Reason #1 to Keep Buying That Gold

[Bean]

all human institutions are transitory

So yes, all currencies collapse sooner or later.  I just don't think that the collapse of the U.S. dollar is something to get too worked up about right now, but we all have 25% of our wealth in gold, so even if that were to occur we would be far more protected than most other investors, so it still doesn't seem like something that is worth getting worked up about.

Not suggesting the US currency collapse is imminent, just the probability is increasing at a rate that I not comfortable with.  Which is why the 25% allocation to gold drew me to the permanent portfolio.  It has strong logic behind its incorporation and soothes my crazy currency fears.

[AdamA]

What do you think about the idea that since the early 1970s the U.S. has basically been on an "Oil and Guns" standard in which the U.S. military is used to keep world oil supplies flowing in exchange for oil producing states maintaining the petrodollar regime, which provides international structural support for the dollar?

Would you mind expanding on this a little bit.  It's an idea I've always found interesting, but haven't really been able to achieve anything more than a vague understanding of.

[goodasgold]

Yes, all human institutions are transitory, but some are more transitory than others. Why rush things by means of the irresponsible policy of piling up debts to the point when they are unpayable?

The specter of America's future bankruptcy (unless we take drastic action to impede it) is not a hazy mirage in the distance. It is happening right now in places such as Detroit. According to an article in today's paper, some people in Detroit do not bother any more to call 911 when they need an ambulance. They know that saving a person's life depends on getting private transportation to the Emergency Room.

Why wouldn't the government just borrow more money (from itself, if necessary)?  That's what it's been doing for about 30 years now when it wanted to spend more than it took in through taxation.

I have the highest respect for you, MT (otherwise I wouldn't have invested in the PP.) But I have the impression, with regard to America's approaching financial crisis, that you may have been lulled into complacency by the financial snake oil being peddled by folks like Paul Krugman, who is one of "Moonbeam" Brown's chief adulators for allegedly "balancing" California's budget.

As for the government borrowing more money from itself, wasn't this tried as long ago as the American Revolution, with disastrous results? And what use is printing additional reams of money, with ever more zeros at the end of each number, if nobody will accept them? See:

http://www.google.com/search?gs_rn=19&g ... B573%3B297

[MediumTex]

Yes, all human institutions are transitory, but some are more transitory than others. Why rush things by means of the irresponsible policy of piling up debts to the point when they are unpayable?

What do you mean by unpayable?  We are talking about fiat currency here.  It's just an abstraction.  There is no limit to it, other than the limits imposed by inflation, but inflation is not a concern if private sector credit is contracting at the same rate that government debt is expanding.

The specter of America's future bankruptcy (unless we take drastic action to impede it) is not a hazy mirage in the distance. It is happening right now in places such as Detroit. According to an article in today's paper, some people in Detroit do not bother any more to call 911 when they need an ambulance. They know that saving a person's life depends on getting private transportation to the Emergency Room.

States or municipalities can easily go broke because they don't control the currency that their debts are denominated in.  The federal government is not under similar constraints.  If the federal government were under similar constraints I would completely agree with you.

Why wouldn't the government just borrow more money (from itself, if necessary)?  That's what it's been doing for about 30 years now when it wanted to spend more than it took in through taxation.

I have the highest respect for you, MT (otherwise I wouldn't have invested in the PP.) But I have the impression, with regard to America's approaching financial crisis, that you may have been lulled into complacency by the financial snake oil being peddled by folks like Paul Krugman, who is one of "Moonbeam" Brown's chief adulators for allegedly "balancing" California's budget.

I can't speak to California's situation (other than my comment above about state finances), but when it comes to the federal government I don't know what approaching financial crisis you are talking about.  Wouldn't such a financial crisis (presumably related to public debt) be preceded by rising interest rates on treasuries, sort of like we saw in Greece a couple of years ago?  I just don't see anything like that happening at all right now.

As for the government borrowing more money from itself, wasn't this tried as long ago as the American Revolution, with disastrous results? And what use is printing additional reams of money, with ever more zeros at the end of each number, if nobody will accept them?

If nobody would accept them, you would be right, but they are accepting them, and when things get bad people run to the dollar, not away from it.

See what happened in 2008 when it looked like the world was ending.  The dollar shot up, not down.

[goodasgold]

What do you mean by unpayable?  We are talking about fiat currency here.  It's just an abstraction.  There is no limit to it, other than the limits imposed by inflation, but inflation is not a concern if private sector credit is contracting at the same rate that government debt is expanding....States or municipalities can easily go broke because they don't control the currency that their debts are denominated in.  The federal government is not under similar constraints.  If the federal government were under similar constraints I would completely agree with you.
...I can't speak to California's situation (other than my comment above about state finances), but when it comes to the federal government I don't know what approaching financial crisis you are talking about.  Wouldn't such a financial crisis (presumably related to public debt) be preceded by rising interest rates on treasuries, sort of like we saw in Greece a couple of years ago?  I just don't see anything like that happening at all right now.

As for the government borrowing more money from itself, wasn't this tried as long ago as the American Revolution, with disastrous results? And what use is printing additional reams of money, with ever more zeros at the end of each number, if nobody will accept them?

If nobody would accept them, you would be right, but they are accepting them, and when things get bad people run to the dollar, not away from it.

See what happened in 2008 when it looked like the world was ending.  The dollar shot up, not down.

Once again, just because the world has prized U.S. dollars in the past does not mean they will necessarily accept them in the future. At one time the people of Zimbabwe were willing to accept Zim dollars, until the printing presses began running around the clock.

Once upon a time, the British were supremely confident that the pound would rule the world unchallenged. Look what happened. One possible scenario can be seen in recent developments in Australia, where the Aussie government has agreed to accept Chinese yuan as a medium of exchange instead of first converting transactions into U.S. dollars. Unless we change our ways, "Zimbabwe here we come." Enough said.

[Bean]

With 25% of our portfolio in gold, I think we are good.  If I read my history correctly, in Weimar Germany you could buy a city block with 2 oz. of gold. 

[WildAboutHarry]

The history of British coins in the 20th Century is interesting.

Prior to WWI, 92.5% silver (Sterling) 3p, 6p, shillings, florins, half-crowns, etc.

After 1919, 50% silver.

After WWII, no silver.

Kind of fiat in a metal-money product.

[MediumTex]

Once again, just because the world has prized U.S. dollars in the past does not mean they will necessarily accept them in the future. At one time the people of Zimbabwe were willing to accept Zim dollars, until the printing presses began running around the clock.

Once upon a time, the British were supremely confident that the pound would rule the world unchallenged. Look what happened. One possible scenario can be seen in recent developments in Australia, where the Aussie government has agreed to accept Chinese yuan as a medium of exchange instead of first converting transactions into U.S. dollars. Unless we change our ways, "Zimbabwe here we come." Enough said.

How would you propose that we change our ways?

What is the U.S. doing that is so different from what the rest of the developed world is doing?

I once heard a smart person say that reserve currencies never collapse, they are "decommissioned."  This process will obviously occur with the U.S. dollar one day, but who knows when that will happen?  It could be ten years from now or a hundred years from now.  My point is that U.S. dollar collapse is not a sound investment thesis (IMHO) because so many other things may happen along the way before the dollar finally does collapse and I would hate to miss out on those other things while I patiently waited for the sky to fall.

That's the beauty of the PP--it allows you to profit from whatever the future may bring, including a currency crisis if that should come along in our investing careers.

[gizmo_rat]

The history of British coins in the 20th Century is interesting.

Prior to WWI, 92.5% silver (Sterling) 3p, 6p, shillings, florins, half-crowns, etc.

After 1919, 50% silver.

After WWII, no silver.

Kind of fiat in a metal-money product.

Yes it's a bit cheeky retaining the name Pound [of] Sterling, purchasing power has somewhat diminished over the centuries.

[goodasgold]

How would you propose that we change our ways?

What is the U.S. doing that is so different from what the rest of the developed world is doing?

I once heard a smart person say that reserve currencies never collapse, they are "decommissioned."  This process will obviously occur with the U.S. dollar one day, but who knows when that will happen?  It could be ten years from now or a hundred years from now.... That's the beauty of the PP--it allows you to profit from whatever the future may bring, including a currency crisis if that should come along in our investing careers.

We can begin by living within our means and beginning to pay off our towering debt to support our credit rating. Americans are responsible for our own debt, regardless of how other nations are behaving or misbehaving.

And I am skeptical of assertions that the national debt is an abstraction. On a personal basis, what would happen the next time our mortgage, car or college tuition payments are due, if we assured our creditors that the debt is a mere abstraction? Bad things would happen, just as will happen the first time the U.S. government is forced to default on its debt, as Detroit and Illinois are in the process of doing, and as California and other spendthrift states will be forced to do in the future.

As to the argument that the federal government can merely run the printing presses around the clock to pay our debt, the game is up when creditors finally conclude that the U.S. dollar, in terms of collapsing value, has joined the ranks of the Zimbabwe dollar or the Weimar deutschmark.

And I agree that the PP is a wise investment, but our profits will last only so long as an increasingly desperate government will allow us to keep them. We still have time to insist that the  government abjure its irresponsibility and get serious about retaining the confidence of the people willing to buy our funny money.

[Pointedstick]

goodasgold, I think you're missing a couple of things:

1. A government that controls its own currency can never run out of money, only trust.
1a. Just because YOU don't trust the government, doesn't mean that the markets won't.
2. Historical hyperinflations have been primarily political phenomena, resulting from losing wars, destroying domestic productive capacity, and owing debts denominated in foreign currencies.

As MT so often brings up, the idea that the dollar is going to collapse in value and creditors are going to angrily demand a superior stronger currency ignores the reality of the world we live in today, which consists of powerful, economically advanced countries trying to devalue their currencies. If the dollar collapses, that would require a new world reserve currency. Who's gonna provide it? The Euro? I think not. The Yen? No way. The Yuan? I'm sure China would like that, but I don't see it happening.

Again, I'm not saying that none of your predictions will ever happen. But if they happen in 40 years, I don't want to spend that time worrying about collapse and losing out on investment performance. 40 years is a long time. By that point, my son will be reaching middle age!

[Bean]

Playing the hypothetical game...

If I were China and within a year or two would have enough gold to back my currency.  Then I would, and instantly become the world reserve currency.

The US doesn't have to be the reason the dollar falls from grace, China could very easily make that happen in the here and now.

[Libertarian666]

Playing the hypothetical game...

If I were China and within a year or two would have enough gold to back my currency.  Then I would, and instantly become the world reserve currency.

The US doesn't have to be the reason the dollar falls from grace, China could very easily make that happen in the here and now.

Did you know that China is now the world's largest gold producer? And none of the gold they mine makes it to the world market; all of it is purchased by their central bank. I wonder why?

(By the way, I have already predicted that they would go on the gold standard sometime in the next few years.)

[Bean]

Did you know that China is now the world's largest gold producer? And none of the gold they mine makes it to the world market; all of it is purchased by their central bank. I wonder why?

(By the way, I have already predicted that they would go on the gold standard sometime in the next few years.)

Gold and most rare earth metals if I remember correctly.  They are also #1 or #2 for importing gold next to India.  If they want to make the play it is right in front of them and my two guesses; they are setting up a Mutually Assured Destruction currency cold war or are just flat out going for reserve status.

I suspect you and I read a lot of the same things 

[Pointedstick]

(By the way, I have already predicted that they would go on the gold standard sometime in the next few years.)

But what would that gain them?

[Libertarian666]

(By the way, I have already predicted that they would go on the gold standard sometime in the next few years.)

But what would that gain them?

Tremendous economic power.

[Pointedstick]

(By the way, I have already predicted that they would go on the gold standard sometime in the next few years.)

But what would that gain them?

Tremendous economic power.

Specifically how, though?

[Gumby]

If the dollar collapses, that would require a new world reserve currency. Who's gonna provide it? The Euro? I think not. The Yen? No way. The Yuan? I'm sure China would like that, but I don't see it happening.

The irony — and what few people ever realize — is that in order to be the world's reserve currency, a country with a debt-based fiat currency has to run an enormous deficit in order to create enough liquidity for the entire world (since money comes from debt in a debt-based monetary system). If that country ran an ongoing surplus, eventually it would make the currency too scarce and there wouldn't be enough liquidity for every country.

[Libertarian666]

But what would that gain them?

Tremendous economic power.

Specifically how, though?

In many ways. One of the most obvious is that they could set up a new version of SWIFT using their currency, preventing the US from interfering with their trade.
Also, they would be able to import whatever they want without having to earn dollars.
Need more? I'll come up with some additional ones later.

[Pointedstick]

Tremendous economic power.

Specifically how, though?

In many ways. One of the most obvious is that they could set up a new version of SWIFT using their currency, preventing the US from interfering with their trade.
Also, they would be able to import whatever they want without having to earn dollars.
Need more? I'll come up with some additional ones later.

True, but none of that requires that they have a big-ass pile of gold. They's just have to defeat our efforts to stop them, whether those efforts be political, military, economic, espionage, or whatever.

Put perhaps another way: if all the gold in the Fed's vaults suddenly disappeared, would the USA either stop having the world's reserve currency, or experience any meaningful stress in its efforts to maintain that position?

[Libertarian666]

Specifically how, though?

In many ways. One of the most obvious is that they could set up a new version of SWIFT using their currency, preventing the US from interfering with their trade.
Also, they would be able to import whatever they want without having to earn dollars.
Need more? I'll come up with some additional ones later.

True, but none of that requires that they have a big-ass pile of gold. They's just have to defeat our efforts to stop them, whether those efforts be political, military, economic, espionage, or whatever.

Put perhaps another way: if all the gold in the Fed's vaults suddenly disappeared, would the USA either stop having the world's reserve currency, or experience any meaningful stress in its efforts to maintain that position?

Even if that gold is still there, it is irrelevant because the dollar is irredeemable.

What I'm referring to when discussing a gold standard Chinese yuan is not an irredeemable paper currency, but a redeemable one, i.e., a real gold standard, in which each unit of currency would be 100% backed by physical gold that you could get if you wanted it. That is, if you had 1 million yuan (or whatever the number would be) you could turn it in for 100 g of gold (or whatever the number would be).

This would instantly make China the #1 economic power in the world, allowing them to import anything they wanted without needing to worry about their dollar balances.

[MediumTex]

What I'm referring to when discussing a gold standard Chinese yuan is not an irredeemable paper currency, but a redeemable one, i.e., a real gold standard, in which each unit of currency would be 100% backed by physical gold that you could get if you wanted it. That is, if you had 1 million yuan (or whatever the number would be) you could turn it in for 100 g of gold (or whatever the number would be).

This would instantly make China the #1 economic power in the world, allowing them to import anything they wanted without needing to worry about their dollar balances.

Let's think this through.

All countries in the world target an inflation rate in the low single digits.  If China did as you are suggesting, that would mean that the yuan would appreciate each year by a few percentage points in relation to all other world currencies, which would likely feel like a noose slowly tightening around the neck of China's vast export-oriented manufacturing sector. 

Why would they want to do that?

To date, China has been repeatedly chastised by the U.S. for being a "currency manipulator" because it has done all sorts of things to artificially depress the value of the yuan in order to strengthen its position as exporter to the world.

It seems like you are suggesting that China would decide to go in the exact opposite direction, but I don't understand how that could possibly be in China's self-interest.

[Pointedstick]

Even if that gold is still there, it is irrelevant because the dollar is irredeemable.

What I'm referring to when discussing a gold standard Chinese yuan is not an irredeemable paper currency, but a redeemable one, i.e., a real gold standard, in which each unit of currency would be 100% backed by physical gold that you could get if you wanted it. That is, if you had 1 million yuan (or whatever the number would be) you could turn it in for 100 g of gold (or whatever the number would be).

This would instantly make China the #1 economic power in the world, allowing them to import anything they wanted without needing to worry about their dollar balances.

Why would the Chinese want a 100% gold-backed reserve currency? That would mean that every time someone else in another country wanted to buy a Chinese bond, China would have to go mine some gold and put it in the Chinese central bank's vault. The whole point of being the world's reserve currency issuer is that you can create currency at will in response to international demand for liquidity and a safe place to put savings. Tying your currency to gold totally hamstrings that.

[moda0306]

Tech,

That kind of economic power would be extremely appealing to any central power.  Why would all of the world turn that down?

Countries can very, very quickly trade a medium of exchange for a store of value after a trade. It's much easier today than in 1776 or even 1933.

I tend to think that gold itself is definitely a tremendous asset to have in a portfolio. However, a gold standard is a barbarous relic.

I'd much rather have a currency be of the sovereign fiat variety, and understand its one risk is inflation, and hold the proper assets elsewhere on my balance sheet, then constantly be wondering whether the link to gold will hold up, and have none of my assets behaving properly in coordination with each other because of all the uncertainty surrounding what we are truly holding when we hold a yuan or dollar. A claim on 2 ounces of gold?  A claim on 1 ounce of gold someday soon?  A claim on nothing but with a foreign exchange window overseas?  A claim on nothing at all backed only by a taxation value-creating mechanism and our productive capacity? This is a recipe for economic disaster, unless the gold standard is so universally popular that no politician would dare to touch it.  Unless fiat currencies start to carry the public support of a holocaust, there would be WAY too much uncertainty built into a gold standard.  Is that self-fulfilling?  Sure.  But fiat really isn't that bad of a deal for most savvy people.

There are so many possibilities.  At least today our markets know there is no link and it can't change, so we can use the investment tools properly to buld a robust portfolio.

[MediumTex]

We can begin by living within our means and beginning to pay off our towering debt to support our credit rating. Americans are responsible for our own debt, regardless of how other nations are behaving or misbehaving.

What does "living within our means" mean when you are referring to government spending by the same government that issues the currency?  What is the "means" in that situation?  How would you know if you were living within it or not?

If you look back to when the U.S. government started running consistent budget deficits in the early 1980s, the economy has performed much better than in the previous years when the government sought to "balance the books."

And I am skeptical of assertions that the national debt is an abstraction. On a personal basis, what would happen the next time our mortgage, car or college tuition payments are due, if we assured our creditors that the debt is a mere abstraction? Bad things would happen, just as will happen the first time the U.S. government is forced to default on its debt, as Detroit and Illinois are in the process of doing, and as California and other spendthrift states will be forced to do in the future.

Even if the U.S. weren't a currency issuer (which it is), if you have the most powerful military in the history of the world with over 1,000 foreign military installations scattered all over the world, no creditor is going to shake you down for anything.  Take Saudi Arabia, for example.  Do you think that they would stop buying treasuries if they knew the effect would be to lose all U.S. military support in the event that they were attacked by a neighbor?

On another front, consider the 2011 S&P downgrade of U.S. debt.  How did that go?  Well, first, it caused interest rates to fall, not rise, which tells you what the market thinks about the ratings agencies, but perhaps more importantly within 18 months of the downgrade the U.S. government sued S&P for $5 billion, allegedly for ratings abuses related to the mortgage and housing market collapse, but it always seemed obvious to me that the lawsuit was the legal equivalent of a hellfire missile fired from a drone circling one of S&P's offices.  After all, the U.S. government hasn't sued any of the other ratings agencies.  Why not?

As to the argument that the federal government can merely run the printing presses around the clock to pay our debt, the game is up when creditors finally conclude that the U.S. dollar, in terms of collapsing value, has joined the ranks of the Zimbabwe dollar or the Weimar deutschmark.

In a debt based monetary system, you don't run the printing presses.  Most new money is created in the private credit markets.  I'm surprised that more people don't understand how this works.

As far as Zimbabwe goes, the hyperinflation there was mostly about capital flight triggered by government confiscation of property and the government's subsequent attempts to mask the effects of their own ill-conceived racially-driven theft of private property.  To compare Zimbabwe to the U.S. seems silly to me.

And I agree that the PP is a wise investment, but our profits will last only so long as an increasingly desperate government will allow us to keep them. We still have time to insist that the  government abjure its irresponsibility and get serious about retaining the confidence of the people willing to buy our funny money.

Is the U.S. government desperate?  What would it be desperate about?

I mean this respectfully, but your points sound like they were lifted from a Bill O'Reilly rant.  Basically, none of the stuff you are saying has any basis in reality, other than in the minds of a media that likes to keep people stirred up about something at all times.

Look into the matters you are discussing in more depth and you may find that the economic ideas that the mainstream media and people like Peter Schiff are spreading are simply wrong in many cases.

Gold is an important part of the PP, but for reasons that are more subtle than the "U.S. is broke" or "Dollar is about to collapse" narratives that people like to spread to sell books and keep viewers.