Vigilant Investor

Frequent Kudlow guest, Jerry Bowyer, published a piece today over at Town Hall that would appear to compound prevailing myths regarding the history of the gold monetary standard, as well as the present misinterpretation of the meaning of $800-plus gold. While tipping his hat to the Austrian / Misesian views on currency, like so many other pundits, Bowyer seems to not fully comprehend what Mises was saying. His piece also is filled with a few non sequiturs, and I’ll try to hit on a few of them.

I should, however, point out that I am a proponent of free market chosen currencies as opposed to fiat paper currencies. Those sentiments are bracketed by my ardent stance against dishonest currencies that are printed from thin air by people who’ve sacrifice nothing to attain this sudden purchasing power which is, in no uncertain terms, functionally stolen from those already storing their wealth in units of the currency! My general belief is that currencies left to the market’s choice will naturally become backed by something other than empty promises or debt, as is the current system. Be it gold, silver, or some other commodity that cannot be manipulated — I’m fine with it… so long as the public retains the right to choose or reject it!

Now, down to business. First, I give Bowyer credit for criticizing the unbacked fiat currency model and the possible motives behind why Keynes’ monetary views were chosen over those of Mises at the start of the 1900s. Notes Bowyer,

“They (governments) wanted inflation—because they believed that inflation would make people feel wealthier than they really were, and thereby trick them into spending more than they otherwise would. This argument was advanced most effectively by a British economist named John Maynard Keynes. Free market economists quickly saw the flaw in Keynes’ argument—that eventually people figure out that they’ve been tricked and respond by cutting back on spending. Economists such as Ludwig Von Mises accurately predicted that this would set up a cycle of boom and bust. They were proved right by the Great Depression, and ever since then conservative economists have defended gold against its liberal detractors.”

I’d add to that an observation attributed to Mayer Amschel Rothschild: “Give me control of a nation’s money and I care not who makes the laws.” Now, some will argue about the authenticity of the comment, but there’s an obvious and very profitable motive behind being anointed the official party to engage in what is tantamount to legalized counterfeiting! Bankers love making profits by deal-making with such money, and politicians clearly love being able to spend our wealth without having to tax citizen-voters in order to get it! That is why fiat currency, bankers, and politicians make excellent bedfellows.

Moving on, though, just the same, Bowyer criticizes the reality that the quantify of gold should vary in its own rate of growth relative to the economy. Bowyer continues his point from above,

“For example, after Christopher Columbus discovered the New World, European conquerors swept through Central America and plundered its gold. The yellow metal flowed back across the Atlantic by the boatload for the entire 16th Century. The explorers had found an extremely efficient way of producing gold—by stealing it. However, the economy of Europe had not been as successful at finding highly efficient ways of producing any other goods and services. Not surprisingly, prices exploded upward, destabilizing both Europe’s prices, and its political systems.”

Mr. Bowyer, that is not an argument against gold standards!! You’ve provided a lesson on the ills of government manipulation of money supply!

The Spanish Empire’s theft of gold created such and inflationary boom thanks to the perceived growth in wealth that its citizens experienced — what, with all that new gold circulating around, everyone must be getting rich, right?

Hardly! When the supply of the currency is increased in such a way, the currency is just as debased (and economic activity becomes just as perverted) as when a Central Bank enables a reckless housing bubble to blow through the roof due to a massive expansion of credit and money! The Spanish have yet to fully recover from such folly, and the United States seems hell-bent on following them down a related path to ruin. (In defense of the Conquistadors, at least they had to do some work to steal all that gold. Today’s central bankers and the associated banking cartel need only press a few keys on the keyboard and ** Poof! ** $ Billions suddenly appear with purchasing power confiscated from you and me!)

Bowyer continues,

“The opposite occurred in the 19th Century. For example, the 1830s were characterized by enormous explosions in wealth generation in the English-speaking world due to the commercial application of railroads. But gold supplies did not expand at the same pace. Goods increased, gold didn’t, and price deflation was the result…

What the heck is the problem with a currency getting stronger and the resulting drop in prices??? The natural state of prices in a non-hampered free market is for them to continuously decline vs. a stable currency. This is what all of us should want: MORE PURCHASING POWER! That equals more wealth.

Such is the primary purpose of an entrepreneur – to find efficiencies where none existed previously in order to bring consumers an improved price for a quality good versus what could previously be acquired, and in doing so, earn a profit. Hence, I cannot find any legitimate reason to support the belief that dropping prices serves as justification for an ever expanding / inflationary money supply, or for that matter, the inadequacy of a gold standard. (However, when it comes to asset prices that are are dependent on / addicted to ever expanding money to support existing levels and future growth, I can fully understand why so many major players are terrified of asset deflation! Just look at what’s transpired with excessive leverage mixed into dramatically over-priced mortgage backed securities!)

Continues Bowyer,

“…In fact, it wasn’t until 1849 and the discovery of gold in California by the now-famous 49ers that this long drought of deflation ended.”

True enough, the supply of gold can increase in such examples. But, again, the gold in this case is backed by sacrifice and labor, and then exchanged for similarly created goods and services into the economy, much unlike fiat paper currency invented from thin air! Nonetheless, through history such “gold rushes” are found to be a rare occurrence, and will probably occur less frequently going forward as more of the earth is conclusively searched for deposits. Moreover, in no way has such an expansion of supply ever reached the proportions of what fiat unbacked currencies are capable of.

…I could multiply examples, and so could you if you simply went to Google and typed in the words ‘panic of’. You will learn about the panic of 1837, the panic of 1893, and 1907. And of course we all know about the panic of 1929.“

I fail to comprehend the association of the phrase “the panic of” being related to an increasing supply of gold when, if you study the many “panics of” you’ll find that one after the other was the consequence of bankers fraudulently issuing more paper claims to gold than they actually held in storage.

Don’t forget, back in those days prior to the Fed and FDR, the U.S. dollar, by definition, was $20 to the ounce of gold. Dollar notes were issued by banks and not governments. Yet, for centuries, bankers have known that most people kept a good deal of their gold in storage as savings, trading as currency their dollar note claims to gold rather than the physical gold itself. Bankers – being in it for the money — have always been lured by the desire to earn extra profits by taking advantage of these stagnant reserves. Hence, it was quite common for them to print more of their own bank’s dollar notes ( more claims to gold) than they actually had in gold storage, and loan them out for interest. However, with more and more notes in circulation, this fraud could be discovered when such notes appeared too common. When exposed, the victimized note-holders would naturally make a run on the bank for their gold, leading to devastating panics — and banker bankruptcy! Note, the problem here is not gold, but exposed fraud that the system had legalized!

Another outright scam was often run by bankers would be to collude to print excess dollars to encourage expansion in the economy that would be entirely dependent on an inflationary supply of money. In other words, the expansion would far exceed anything the economy would have naturally supported precisely because the supply of cheaper money would not naturally tighten (driving up interest rates) to signal entrepreneurs that they needed to / would have to slow down. After reaching a certain point, these colluding fraudsters would contract the money supply (raising rates, calling loans, and reducing lending) which would then expose the very perversion in business investment they had encouraged, thus causing a bust in the economy. Then, those same bankers would step in and buy assets and collateral for pennies on the dollar while the suckered entrepreneurs and investors were crushed with massive losses.

This type of ploy was even used by Nicholas Biddle in his fight over the second central bank of the United States vs. Andrew Jackson. Jackson was a proponent of hard money, a stance further enhanced by the central-bank-induced boom and bust in agriculture, causing the panic of 1819. By the 1830s, faced with President Jackson’s refusal to recharter the central bank, Biddle — the bank’s president — deliberately used a tightening of the money supply to create a depression, causing financial turmoil for the unwitting masses in order to unseat Jackson’s presidency. (Biddle’s efforts failed, and when the bank failed several years after losing its central bank charter, Biddle was charged with fraud.)

Now, what on earth does such a history of panics have to do with gold standards, other than to suggest that fraud that defied the standard allowed for deceit, manipulation, and the creation of bubbles and panics?

No! Gold certainly can’t be blamed for the hard fact that governments and banking cartels (from the Rothschilds to the Morgans to the present day fat-cats) can’t be trusted with fiat currencies that always end up malleable to special interest and political / government whim. The purpose of the gold standard / bimetallism / free market chosen currency is that it prevents such manipulation and the outright confiscation of wealth that fiat currency allows. Furthermore, a backed currency and the associated market-force-determined interest rates forces economies to live within their means — thus preventing the very boom / bust cycle central bankers and policy makers purport to fight. Moreover, unbacked fiat currency is throughout history a license for those in power to counterfeit and cause mayhem.

That is what the gold standard is supposed to prevent. A currency is a store of wealth and should not be devalued by endless inflationary printing. One need only look at the U.S. dollar supply since the Fed came to be and note the illegalization of gold under FDR, as well as the demise of the gold-standard with the Nixon Default in the early 70s. Doing so, you’ll clearly see a history of bankers making $ billions by printing currency backed by nothing, leading to severe, reckless dislocations in the financial systems and then bailouts for profiteers and victims alike.

What am I missing? On one hand the Bowyer types criticize the Keynesians and our modern neo-Keynesians for stealing wealth with inflation, and then they mish-mash their economic history by criticizing the gold standard for not allowing it.

Finally, as for the price of gold and its abilities as an inflationary indicator, which Bowyer leads off his piece, we should remind our readers about crowd-psychology and its influence on economies and markets. While, these days, many consultants, economists, and analysts worship on the alter of the Efficient Market Hypothesis, our blog has been entirely devoted to pointing out that the conventional wisdom on such subjects can often be outside the boundaries of popularly perceived reality.

As such, the crowd’s influence on economies and, therefore, markets, is much like Wiley Coyote of Warner Brothers cartoon fame, who is capable of running onward and defying gravity so long as he isn’t aware that he’s actually run off the edge of a cliff.  Poor Wiley eventually suffers his plummeting fate, but only after looking down to realize his true circumstances.

Similarly, the the masses, comforted by the safety of their peers, often fail to recognize their own economic reality and continues on the popular trajectory long after the road has curved.  That belief system is supported in our current environment by those dependent on the status quo on Wall Street and in Washington D. C.  The dollar drop relative to gold, as well as versus other hard assets such as oil, suggest a sharp turn in the road began sometime back in early 2000.

So, while Bowyer raises the valid question of gold’s present value as an inflationary indicator, he loses that focus somewhere in the article with tangents that address the value of a gold standard, and then gold’s value-relationship to modern economic drivers — As if gold had not previously encountered global trade or fresh technology.

That’s not to dismiss the impact such developments have in relationship to economic change. But, this analyst believes diverting the meaning of $811 gold (which days ago was testing its 1982 highs by flirting with $840)  into such a conversation fails to consider the real and hard impact of what’s transpired with the massive expansion of unbacked fiat dollars and credit since the demise of the gold standard in 1971, as noted in this and prior graphs.

Moreover, again, I can’t help but look at the dollar’s relationship to other things that can’t be created so easily as expanding credit and money supply– things like oil, commodities, agriculture, etc.  Oil nearing $100 combined with the price of gold,  combined with countless other examples of the dollar losing value — if that’s not inflation, then what is?

The broader, popular dismissal of the role of gold reveals a multi-generational disconnect from the importance of a reliable currency.  Outside of Western nations, people are far more tuned-in to what can happen with currency inflation, and they understand that measuring wealth and investment returns in terms of a national currency alone is naive. Many have been time and again victimized by their local financial ministries of truth, whose statistics always overstate economic growth and understate real inflationary pressures. In that context, we encourage readers to question the validity and relevance of popular government produced CPI and GDP figures.

Moreover, my read on what is unfolding is that the world is coming to terms with the fact that the U.S. has abused the role of the dollar in Bretton Woods II as the world’s currency standard.

As such, the consumer and governments of the U.S. are addicted to cheap debt to such a degree that they’ve grown to feel entitled to it. As foreigners come to terms with the errors of their ways — and attempt to figure out what to do with $ trillions of reserves that are losing value to other currencies and hard assets alike — that is the economic swamp in which we are bogged down in at the moment.

That said, gold’s price is suggesting that the pricing mechanism is well out of whack for all the reasons mentioned above. With so many severe dislocations having been encouraged by massive global credit and money supply expansions, those relationships are out of order. Increasingly the world is worried about fiat currencies and especially the U.S. dollar. Efficient market believers will dismiss gold as the irrelevant relic of fringe kooks, pointing to other rising asset prices — but many of those same critics failed to comprehend the implications of the housing and credit bubbles, or foresee that it would lead to the severe credit lock up and insolvency crisis we’re now facing.

Whether gold’s price is good sign or an ill-omen depends on the decisions you are making. Understanding what these relationships mean is crucial to correct business and investment decision making. The train is leaving the station!

In closing, we throw in these recent graphs as a reminder to our readers about relationships and pricing mechanisms.

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