reserved. Reprinted at USAGOLD by permission.

Return to the The Gilded Opinion Index Page

The Rocket School of Economics -- The Lecture Series Index

  • 22 May 2009 -- An Often Overlooked Issue!
  • 28 Mar 2009 -- Problematic Banking Systems!
  • 14 Nov 2008 -- What Exactly is an Asset?
  • 23 Aug 2008 -- Through the Looking Glass?
  • 02 Aug 2008 -- Compounding to the Downside!
  • 26 May 2008 -- Back to Basics Again!
  • 31 Mar 2008 -- The Broken Watch -- Part 2.
  • 27 Mar 2008 -- The Broken Watch -- Part 1.
  • 06 Feb 2008 -- The Financial Equivalent of Faulty Towers.
  • 10 Dec 2007 -- Monetary Systems & Productive Assets.
  • 14 Feb 2007 -- Divorced from Reality
  • 06 Sep 2006 -- Gold, Bankers, the Trade Deficit and Unsettled Transactions
  • 19 Jun 2006 -- When is a Reserve Not a Reserve?
  • 31 May 2006 -- The significance of August 15, 1971.
  • 08 Apr 2006 -- Keep Your Eye on the Ball!
  • 30 Mar 2006 -- What came first?
  • 11 Mar 2006 -- An Unanswered Question.
  • 08 Jan 2006 -- Where have all the projects gone!
  • 11 Dec 2005 -- Gorillas, Rising Gold Prices and Depreciating Paper Currencies!
  • 23 Oct 2005 -- Custodial Risk.
  • 16 Sep 2005 -- An Inherent Flaw.
  • 08 Aug 2005 -- Central Banks and 'Reserves'.
  • 31 Jul 2005 -- Central Bankers, Actors and 'We'.
  • 17 Jul 2005 -- Unintended Consequences! -- Part 3.
  • 07 Jul 2005 -- Unintended Consequences! -- Part 2.
  • 25 Jun 2005 -- Unintended Consequences! -- Part 1.
  • 14 Jun 2005 -- The Two Greater Fools Theory.
  • 03 Jun 2005 -- Real Money, Funny Money and YOU -- Part 4.
  • 30 May 2005 -- Real Money, Funny Money and YOU -- Part 3.
  • 26 May 2005 -- Real Money, Funny Money and YOU -- Part 2.
  • 21 May 2005 -- Real Money, Funny Money and YOU -- Part 1.
  • 09 Nov 2002 -- Carrying a Big Stick.
  • 17 Sep 2002 -- Wishful Thinking!
  • 27 Jul 2002 -- Gold Bugs Beware -- part 2.
  • 10 Jun 2002 -- Gold Bugs Beware!
  • 06 Apr 2002 -- Currencies versus Gold.
  • 26 Jan 2002 -- Bear Market Strategies.
  • 01 Jan 2002 -- 2002 -- A Perspective.
  • 20 Oct 2001 -- The Storm Clouds are Gathering.
  • 30 Sep 2001 -- What to Say?
  • 01 Jul 2001 -- ...Said the Fly to the Spider.
  • 14 Jun 2001 -- Upward and Downward!
  • 28 May 2001 -- Volatility Time, Again!
  • 14 May 2001 -- The Coming Bull Market in Gold Stocks?
  • 24 Feb 2001 -- High Hopes, Wishful Thinking & The Absurd
  • 20 Feb 2001 -- Who Put the Holes in the Swiss Cheese?
  • 22 Jan 2001 -- US Dollar Admits Identity Crisis!
  • 16 Jan 2001 -- Dear George W.
  • 24 Nov 2000 -- The Bubble Has Burst
  • 11 Nov 2000 -- The Media, Bull Markets & the Gold Price
  • 02 Nov 2000 -- Gold Stocks
  • 29 Oct 2000 -- Oh The Tangled Web We Weave ...When We Set Out to Deceive
  • 24 Oct 2000 -- A Mystery!
  • 16 Oct 2000 -- A Peso Here ...and a Few Thousand Pesos There
  • 10 Oct 2000 -- The Unfolding
  • 30 Sep 2000 -- What's Wrong with THIS Picture?
  • 25 Sep 2000 -- Buy Gold Now!!
  • 23 Sep 2000 -- The Times, They Are a' Changing
  • 15 Sep 2000 -- Time WILL Tell!
  • 27 Aug 2000 -- SS "Paper Assets" Begins to Take on Water
  • 06 Aug 2000 -- The Indian Summer
  • 26 Jun 2000 -- A Yellow Brick Wall
  • 22 May 2000 -- The King IS Naked
  • 30 Apr 2000 -- Goodbye Yellow Brick Road
  • 18 Apr 2000 -- Beware the Ides of March, April and May
  • 08 Apr 2000 -- Really, Sir Aldot!
  • 25 Mar 2000 -- Where To From Here?
  • 18 Mar 2000 -- The Gnomes of Zurich
  • 12 Mar 2000 -- The "New" Economy??
  • 06 Mar 2000 -- Two Questions
  • 04 Mar 2000 -- Iceberg Dead Ahead!
  • 28 Feb 2000 -- The Wizard of Oz
  • 06 Feb 2000 -- Here We Go Again!!
  • 15 Jan 2000 -- Comments on the Gold Market
  • 29 Dec 1999 -- No Raw Ingredients Required
  • 28 Dec 1999 -- No Way Out
  • 14 Dec 1999 -- Ho, Ho, Ho!
  • 07 Dec 1999 -- Greenspan's Bubble
  • 03 Dec 1999 -- Early Warning Signs

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