Gold and silver are not investments – they’re money

Last Friday the stock market experienced a sea change. Perhaps even a game changer. Gold suddenly skyrocketed $66 (about 3.5%), and gold stocks went up almost 7% in one day. You can look at this in one of two ways. Either the value of gold went up, or the value of the dollar went down.

The truth is probably somewhere in between, leaning heavily towards the dollar losing value. Gold and silver generally don’t gain or lose value so rapidly with such volatility. After all, it’s not silver and gold that is being magically produced by a Federal Reserve computer. The increase in the stock of gold and silver is rather slow. Watch this ingenious video and you’ll see that the cost of almost everything has pretty much stayed constant since the 1960’s in terms of silver and gold.

Except, of course, for education, which has been so grossly inflated because of government loans that even in terms of silver the price has skyrocketed.

This tells you several things. First, a silver dime or silver quarter from 1964 or earlier (all dimes and quarters were made of 90% silver before 1965) can buy the same thing today that it could buy in 1964. Second, if you had saved all your money in silver dimes and quarters, then you’d have the same purchasing power today that you would have had in 1964. If you had saved in pieces of paper called dollars, you would be able to buy very very little.

Here’s more: The price of gasoline has actually gone down since 1964, not up. If you want to see that in practical terms, then take 10 dimes from 1964 or older. That’s one lousy dollar in legal tender, and go fill up your tank. One dime will buy you a gallon of gasoline. One dollar in silver dimes will buy you 10.

Owning dollars is opening yourself up to government theft, because the government can just print them. Imagine if there was a magical elf that could simply conjure silver out of thin air. Don’t you think the price of silver would go down? Sure it would. You wouldn’t want to own it anymore. Well, there is a magical elf that can conjure up dollars out of thin air. It’s called the Federal Reserve. So why would you ever want to own dollars? After all, they grow on trees.

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When the new Federal Reserve money starts churning…

I’ve been pondering different scenarios as to how the whole house of cards will fall. I read an article recently that seems to be the simplest explanation yet. Here it is in a few paragraphs.

The Fed buys bonds so the government can borrow at low rates. This enables it to have multi trillion dollar deficits annually with no immediate consequences. In order to buy the bonds, the fed conjures up money out of nothing. The money ends up on the balance sheet of some big bank. That big bank doesn’t touch the money, because the economy is fragile and they want to keep the cash reserves for rainy days. So interest rates get low and inflation is delayed, since the money isn’t moving.

Then, the economy starts picking up a bit. GDP goes up. People start borrowing money and spending money. The big banks start to unlock some of those cash reserves. Problem is, there’s such a staggering amount of them that it overwhelms the system and prices start flying out of control. So the Fed has to suck some of that cash back in its black hole by selling bonds, taking the money and burying it.

The Fed is like the Big Bang of fiat money. The monetary universe expands and contracts and the fed is at the center of the universe.

So anyway, as the Fed tries to control the hyper inflation it itself created, interest rates go up. People finally stop buying bonds. Banks, who were relying on the Fed feeding them with money, are no longer fed. Their leverage – the amount of money they lend out over the amount they actually hold – is now about 33 to one and gets called in by people looking for their cash. Banks fall like dominoes, and the Fed either has to agree to hyperinflation, or a depression. It will pick one or the other. Those that own real assets will be fine.

Keynes vs Mises: When the Golden Moose come Home to Roost

A few posts ago I believe I mentioned the size, numerically, of the Keynesian bubble the world is currently in. The gross domestic product of the entire planet is something like $65 trillion. That’s enough for a nice-sized moose farm, assuming all said moose on farm are solid gold and there are a lot of them.

I kid, but the value of the world-wide derivatives market, which means money that people assume they are owed and that is coming to them, is something around $1 quadrillion. A quadrillion is a thousand trillion. Let’s look at it numerically:

1,000,000,000,000,000

The problem is the discrepancy. That is, say some bank owns a Greek bond, and Greece owes that bank $1,000. Bank gets to write on sheet that bank has $1,000. But really bank does not, because Greece cannot pay bank. So bank loses $1,000. Those dollars never, in fact, existed. They were just assumed to exist.

The same is the case with every dollar over $65 trillion that exists in the worldwide derivatives market, because there’s no mathematical way that a quadrillion dollars in value exists on the planet when planetary GDP is only $65 trillion.

So the difference between those numbers is the size of the bubble in real numeric terms. And when that bubble bursts, everything goes back to zero. Like a planetary jubilee, debt slaves released.

The cause of this bubble is governmental bailouts and handouts and payouts in virtually every western country that can never be repaid. It started at the level of individuals, and went up the money chain from there. The progression is like so:

  1. Federal Reserve prints money and loans it to bank
  2. Bank loans it to Bob, an individual, bank being coerced by some government initiative to give Bob stuff he can’t afford
  3. Bob can’t pay back bank, Bob loses house
  4. Bank can’t sell house, loses loan
  5. Bank asks government to bail it out, so debt goes up the money chain from individual (Bob) to bank.
  6. Federal Reserve prints money and loans it to government
  7. Government bails out bank
  8. Bob loses home and the value of whatever dollars he does have goes way way down.
  9. Bob can’t spend money because he’s broke
  10. GDP, which is 70% consumer spending, goes down
  11. In a panic, Federal Reserve prints up more money so government can give it to Bob so he can spend it.
  12. Government goes into debt, the final level in the money chain.
  13. No one can bail out government, so bubble bursts.

It’s a dollar bubble. It keeps getting printed and printed at every step of the way. And it’s going to burst.

Keynes maintained that by intervening in the economic cycle, i.e. giving Bob money he couldn’t pay back, the government could paper over recessions and only have growth. Where Keynes went wrong was that he didn’t understand that once government has the power to create money out of nothing, that power, like any absolute power, gets abused. Soon, the government isn’t papering over mild recessions by handing out money. They’re furiously handing out money to keep the entire global economy from collapsing.

Think trillion dollar stimulus bills, $700 billion bailouts, $2 tillion European bailout funds, and God knows how many dollars the Fed is printing. Really, only God knows because they don’t have to tell anyone. And Herman Cain thinks this is fine.

But the more they hand out, the bigger the quadrillion dollar bubble grows. And the time until it finally bursts gets closer and closer.

In the end its all about Hubris. Keynes thought he could outsmart human nature by giving the government the right to print money backed by nothing. He thought he could stabilize the world through a simple tactic.

Mises knew better when he said that you can’t have your cake and eat it too. You can’t have growth without recessions, and if you try to, then all you’ll get is one big recession (read: crash) when the golden moose finally come home to roost, or whatever sound they make.