Reason #1 to Keep Buying That Gold

[goodasgold]

Yes, the skeptics keep laughing at us, but someday (I don't pretend to know when) the cows have to come home and begin depositing some very unpleasant materials in the national (and global) living room:

http://www.forbes.com/sites/thomasdelbe ... -of-cards/

Before our "leaders" get a clue and solve it by taxing us savers at 75% rates, not to mention raising the collectibles tax rate to 90% before confiscating our gold (again), let's hope we have a few good years enjoying the benefits of our PP wisdom and frugality. 

[MediumTex]

Why would a politician or central banker want to go back to a gold standard?

That's something I have never understood when talking about confiscation scenarios.

Big spending politicians and inflationary monetary policies by central banks don't work very well under a gold standard.

Always trust politicians to act in their own self-interest and a gold standard is simply not in the self-interest of most politicians.

[Libertarian666]

Why would a politician or central banker want to go back to a gold standard?

That's something I have never understood when talking about confiscation scenarios.

Big spending politicians and inflationary monetary policies by central banks don't work very well under a gold standard.

Always trust politicians to act in their own self-interest and a gold standard is simply not in the self-interest of most politicians.

It's not that they will want to go back to a gold standard, it's that they will be forced to do so or no one will take their money. That's the way it has been in the past, at least.

[Pointedstick]

It's not that they will want to go back to a gold standard, it's that they will be forced to do so or no one will take their money. That's the way it has been in the past, at least.

That's interesting. Could you give a historical example? sort of embarrassingly unfamiliar with familiar with thie part of monetary history.

[Libertarian666]

Here's one example I could find fairly easily. It's oddly difficult to construct a Google query to locate such examples, for some reason, although I know this has happened on quite a few occasions:

http://rgrossman.web.wesleyan.edu/Resea ... 202009.pdf

Of course the US went back on the gold standard after the War Between the States as well.

[MediumTex]

Libertarian666,

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?

I am not aware of any country with a productive economy and very powerful military that has experienced a currency collapse, other than following a war that it lost.

With the U.S., we are talking about the largest economy in the world, most powerful military in the world, largest bond market in the world, world reserve currency, very productive workforce, vast natural resource deposits, etc.  Is it realistic to imagine that this country would experience a currency collapse?  Under a currency collapse scenario, wouldn't the resulting spike in every other currency in the world as money exited the dollar basically turn the U.S. economy overnight into the strongest exporting nation in the world?  Would central banks in other countries REALLY allow this to happen?  Look at what the Swiss central bank did in 2011 in response to perhaps 1% of the scenario I am describing where the franc was experiencing modest appreciation in relation to other world currencies.

[Libertarian666]

Libertarian666,

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?

I am not aware of any country with a productive economy and very powerful military that has experienced a currency collapse, other than following a war that it lost.

With the U.S., we are talking about the largest economy in the world, most powerful military in the world, largest bond market in the world, world reserve currency, very productive workforce, vast natural resource deposits, etc.  Is it realistic to imagine that this country would experience a currency collapse?  Under a currency collapse scenario, wouldn't the resulting spike in every other currency in the world as money exited the dollar basically turn the U.S. economy overnight into the strongest exporting nation in the world?  Would central banks in other countries REALLY allow this to happen?  Look at what the Swiss central bank did in 2011 in response to perhaps 1% of the scenario I am describing where the franc was experiencing modest appreciation in relation to other world currencies.

I'm sure that the other countries would start printing even more wildly if that happened, so it's entirely possible that the dollar would remain fairly stable against other currencies.

But there is one type of money that no one can print. I'll leave the rest of the analysis as an exercise for the reader.

[Bean]

Roman Empire, British Empire, etc.

I think the list is very extensive of the rise and fall of "empires" that at their peak had "the largest economy in the world, most powerful military in the world, largest bond market in the world, world reserve currency, very productive workforce, vast natural resource deposits, etc."

Each of them went through a civilization life-cycle that ended in the ultimate corruption of the currency.  That was either a direct cause or symptom of their fall from grace.

Currently reading "Currency Wars," but due to an ancient history kick, I can attest to historical accounts of currency corruption being a common theme.

[goodasgold]

Why would a politician or central banker want to go back to a gold standard?

That's something I have never understood when talking about confiscation scenarios.

Seizing the gold of us savers does not necessarily imply going back to the gold standard, it's just that desperate politicians will grab anything of value to gain a little more time. Kind of like junkies ripping the gold teeth out of their granny's mouth in order to get money for another fix.

The attitude of our "leaders" like Brown is, "Whaddya mean I'm driving us into bankruptcy! The banks still let me charge stuff on the credit card, don't they?"

[frommi]

Seizing the gold of us savers does not necessarily imply going back to the gold standard, it's just that desperate politicians will grab anything of value to gain a little more time. Kind of like junkies ripping the gold teeth out of their granny's mouth in order to get money for another fix.

The attitude of our "leaders" like Brown is, "Whaddya mean I'm driving us into bankruptcy! The banks still let me charge stuff on the credit card, don't they?"

To do what with the gold? This would not reduce the debt. To reduce debt longterm there are only two ways, inflation/financial repression or default. In the US the default is unthinkable, in the EU not. So propably we are a very long time in the situation where inflation is above short-term yields. This happened before in the history of the US, from 1934 to 1954. From 1942 to 1948 you would have lost 44% of your purchasing power in cash alone.

[MediumTex]

Roman Empire, British Empire, etc.

I think the list is very extensive of the rise and fall of "empires" that at their peak had "the largest economy in the world, most powerful military in the world, largest bond market in the world, world reserve currency, very productive workforce, vast natural resource deposits, etc."

Each of them went through a civilization life-cycle that ended in the ultimate corruption of the currency.  That was either a direct cause or symptom of their fall from grace.

Currently reading "Currency Wars," but due to an ancient history kick, I can attest to historical accounts of currency corruption being a common theme.

As I have said many times, all human institutions are transitory, including monetary arrangements.  This is tantamount to saying that all of our individual lives are transitory.  In other words, human institutions have life cycles just like we as individuals do.

Recognizing the basic truths above, however, is not a reason to go Chicken Little at any particular point in time.

If someone starts screaming "We're all gonna die!  We're all gonna die!" I might try to calm everyone down and reassure the speaker that his death probably wasn't imminent.  I would be doing this with the understanding that what he was saying was absolutely true--we are all gonna die, but that death is not necessarily imminent, and thus it's not something to freak out about today.

The currency collapse narrative often takes historical currency "collapse" events that took place over decades and seeks to compress them into a news cycle or perhaps a couple of years.  That seems unrealistic to me, and it tends to stir people up in a way that can make it hard to think clearly about the full range of potential economic scenarios.

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.

[MediumTex]

Why would a politician or central banker want to go back to a gold standard?

That's something I have never understood when talking about confiscation scenarios.

Seizing the gold of us savers does not necessarily imply going back to the gold standard, it's just that desperate politicians will grab anything of value to gain a little more time. Kind of like junkies ripping the gold teeth out of their granny's mouth in order to get money for another fix.

The attitude of our "leaders" like Brown is, "Whaddya mean I'm driving us into bankruptcy! The banks still let me charge stuff on the credit card, don't they?"

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.

[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.)