Paper Promises to Pay
Over the years, I’ve read Business Insider with respect. Their articles always seemed insightful, well-written and authoritative. However, after the “April Plunge” (April 12th & 15th) in the price of gold, Business Insider published an article which openly celebrated the plunge in gold’s price and struck me as largely nonsensical.
In “EVERYONE Should Be Thrilled By The Gold Crash” Business Insider wrote:
“On Friday [April 12th], when the price of gold plunged, we said it was ‘great news.’ The idea behind saying the gold news ‘great news’ is basically this: The last few years have seen a major ideological battle take place.”
Absolutely true. The difference between investing in physical gold and investing in paper stocks, paper bonds, paper gold or even paper cash isn’t like the difference between investing in GM or IBM. The difference between investing in physical gold and any other paper debt-instrument is as profound as the ideological difference between the Muslim and Christian faiths. The clash between physical gold and paper debt instruments (between actual payments and mere promises to pay) is the financial equivalent of a holy war. No compromise is possible. In the end, there can be only one.
“On one hand, you have established economists, who believe the government has tools at its disposal to address a crisis. These tools include deficit spending and a violent expansion of the Fed’s balance sheet.”
“Established” economists? “Established” by who and for how long? For 42 years since the US adopted a pure fiat currency? A century (since Lord Maynard Keynes)? The fact that any economist is “established” proves nothing about the validity of his theories—especially at a time when, despite his “establishment” connections, the economy is impaired and perhaps on the verge of collapse.
“Conversely, you have critics who slam the arrogance of economists and central planners, and who have predicted that all of this economic acrobatics would result in an economic collapse, hyperinflation, and an explosion in the price of gold. Gold is important to their worldview, because it represents a quasi-money that’s not tied to any government or central bank.”
Bunk. Gold is not “a quasi-money”. Gold is the real deal. Gold has been the primary “money” for 3,000 years. Paper, fiat currencies like the US dollar are the “quasi-money”.
“Paperbugs” (those who value paper debt-instruments more highly than physical gold) see faith in gold as a kind of blasphemy. Today’s holy war between the paperbugs and goldbugs is to determine whether gold or paper will be our economy’s “god”.
“Investing in gold is a rejection of government money and finance.”
Yes, yes, YES! People invest in gold because they fear and distrust the government and the fiat monetary system. Insofar as fiat currency depends on public confidence, any investment in physical gold evinces a loss of public confidence in paper dollars and therefore strikes at the heart of the fiat monetary system.
“Money flowing into gold-related assets represents a belief that rocks (however shiny they are) are a better place to invest than human endeavors (like stocks).”
“Arguably, 2000 represented a peak in belief in the capabilities of humans. Of course, that bubble crashed. Then we had 9/11. Then we had two wars. Then we had the housing implosion. Then we had the financial crisis. Then the horrible recession. Then the European crisis and the debt ceiling and everything else. In other words, we had a series of events that, for good reason, shook our faith in humanity.”
Business Insider would have us believe that fiat currencies represent a faith in humanity while faith in gold is merely a form of primitive rock worship. If embracing gold constitutes a rejection of “humanity,” we mean ol’ goldbugs should be ashamed of ourselves, shouldn’t we?
But recent events have done nothing to shake my faith in humanity. I’m still inclined to believe P.T. Barnum’s observation that “There’s a sucker born every minute” (Proof? How many people voted Democrat in the last election? How many voted Republican?) I have faith in persistent human ignorance and greed. My faith in the human tendency to support any idiotic program—like fiat currency and paper debt instruments that promise something (tangible) for (virtually) nothing—remains unshaken.
I.e., if I want to buy a new Cadillac, I can pay for the car with physical gold. But because gold is hard to find, refine and coin, paying for products with gold is difficult—even painful. Such payments are based on hard work and the personal discipline required to save your money.
On the other hand, thanks to fiat money and paper debt-instruments, I can purchase that Cadillac with nothing more than my promise to pay the debt at some later date.
So, if I want a Cadillac, it’s far easier to give the dealer my mere promise to someday pay rather than my actual payment (physical gold). Thus, in the world of fiat dollars, you and I can acquire “something” tangible (a physical Cadillac) for “nothing” (or virtually nothing): our intangible promises to pay (someday).
Promising to pay is called “credit”. People love it. Most people would much rather pay with an intangible “promise” (which they can personally spin out of thin air) than with a physical ounce of gold—which is hard to find and hard to save. Therefore, when a fiat monetary system is first established, everyone feels pretty good since they can ultimately purchase tangible things (like cars and homes) in return for nothing more than their intangible promise to pay at some future date.
Consumers (people who want Cadillacs; the political majority) will look at a paper monetary system and exclaim, “Is this a great system—or what?!”
Producers (people who manufacture Cadillacs; a political minority) aren’t so impressed. Sooner or later they realize that they aren’t actually being paid for their productivity. They’re selling tangible Cadillacs for intangible promises to pay. That’s a sure formula for going bankrupt.
The problem with an economy based on promises to pay rather than actual payments, is that, inevitably, people go too far and make more promises than they can ever possibly keep. (Witness today’s national debt and the “liar loans” of the previous decade.) Once it becomes clear that the promises can no longer be kept (as has happened with “liar loans” and will happen with the national debt), the value of the paper “promises to pay” (debt-instruments like US bonds, stocks and dollars) falls dramatically, illusions of paper wealth are destroyed, and the economy may collapse into chaos.
Thus, thanks to fiat currency, we might have one to two generations who get to live in apparent prosperity, followed by a third generation who will live in poverty and political turmoil. Given the price that the third generation will ultimately be forced to pay, I see no reason to regard paper debt-instruments as more “humane” than gold.
• Paperbugs (also called “Keynesians”) argue that it’s possible to run a prosperous economy forever based only on promises to pay.
Goldbugs, on the other hand, argue that, sooner or later, the world will demand actual, physical payments rather than more intangible promises.
Common sense can tell you which argument must inevitably prevail.
• “If we measure stocks in relation to gold, we see that stocks actually bottomed in Summer 2011.”
Could be—but was that “bottom” the result of natural forces in the free market? Or was that bottom achieved artificially by means of market “stimulation” by government, the Fed and Wall Street in the manipulated market? Have the prices of stocks risen since A.D. 2011 because the free market values them more highly, or because government manipulators are doing everything possible ($85 billion per month in Quantitative Easing) to sustain the illusion that stocks are gaining value?
• Business Insider claims that A.D. 2011 was the moment of both maximum belief in gold (“rocks”) and the minimum belief in “humanity”. Since then, a politically-correct belief in “humans” has been growing while the anti-social faith in “rocks” (gold) has fallen.
But goldbugs don’t believe in “rocks” over humans. We believe in objective reality over the “appearance” of reality. Therefore, we believe in tangible “rocks” (physical gold) rather than paper “certificates of rocks”. We believe in payments rather than promises to pay. We believe in people who are smart enough to value tangible, objective reality (gold) rather than the illusions and the appearance of reality provided by paper certificates and mere promises to pay. We aren’t cruel. We’re merely objective—and smart.
“So ultimately, the decline of gold and the rise of stocks [and growing confidence in ‘humanity’] is a big trend that everyone should cheer.”
“Everyone should cheer”? I might agree if the decline in gold and rise in stocks was caused by free, rather than manipulated, market pressures. But if gold is falling and stocks are rising because they’ve been artificially “stimulated” (manipulated) by the Powers That Be, we goldbugs contend that the “truth will out,” the lies (manipulated prices) will fail, and soon gold will again rise dramatically while stocks fall.
• “The huge corpus of economic research, which has informed the US’ efforts to stimulate [manipulate] the economy, is not a pile of garbage. You can do a lot without blowing things up, as the goldbugs claimed would happen.”
Now I’m inspired. My confidence soars like an eagle. By arguing that “You can do a lot without blowing things up,” the paperbugs implicitly admit that if they do “too much,” they might “blow things up”—just as the goldbugs have warned.
No doubt you can “do a lot without blowing things up”—for a while. But who knows where the line is between doing “a lot” and doing “too much”? And who believes the stimulation/manipulation of our economy can go on forever? No one.
The stimulation/manipulation must inevitably end. But, when it does, will the economy be able to sustain itself? Just this week, Ben Bernanke mentioned the possibility of ending QE3 sometime this year and the Dow, which had been up nearly 150 points for the dropped down to a 100-point daily loss. The stock markets know that only thing holding them up and even causing their rise is QE3. The stock markets know that if QE3 ends, stocks will generally suffer a significant decline.
Paperbugs believe that once they jump-start the economy with enough stimulation/manipulation, the economy will be empowered to proceed on its own force.
Goldbugs believe that even if the stimulation/manipulation doesn’t result in an economy that’s so addicted to stimulation/manipulation that it’s unable to proceed on its own—the debts incurred by the stimulation/manipulation will still be sufficient to cripple or collapse the economy.
• One of the big questions we face in the today’s markets is Who is in control? Are the central planners in Washington DC in charge of the stimulated/manipulated markets?
For the moment, Yes. But should they be?
Shouldn’t we have a free market where the people are in charge? Ohh, the free markets would probably be a lot more volatile than the stimulated/manipulated markets. But, in suffering a series of minor upturns and downturns, the free markets might also be less prone to a single, devastating collapse that could result in a depression that lasts for a decade or more.
Plus, with a “free” market dominated by the people, we’d see the “power” of the markets distributed among millions of individual investors. The “distribution of power” is conducive to freedom and minimal corruption.
On the other hand, with a stimulated/manipulated market, the power is in the hands of central planners. That centralization of power is contrary to the fundamental principles on which this nation was founded and is conducive to widespread exploitation and criminal behavior.
What we’re witnessing in our markets and economy right now is a “holy war” between those who believe in paper promises and the central planning required to make those paper promises good—and the goldbugs who believe in payments, savings, personal responsibility and the personal freedom of the “free” market.
Whoever is going to run our markets—either the people or the government—will be the same entity that runs this country. Shall we have freedom and market volatility? Or shall we have central planning and lost Liberty?
Any fool (including Business Insider) can see what the answer to those questions should be. But what should be and what is can be two very different conditions.
Today’s “holy war” between the paperbugs (promises, promises) and the goldbugs (payments) will not merely determine whether Americans invest in paper or gold. It will determine whether this nation shall be free or slave.