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.

Keynesian Hubris – Man as an Economic God

Here’s the difference between Keynesian economics and Austrian economics illustrated by example. Austrian economics believes mistakes (money put in the wrong place, aka “malinvestment) have to be paid for by loss of that money. Government, or man, cannot stop the loss of money by mistakes being made. For Austrians, money is real, like gold or silver. Paper money is only representative of gold or silver that exists somewhere, and therefore cannot be wasted on buying mistakes.

Keynesian economics believes that mistakes (money put in the wrong place or “malinvestment”) can be bought by government so no one loses money. Money is created by government by the word of government and paper money represents nothing. Government, therefore, can fix any mistake at any price, and man becomes God of the economy.

Let’s do a case study. Let’s say you need $10. So you sell a piece of paper, a bond, a contract, for $10 to someone that says you owe him $11 one year from now. You now have a $1 deficit and he has $11 in the form of a piece of paper, or a bond, that says you owe him $11 in a year. Let’s say you take his $10, invest it in a business in the private sector that produces, I don’t know, a revolutionary kind of cheese. The business succeeds and gives you back $12 from your original $10, selling the cheese for $15. Then you take that money the cheese company gave you, give $11 of it back to the guy you owe $11 to, and you’re up $1, he’s up $1, the cheese company is up $3, and the cheese people can make their cheese thanks to your $10 investment. Everyone wins. The new money is printed up for the Keynesian, the gold or silver is taken out of reserve for the Austrian. In such a case, the Keynesian is actually better off, because he doesn’t have to find actual gold to back up the new dollars created by the good investment in cheese. If every investment worked out, Keynesian economics would be a great system. Unfortunately, reality does not work this way.

Now, let us suppose that you borrow $10 from a guy who is expecting $11 back in the same way. You take that $10 and hire (purchase) a guy who sits at a government desk filling out unnecessary forms. This is called a “government job” in the “public sector”. He produces no wealth, no cheese he can sell for more money, and just eats up your $10. Now you still owe $11 to the bondholder, but you have nothing. Keynes says, “Print up $12!” So you print it, give $11 to the bondholder, and pocket $1. Well, it looks like everyone wins, but nothing was actually created, so it now takes more money to buy the things that the bondholder was going to buy with his $11 because there are less things of value in the world and more “money” to buy those less things with. He now really only has $9.

The Austrian, in such a case, says that the bondholder should lose his $10 instead of be paid $11 in money off the presses. This keeps the money supply constant, and it requires people to pay for their mistakes and try not to repeat them again.

Man is not an economic god. Since there are mistakes made in this world, those mistakes must be paid for, whether in inflation or loss of investment. Keynes runs to the presses at this point, so all the mistakes made in the world are paid for by ordinary people whose money is affected when the government prints money to paper over mistakes.

If Austrian economics ran the world, the people who made the mistakes would take all the losses, and the people who saved money would be unaffected.

Once government pays for all mistakes, or “bails you out” then people become more encouraged to continue making mistakes. The more mistakes made, the less value there is on the planet, and the more poor people there are. Keynes just spreads the pain around to everyone, 99% of whom do not deserve the pain because they didn’t make the mistake.

Austrian economics clears debt whenever it cannot be paid and takes small losses as they come. Those who made the mistakes are wiped out and must start over, and the rest of society keeps building and creating wealth.

Keynes covers up all mistakes by printing the money to make it look like the mistake doesn’t matter. Keynes hopes to pay for the mistakes through “growth” meaning Keynesians hope that at some point, people will make much less mistakes and eventually pay for the mistakes made in the past by making really good investments in the future. But train people to rely on government to print money in response to mistakes, and they won’t ever make good decisions to pay for past mistakes. So debt goes up and up and up and governments need more and more and more money to cover up the mistakes until at some point, money itself is not trusted as a medium of exchange.

At some point along the way, the big piling mistake that the Keynesians keep piling and piling overflows, and all the pain stored up in that giant pile (aka a “keynesian bubble”) is released in one big wave leading to absolute disaster.

We just saw a bout of “global easing” by central banks (read: money printers) around the world. That means they’re printing more money to paper over the mistakes. The markets skyrocketed because now there’s more money to put into the system. But that money represents no new created wealth at all. It’s just existing wealth more diluted.

At a certain dilution, it just loses all meaning. And that’s when the crash happens. No one knows what dilution is the tipping point. But it’s getting closer, fast.