Reason #1 to Keep Buying That Gold

Discussion of the Gold portion of the Permanent Portfolio

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moda0306
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Re: Reason #1 to Keep Buying That Gold

Post by moda0306 » Wed Jul 10, 2013 11:07 am

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.
"Men did not make the earth. It is the value of the improvements only, and not the earth itself, that is individual property. Every proprietor owes to the community a ground rent for the land which he holds."

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Re: Reason #1 to Keep Buying That Gold

Post by MediumTex » Wed Jul 10, 2013 11:31 am

goodasgold wrote: 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. 
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Re: Reason #1 to Keep Buying That Gold

Post by Gumby » Wed Jul 10, 2013 12:45 pm

goodasgold wrote:We can begin by living within our means and beginning to pay off our towering debt to support our credit rating.
In a debt-based monetary system, "paying down the debt" is a terrible idea — unless the private sector is fully employed and flooded with liquidity (in which case paying down the debt is necessary to prevent inflation). Since all our money comes from debt issuance paying down the debt would just suck money out of the private sector — which makes absolutely no sense when people need liquidity and the high-powered money is just being issued from unlimited fiat paper debt in the first place.

So, this idea that a government surplus is somehow prudent is nothing more than a recipe for economic disaster.

Mosler explains...
Al Gore

Early in 2000, in a private home in Boca Raton, FL, I was seated next to then-Presidential Candidate Al Gore at a fundraiser/dinner to discuss the economy. The first thing he asked was how I thought the next president should spend the coming $5.6 trillion surplus that was forecasted for the next 10 years. I explained that there wasn't going to be a $5.6 trillion surplus, because that would mean a $5.6 trillion drop in non-government savings of financial assets, which was a ridiculous proposition. At the time, the private sector didn't even have that much in savings to be taxed away by the government, and the latest surplus of several hundred billion dollars had already removed more than enough private savings to turn the Clinton boom into the soon-to-come bust.

I pointed out to Candidate Gore that the last six periods of surplus in our more than two hundred-year history had been followed by the only six depressions in our history. Also, I mentioned that the coming bust would be due to allowing the budget to go into surplus and drain our savings, resulting in a recession that would not end until the deficit got high enough to add back our lost income and savings and deliver the aggregate demand needed to restore output and employment. I suggested that the $5.6 trillion surplus which was forecasted for the next decade would more likely be a $5.6 trillion deficit, as normal savings desires are likely to average 5% of GDP over that period of time.

That is pretty much what happened. The economy fell apart, and President Bush temporarily reversed it with his massive deficit spending in 2003. But after that, and before we had had enough deficit spending to replace the financial assets lost to the Clinton surplus years (a budget surplus takes away exactly that much savings from the rest of us), we let the deficit get too small again. And after the sub-prime debt-driven bubble burst, we again fell apart due to a deficit that was and remains far too small for the circumstances.

For the current level of government spending, we are being over-taxed and we don't have enough after-tax income to buy what's for sale in that big department store called the economy.

Anyway, Al was a good student, went over all the details, agreeing that it made sense and was indeed what might happen. However, he said he couldn't "go there." I told him that I understood the political realities, as he got up and gave his talk about how he was going to spend the coming surpluses.


Source: Seven Deadly Innocent Frauds of Economic Policy
Interestingly, this was even true before we went off the gold standard. It's not a coincidence that every depression in our nation's history was preceded by a government surplus (a government surplus often comes from a private sector deficit).
L. Randall Wray wrote:“With one brief exception, the federal government has been in debt every year since 1776. In January 1835, for the first and only time in U.S. history, the public debt was retired, and a budget surplus was maintained for the next two years in order to accumulate what Treasury Secretary Levi Woodbury called “a fund to meet future deficits.”? In 1837 the economy collapsed into a deep depression that drove the budget into deficit, and the federal government has been in debt ever since. Since 1776 there have been exactly seven periods of substantial budget surpluses and significant reduction of the debt. From 1817 to 1821 the national debt fell by 29 percent; from 1823 to 1836 it was eliminated (Jackson’s efforts); from 1852 to 1857 it fell by 59 percent, from 1867 to 1873 by 27 percent, from 1880 to 1893 by more than 50 percent, and from 1920 to 1930 by about a third. Of course, the last time we ran a budget surplus was during the Clinton years. I do not know any household that has been able to run budget deficits for approximately 190 out of the past 230-odd years, and to accumulate debt virtually nonstop since 1837.

The United States has also experienced six periods of depression. The depressions began in 1819, 1837, 1857, 1873, 1893, and 1929. (Do you see any pattern? Take a look at the dates listed above.) With the exception of the Clinton surpluses, every significant reduction of the outstanding debt has been followed by a depression, and every depression has been preceded by significant debt reduction. The Clinton surplus was followed by the Bush recession, a speculative euphoria, and then the collapse in which we now find ourselves. The jury is still out on whether we might manage to work this up to yet another great depression. While we cannot rule out coincidences, seven surpluses followed by six and a half depressions (with some possibility for making it the perfect seven) should raise some eyebrows. And, by the way, our less serious downturns have almost always been preceded by reductions of federal budget deficits. I don’t know of any case of a national depression caused by a household budget surplus.”?


Source: http://www.nakedcapitalism.com/2010/02/ ... s-why.html
Last edited by Gumby on Wed Jul 10, 2013 1:04 pm, edited 1 time in total.
Nothing I say should be construed as advice or expertise. I am only sharing opinions which may or may not be applicable in any given case.
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Re: Reason #1 to Keep Buying That Gold

Post by Pointedstick » Wed Jul 10, 2013 12:57 pm

In fact, by definition, a government surplus has to originate from a deficit in the private sector. Think about it:

Government taxes its people $100.

Government spends $90 on goods produced by the domestic economy (things like weapons, junkets to Vegas, and subsidizing unsustainable lifestyles).

Result: resources have been reallocated, the government posts a surplus, and the private sector is net $10 poorer.
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Re: Reason #1 to Keep Buying That Gold

Post by Gumby » Wed Jul 10, 2013 1:11 pm

Pointedstick wrote: In fact, by definition, a government surplus has to originate from a deficit in the private sector. Think about it:

Government taxes its people $100.

Government spends $90 on goods produced by the domestic economy (things like weapons, junkets to Vegas, and subsidizing unsustainable lifestyles).

Result: resources have been reallocated, the government posts a surplus, and the private sector is net $10 poorer.
Correct. Now paying down this some of the government debt can be a good idea in a situation where inflation is on the rise as private credit is gets out of control and everyone has a job. But, the simplistic idea of paying down fiat debt — just to be prudent and feel good about it — is a terrible idea.

Mind you, I totally sympathize with the evils/problems of government spending. But that's a whole other problem that requires other solutions (citizens dividends, tax elimination, etc).
Nothing I say should be construed as advice or expertise. I am only sharing opinions which may or may not be applicable in any given case.
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Re: Reason #1 to Keep Buying That Gold

Post by tennpaga » Wed Jul 10, 2013 1:15 pm

Pointedstick wrote: In fact, by definition, a government surplus has to originate from a deficit in the private sector.
This can be fleshed out a little more (which I know you know PS, but I wanted to chime in).

In what follows, think of every term as being a positive number.

By definition...
  government deficit = non-government surplus.

And
  non-government surplus = private domestic surplus + foreign surplus

But a "foreign surplus", viewed from the U.S. perspective, is the U.S. trade deficit.  Therefore:

  government deficit = private domestic surplus + trade deficit

Some implications of this:

* If we want to decrease the government deficit, the sum of private domestic surplus and trade deficit have to decrease as well.

* If we want private domestic surplus to be greater than zero, the government deficit must be at least equal to the trade deficit.
Last edited by tennpaga on Wed Jul 10, 2013 1:54 pm, edited 1 time in total.
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* Gresham's corollary: Avoid participating in systems where good behavior cannot win.

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Re: Reason #1 to Keep Buying That Gold

Post by goodasgold » Wed Jul 10, 2013 2:02 pm

MediumTex wrote: 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?...
Is the U.S. government desperate?  What would it be desperate about?
Ozymandias

I met a traveller from an antique land
Who said: `Two vast and trunkless legs of stone
Stand in the desert. Near them, on the sand,
Half sunk, a shattered visage lies, whose frown,
And wrinkled lip, and sneer of cold command,
Tell that its sculptor well those passions read
Which yet survive, stamped on these lifeless things,
The hand that mocked them and the heart that fed.
And on the pedestal these words appear --
"My name is Ozymandias, king of kings:
Look on my works, ye Mighty, and despair!"
Nothing beside remains. Round the decay
Of that colossal wreck, boundless and bare
The lone and level sands stretch far away.'
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Re: Reason #1 to Keep Buying That Gold

Post by MediumTex » Wed Jul 10, 2013 2:11 pm

goodasgold wrote:
MediumTex wrote: 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?...
Is the U.S. government desperate?  What would it be desperate about?
Ozymandias

I met a traveller from an antique land
Who said: `Two vast and trunkless legs of stone
Stand in the desert. Near them, on the sand,
Half sunk, a shattered visage lies, whose frown,
And wrinkled lip, and sneer of cold command,
Tell that its sculptor well those passions read
Which yet survive, stamped on these lifeless things,
The hand that mocked them and the heart that fed.
And on the pedestal these words appear --
"My name is Ozymandias, king of kings:
Look on my works, ye Mighty, and despair!"
Nothing beside remains. Round the decay
Of that colossal wreck, boundless and bare
The lone and level sands stretch far away.'
If you haven't read "TIPSymandias", you should do so.

Note, too, that in Ozymandias above, if the traveler had read on the inscription that Ozymandias had left a chest of gold buried under the statue, it would still be there and still be valuable, regardless of the fate of Ozymandias's other endeavors.  This is the position of every PP investor, and in this way the lessons from Ozymandias would not be applicable.  The purpose of "TIPSymandias" was to highlight the foolishness of substituting TIPS for gold in the PP.

I couldn't agree with you more about the long term fate of all human institutions (and of humans as well), but that doesn't help any of us with investment decisions over shorter time horizons.

"TIPSymandias":
I met a traveller from an antique land
Who said: I have seen a curious bond
This bond made a promise rare among men and kings,
Backed by full faith and credit
The bond made it clear to all who bought, purchasing power is safe
Those who look upon the bond are counseled to take comfort
That which is will always be, a promise made is a promise kept,
And other assorted platitudes and assurances.
On the back of the bond these words appear:
"Inflation is tamed for all time!
Gold is barbarous and obsolete, inflation look upon this mighty bond and despair!"
No record of the issuer of the bond remains. Round the decay
Of this curious promise, boundless and bare
The lone and level sands of change stretch far away.
Only strength can cooperate. Weakness can only beg.
-Dwight Eisenhower
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Re: Reason #1 to Keep Buying That Gold

Post by Pointedstick » Wed Jul 10, 2013 4:42 pm

All of these discussions seem to revolve around the prediction that the USA will experience some sort of dramatic currency collapse within our lifetimes, and probably sooner rather than later.

The problem isn't that I don't believe that such a thing can occur, but the people who predict this have been doing so since the 1980s and they've been wrong so far. "So far" in this context is 30 years, which is close to an individual's entire career. So following this advice at any time in the past would have resulted in missing out on a lot of stock and bond gains, and an awful lot of worry about something that still hasn't happened.

I'm sure the USA will fall sooner or later. I just don't have confidence that it will happen within my own lifetime or that it will be a dramatic, overnight event. Maybe it will, maybe it won't. And it it does, my 25% slug of gold is going to keep me a lot happier than almost everyone else.
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Re: Reason #1 to Keep Buying That Gold

Post by frugal » Wed Jul 10, 2013 6:45 pm

Someone told me that the price of gold is made by UK and US.

The GOLD is moving from Ocident to ORIENT ( China, India ...)

So in the future when the interest in the gold finish, because UK and US have no more gold, the PRICE will go to near ZERO.

The real price will fall a lot at least, because they will no longer have high prices for Gold because it is on other hands...


Please explain how this works.
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Re: Reason #1 to Keep Buying That Gold

Post by MediumTex » Wed Jul 10, 2013 6:48 pm

frugal wrote: Someone told me that the price of gold is made by UK and US.

The GOLD is moving from Ocident to ORIENT ( China, India ...)

So in the future when the interest in the gold finish, because UK and US have no more gold, the PRICE will go to near ZERO.

The real price will fall a lot at least, because they will no longer have high prices for Gold because it is on other hands...

Please explain how this works.
That just sounds like one more dumb theory with little basis in reality and zero predictive value.
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Re: Reason #1 to Keep Buying That Gold

Post by technovelist » Wed Jul 10, 2013 6:59 pm

frugal wrote: Someone told me that the price of gold is made by UK and US.

The GOLD is moving from Ocident to ORIENT ( China, India ...)

So in the future when the interest in the gold finish, because UK and US have no more gold, the PRICE will go to near ZERO.

The real price will fall a lot at least, because they will no longer have high prices for Gold because it is on other hands...


Please explain how this works.
I'll be happy to buy all the gold you have at $100/oz so you won't have to worry about that.
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