Gyroscopic Investing

http://www.youtube.com/watch?feature=pl ... fzO_YhOYNQ

I shared this Youtube video titled "The Dumbest Thing Ever Said About Gold Investments" on my facebook page.

Upon further reflection I am thinking maybe I should issue an apology because it is not so stupid after all.

Don't all of us here share her thinking to some extent? I mean, aren't we 50 percent in government securities (assuming Long and Short term bonds) and only 25 percent in gold?

jackh wrote: http://www.youtube.com/watch?feature=pl ... fzO_YhOYNQ

I shared this Youtube video titled "The Dumbest Thing Ever Said About Gold Investments" on my facebook page.

Upon further reflection I am thinking maybe I should issue an apology because it is not so stupid after all.

Don't all of us here share her thinking to some extent? I mean, aren't we 50 percent in government securities (assuming Long and Short term bonds) and only 25 percent in gold?

I almost posted something similar to what you're saying.  In many ways the US dollar is a much safer investment.

It's just the idea that gold isn't' "backed by anything" that is moronic.

AdamA wrote:It's just the idea that gold isn't' "backed by anything" that is moronic.

Well, Harry Browne essentially said that the fact that gold isn't backed by anything is what makes it appealing...

Here's Browne's own words about gold:

Most financial assets are obligations due to you. A bond, bank account, or Treasury bill is someone's promise to pay you a number of dollars. A stock is a piece of paper that entitles you to a share of a company's assets and profits — if any.

And unless you maintain a private army, even real estate is a paper promise — since its value depends on the government's restraint in respecting your deed, and on the performance of its promise to protect your property.

Gold is the only investment that stands on its own. It is real money — portable, independent, divisible, durable, and recognizable — and so it survives when everything else fails. Welcome in far more places and circumstances than your American Express card, it is the most reliable source of financial security.

That doesn't mean that gold will always have today's value. But it will always have some value — no matter what happens to governments or currencies.

It is your portfolio's asset of last resort.

Source: Harry Browne, Why The Best-Laid Investment Plans Usually Go Wrong, Page 321.

During times when promises aren't being kept, you want an asset with value that isn't backed by anything. That's the whole point.

Gumby wrote: During times when promises aren't being kept, you want an asset with value that isn't backed by anything. That's the whole point.

Gold itself is the ultimate backing...but that is clearly not the point the woman in the video is trying to make.

I think what she is toutching upon is how the whole edifice of wealth in any form is simply a social construct. Everyone is only as rich as the rest of the world recognises them as being. Gold would probably only be worth $50/ounce  as a purely industrial commodity. Perhaps with the huge stocks we have now it might dip below that if bizarrely people stopped seeing it as money. It is money but without taxation to impart value on it. The USD does have a value backstop from the fact that USD are the only thing you can pay US taxes with. Gold as money relies on the greater fool principle that someone will buy it from you in the hope that someone will buy it off them. That has held up perfectly for 5000 years .

Gold is backed by dollars - if you own American Gold Eagles, old double eagles, etc.

Sovereigns by British pounds (I think).

Swiss gold francs by the Swiss franc.

Etc.

It certainly isn't a very favorable exchange rate, but it does provide a floor of sorts for legal tender coins in the event gold became an industrial metal and the price plummeted.  At stone's $50 per ounce for gold the face value of a one-ounce gold American Eagle would be at parity with the dollar

Gold's appeal, as already stated, is that it stands on its own. It doesn't need the approval of a government behind it. The free markets, the most efficient pricing mechanism on the planet, will always hold it as valuable barring some future invention that makes it so abundant that we can get all we want.

When you hear a reporter talking about why the markets did this or that, please remember that there is no way they went out and surveyed all the participants to find out their reasoning. They maybe talked to a few people and then make some broad statement to put a narrative onto something that actually explains nothing but sounds plausible to their world view.

This is a long way of saying that this reporter, and all of them like her, can't possibly know the reason why the markets do anything from day to day outside of some blatantly obvious world events going on.

Have you ever been put in a situation where you are expected to explain something that you in fact do not understand at all?  I feel like this must be what a reporter's life is like a good percentage of the time.  You're expected to pontificate on subjects that you may have only heard of a day or two ago.

This is probably how I'd sound if someone stuck me on camera and asked me to explain some deep aspect of rugby strategy.

stone wrote:The USD does have a value backstop from the fact that USD are the only thing you can pay US taxes with.

More importantly, due to legal tender laws, US debts are denominated in US dollars and must be payable in US dollars.

LW,

Do you think that in the absence of legal tender laws there'd really be much of a difference in how we conduct business?  Yeah, we might get some people in Utah that want to use gold in contracts, but I think legal tender laws (at this point... probably hasn't always been this way) are pretty much redundant to the way the system would work anyway.

I think taxes are the overriding factor in the currency value.  People hate scrounging together the money to pay taxes... they hardly get infuriated over legal tender laws.

In fact, I didn't even know what "legal tender laws" were until a a few months ago.    I just use the dollar because it's the commonly used medium of exchange, and the dangnabbit gubmint makes me pay taxes in that currency to boot.

moda0306 wrote: Do you think that in the absence of legal tender laws there'd really be much of a difference in how we conduct business?  Yeah, we might get some people in Utah that want to use gold in contracts, but I think legal tender laws (at this point... probably hasn't always been this way) are pretty much redundant to the way the system would work anyway.

I just think of it in the most general terms.  Taxes are just one more "debt" that have to be paid in US dollars.  They are simply one more element of what we have to cough up dollars for in order to do business in the United States.

Doing business in the United States is a nice thing and such business must be done in dollars.  Taxes are a part of that (but IMO just a part.)

moda0306 wrote: I think taxes are the overriding factor in the currency value.  People hate scrounging together the money to pay taxes... they hardly get infuriated over legal tender laws.

I'd be interested in your opinion on something.

Imagine that the government assessed withholding taxes in terms of Japanese Yen (for what reason, I do not know.)  So if I am paid in terms of dollars or gold or Euros or whatever, the government demands its percentage and takes it in terms of Yen.  (Versus now when the government takes whatever currency you are paid in and uses it to "buy" dollars.)

Now I'm no longer paying my taxes in terms of dollars.  But wouldn't the dollar still be the means of repaying all those other debts that exist and will exist in the future (thanks to legal tender laws)?  Or do you see my stupid Yen scheme actually ending the dollar?

Lone Wolf wrote:

moda0306 wrote: Do you think that in the absence of legal tender laws there'd really be much of a difference in how we conduct business?  Yeah, we might get some people in Utah that want to use gold in contracts, but I think legal tender laws (at this point... probably hasn't always been this way) are pretty much redundant to the way the system would work anyway.

I just think of it in the most general terms.  Taxes are just one more "debt" that have to be paid in US dollars.  They are simply one more element of what we have to cough up dollars for in order to do business in the United States.

Taxes are fundamentally different than private debt. Taxes remove base money from the private sector. That doesn't happen with private debt.

The funds to pay taxes and buy government securities come from government spending.

LW,

I think I understand your point, so I'll babble and let me know if I'm missing it... basically, if we were to quit taxing in our nation's currency, would it cease to have value??

I think it would for a while, because millions of long-term contracts are denominated in the U.S. dollar, and those contracts are enforced by our gov't.

I think one step towards taxing in yen is just to simply not tax at all... this probably could be done for awhile until people start feeling awash in cash and feel the urge to spend.  If it was thought that the gov't would never tax again, but keep spending on inflation-indexed items like SS, medicare, and other expenses, the currency would probably start its path to ruin.

Adding in a Yen tax probably has the affect of us having to rid ourselves of dollars to get yen, and I'm not entirely sure what that affect would be.

Gumby wrote: Taxes are fundamentally different than private debt. Taxes remove base money from the private sector. That doesn't happen with private debt.

Can you expand on how this distinction relates to the question at hand (why dollars have value)?  From my perspective, whether I'm paying my taxes or participating in some other type of transaction, the law directs me to use dollars.  That strikes me as the key issue.  I may be missing your point.

moda0306 wrote: I think one step towards taxing in yen is just to simply not tax at all... this probably could be done for awhile until people start feeling awash in cash and feel the urge to spend.  If it was thought that the gov't would never tax again, but keep spending on inflation-indexed items like SS, medicare, and other expenses, the currency would probably start its path to ruin.

Thanks, your 0% tax rate is another good way to look at it.

The Kingdom of Saudi Arabia, for example, collects essentially no tax at all.  This is because wealth simply springs up from the ground.  So there's definitely something more to the equation than the tax angle.

The Saudi Arabian Riyal does possess a currency peg, although I no longer recall how it works.  Does this break the definition you use for a "fiat currency"?  Do you restrict that to currencies that use no pegs of any kind?

If we found ourselves in a situation where oil started bubbling out of the ground on Federal property, what would happen?  If the government possessed such incredible wealth that tax rates went to a KSA-style 0%, wouldn't the dollar survive just fine?  I don't see it collapsing as a currency so long as legal tender laws remained in effect.  But then again, the idea of 0% tax rates has me so enraptured that it is unlikely that I can think straight. 

moda0306 wrote:Adding in a Yen tax probably has the affect of us having to rid ourselves of dollars to get yen, and I'm not entirely sure what that affect would be.

The private sector wouldn't be ridding itself of any dollars. We'd simply be trading dollars with someone else who has Yen. Those dollars would still remain in the private sector.

Gumby,

I realize that... I was thinking more domestic vs foreign... we'd be compelled to export dollars and import yen in exchange.

Lone Wolf wrote:Can you expand on how this distinction relates to the question at hand (why dollars have value)?  From my perspective, whether I'm paying my taxes or participating in some other type of transaction, the law directs me to use dollars.  That strikes me as the key issue.  I may be missing your point.

My point is that you can't pay taxes without base money. And base money wouldn't exist without government spending.

The answer to why this fiat currency has value is actually on the money. It says:

[align=center]"This note is legal tender for all debts, public and private".[/align]

The key word is public. The dollar is the only medium for extinguishing tax liabilities to the sovereign government. Money is tax driven, and that’s why it’s valuable.

moda0306 wrote:we'd be compelled to export dollars and import yen in exchange.

Right... but you know that the dollars never leave American shores, right? There is no importing or exporting of dollars other than the fact that the people owning them live in different countries and aren't buying milk and food with those dollars. They can re-invest those dollars or give them to the Treasury for safekeeping.

The dollar never leaves American banks. If we all had Yen, we'd have to open up accounts at Japanese banks in Japan.

A currency peg would still leave you with a fiat currency, I believe, just not a sovereign fiat currency.

Any sort of incredible find of real wealth out of the ground is going to expand our productive capacity, and that means the creation of new net financial assets will be in order, and therefore taxation much less important to control currency value.  The whole idea is to have the proper amount of currency in the economy to be the oil in the engine... as the engine grows, you need more oil, otherwise things start to go haywire.

I'd imagine a 0% tax rate would be ok in situations where 1) you are way under capacity (either by new natural resources or high unemployment), and 2) people had the belief that they will someday have to pay taxes again, and the gov't will have the ability to collect them.

Gumby wrote:

moda0306 wrote:we'd be compelled to export dollars and import yen in exchange.

Right... but you know that the dollars never leave American shores, right? There is no importing or exporting of dollars other than the fact that the people owning them live in different countries and aren't buying milk and food with those dollars. They can re-invest those dollars or give them to the Treasury for safekeeping.

Gumby,

For my own sanity, I usually try to think of things as happening on a physical level... when banks have "reserves," I imagine a vault full of cash with which they can lend a certain amount of times over.  When the gov't "collects taxes" I imagine them getting a $100 bill and putting it in a shredder.  When we buy something from China, I imagine a physical dollar going from the checking account of an American to a Chinese business' checking account via mail.

I feel this helps more than it hurts.

moda0306 wrote:When we buy something from China, I imagine a physical dollar going from the checking account of an American to a Chinese business' checking account via mail.

I feel this helps more than it hurts.

Well, it's more accurate to imagine the check going to a US address and being deposited in a US business checking account somewhere in the continental United States, by a Chinese person. You can't deposit dollars in a Chinese business checking account. It's impossible.

And that's why the funds to buy Treasuries always exist as reserves in the US banking system. When the Treasury auctions take place, the Fed coordinates with the Treasury to target those reserves. In your model, the funds wouldn't exist in the US banking system.

This applies to Eurodollars, etc. also.  They aren't really held outside the country, but by an intermediary bank.  I believe it was started by the Soviet Union withdrawing their money from the U.S. due to fears of confiscation and depositing it with a British bank who would then clear it with the U.S. correspondent bank.

MG

Gumby wrote:

moda0306 wrote:When we buy something from China, I imagine a physical dollar going from the checking account of an American to a Chinese business' checking account via mail.

I feel this helps more than it hurts.

Well, it's more accurate to imagine the check going to a US address and being deposited in a US business checking account somewhere in the continental United States, by a Chinese person. You can't deposit dollars in a Chinese business checking account. It's impossible.

And that's why the funds to buy Treasuries always exist as reserves in the US banking system. When the Treasury auctions take place, the Fed coordinates with the Treasury to target those reserves. In your model, the funds wouldn't exist in the US banking system.

So when we buy stuff from China, it ends up as a deposit in the United States banking system?  Why can't it go to a Chinese bank?

So how do Chinese people walk around with dollars (greenbacks) if they have zero US dollar reserves?

moda0306 wrote: So when we buy stuff from China, it ends up as a deposit in the United States banking system?  Why can't it go to a Chinese bank?

So how do Chinese people walk around with dollars (greenbacks) if they have zero US dollar reserves?

Currency in circulation (of whatever type) would never be included in a nation's reserves, would it?

In any case, isn't currency in circulation always a small part of the total amount of money in a modern fiat system?

Yeah, which is why all the ballyhoo about the trade deficit is nonsense.  We don't barter, we exchange U.S. dollars for imported goods/services which just then winds up "reinvested" back in the good ol' U.S. of A as it never really left in the first place.

Banks don't transfer money; they "clear" with correspondent banks in foreign countries to settle their accounting in those foreign currencies.

The Central Bank of China has trillions of reserves...  on deposit in other countries.

Its all smoke and mirrors; accounting fictions back by so-called RULE OF LAW.  That's why nationalization is a tempting tactic.  It's an unlawful change in the legal ownership of assets within a country.

MG

moda0306 wrote: So when we buy stuff from China, it ends up as a deposit in the United States banking system?  Why can't it go to a Chinese bank?

MG and Gumby,

I am more thinking that if there are US dollars sitting in a foreign bank they must be included in the "reserves" of that country, right?

Other than that, though, its interesting to finally see these "foreign accounts" for what they are.