The Need For One-Armed Economists

“You have to choose (as a voter) between trusting to the natural stability of gold and the natural stability of the honesty and intelligence of the members of the government. And, with due respect for these gentlemen, I advise you, as long as the capitalist system should last, to vote for gold.” George Bernard Shaw, The Intelligent Woman’s Guide to Socialism and Capitalism, 1928.

Shaw may not have considered the insidious effects of colluding governments, but his point is still clear. Insightful even. When you discuss government today, honesty and intelligence seem quaint ideas. More important, the governments are being replaced by unelected bureaucracies. European Central Bank, IMF, UN, The Fed, and others.

It has become that governments operate in their own best interests and act in the best interests of the people only on those rare occasions when the two coincide. Accordingly, we tend to place little value on government. From Shaw then we care about an estimate of the present and future value of gold and silver.

I think gold presently is a speculative bubble with a compelling story and have said so before. What price gold? Nonetheless, there may be some underlying validity in the story. Here are some things that we can agree on regardless of our view about gold:

  1. There is latent inflation. You cannot print a lot of money and have no inflation. The US and Japan are leading the way, but others are involved. China’s money supply has increased immensely in the past few years. More likely to keep the exchange rate low than hype the economy. So far, the reduction in how fast the money turns over has hidden the inflation. When velocity returns to normal there will be inflation.
  2. These currency manipulations are symptomatic of a currency war. That is more serious than inflation. I know of no example where a currency war ends well, except possibly United States versus the rest of the world from 1950 or so onwards. That was not a fair fight so maybe is not representative of the issue.
  3. Governments virtually everywhere have spent money they did not have and have incurred debts they have no reasonable expectation of repaying unless they can shrink the purchasing power of the sum outstanding.
  4. Governments have recently tested the idea that the accumulated value of assets privately owned by their people may belong to the government. Cyprus may be only the first.
  5. Western governments and Japan have outstanding social promises that have not been funded and the shortfalls materially exceed the published debt figures.
  6. Gold and silver are a decent long-term hedge against inflation.
  7. A global economic catastrophe, fueled by an American mistake, is not specifically precluded.

I have doubts about a cabal that is acting to impoverish us all and take over the world. I think we can rely on Mark Twain for the insight we need on this. “Never attribute to malice anything that is adequately explained by stupidity.”

Given these and probably more, should we all rush out and purchase gold, silver and platinum? Answer. “An unqualified maybe!”

Those of you who follow this space know that I like the question, “Okay, then what?” I think “maybe” because of the harder questions that follow the buy gold decision. Specifically:

  • Hard, “When should I buy?”
  • Hard, “For how much?”
  • Hard, “Should I trust the TV and fund shills?”
  • Harder, “If gold is the salvation, what will keep the government from confiscating it?”
  • Harder, “If there is a near-apocalyptic crisis, what things will go wrong that gold cannot fix?”
  • Harder, “If it is not confiscated, when and how should I get out?”
  • Hardest “If I cannot tell when to buy, cannot know the right price, cannot trust the spokespersons, cannot be certain to keep it from the government, cannot see how to liquidate the position and cannot necessarily keep it from being stolen by marauders, why should I not seek something else?” Possibly additionally.

This precious metal hype is falling into my “bad movie” category. There is little advertising for good movies because they don’t need to do it. Ergo, things that are heavily promoted are not very good.

There is still a possibility that should be addressed. Maybe gold is the answer, but I don’t know enough yet. Here is the story of the other side, without conspiracy theories. Remember Twain. It could be mere stupidity.

Asking, “Will printing money work?” is the equivalent of asking, “Will heroin work?” Of course it will, just not the same way forever.

From the New York Herald/Tribune 27 April 1933

“As the effects of the first jab in the arm wear off, the country is plainly more than a little worried over the cure-all drug called inflation. The first dose was just a promise – and what beautiful dreams it produced! Exchange was about to be stabilized, stocks and commodities were to go kiting, everyone was to be prosperous – long live the 50-cent dollar!

Now the headache of the morning after is already unmistakable in many quarters. Such is the familiar inevitable history of the inflation treatment, and it is interesting to see even the first preliminary stage following the classic formula. Nothing is more certain to produce a temporary thrill, a delusion of well-being; nothing is more certain that, as the effects wear off, the patient feels worse than ever. That is the chief viciousness of inflation. It is in literal truth a habit-forming drug requiring ever larger and larger doses to keep the patient satisfied. “

Insightful, and coming up on 80 years old. You would think that governments would have learned the lesson by now, but you would be wrong. As the quote points out, ever-larger doses are required to gain the required euphoria. Surely, they have noticed.

But, as many are prone to say, “This time is different.” Possibly It is. This time we have serious attempts to both print money and keep interest rates low. The addictive nature of both of these stupidities, when taken together, may be insurmountable.

The real crisis is that real interest rates, (earnings minus inflation) are negative and will almost certainly remain that way in the short run. That is different from the early ’30’s. Interest rates were low then, but inflation was negative so real rates were rather high. Subsequent inflation reduced real rates but did not make them negative.

If there is serious inflation now, the economy will slow and rates will become more negative still. If rates increase to a positive real return, the economy will slow dramatically. I don’t see how the governing bodies can miss both problems.

Inflation and its companion, negative real rates, are indeed like heroin. The dose that achieves the required reaction is extremely close to the dose that kills you. Assuming death (economic collapse) as a possibility, there is a home for gold in the portfolio. A simple step to safety. Therefore buy!

On the other hand, (You can see why Harry Truman asked for one-armed economists) gold is a multiple decision purchase. 1) When to buy, 2) for how much, 3) when to sell, 4) for how much, 5) how to avoid loss by confiscation or theft, and 6) sell to whom.

I don’t see a way to solve the 6-way decision problem and I don’t see the urgency. I think it will take a few more years (probably 4 or 5) for the low rate problem to play out and that will drive the catastrophe if there is one.

Governments are learning an old lesson. It is easier to ride a tiger than it is to dismount. I will wait, but I will be vigilant.

Don Shaughnessy is a retired partner in an international accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.

One Comment on “The Need For One-Armed Economists

  1. Pingback: Is “Golden” Still a Positive Adjective? | moneyFYI

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