My my my. Articles ridiculing gold are starting to pop up all over the Australia financial media now. What gives? It’s nice to see the media actually discussing gold. But what’s a little disturbing is how poorly understood gold’s historic role in the financial system is. What’s more, doesn’t anyone know what sound money is any longer?
The burden of today’s Markets and Money, then, is to remind these nattering nabobs of negativism that gold is not anyone else’s debt. It is not anyone else’s liability. It cannot be created with a few keystrokes. And for thousands of years, millions of people from all walks of life have been happy to use it as money because of its unique features (divisibility, durability, scarcity, difficulty in counterfeiting).
Gold is a commodity. But its price is not driven exclusively by the Indian jewellery market or investment demand. As a tangible commodity, gold has some of the aforementioned qualities that make it a fantastic medium of exchange.
And for people who trot out the canard that you can’t buy a Big Mac with gold coins, what do you think goldsmith’s notes were? They were receipts that indicated gold ownership and your ability to pay a debt. You could exchange goldsmith’s notes as payment for goods and services because the paper claim was backed by a real asset. Goldsmith’s notes were the precursor to bank notes. Same type of system, but with real money.
Is this all just some nostalgia for a financial system that no longer exists? Does gold have a real role to play in the future financial system? Of course it does! Gold is a threat to the fiat money peddlers from the warfare/welfare State because it exacts a heavy price for deficit spending and money creation. The expansion of credit or deficit spending is always possible in a fiat money system and thus placates voters with false prosperity borrowed from the future.
The rise in the gold price is telling us that markets are increasingly suspicious of the government-backed money and its ultimate affect on the real economy. Or, as guest essayist Greg Canavan says, ” Gold is saying that the crisis is not over, that it is in fact getting worse. We are seeing Gresham’s Law in action, as bad money pushes out the good. Gold is being swept off the market by millions of individuals who know that without fail governments always ruin the value of their paper money.”
The only real – albeit shallow – criticism of the gold story is that it’s primarily a U.S. dollar story. For Aussie investors, a collapsing greenback doesn’t equate to a higher Aussie-dollar gold price. We would say, though, that this is a short-sighted appreciation of what gold is saying about the modern money system.
The modern money system is built on credit, debt, and government money backed by nothing. To believe that does not mean you’d covert all your assets to bullion, or all your shares to gold stocks. But it IS to believe that the architects of this system are criminals who effectively steal your wealth through inflation and control of the money supply.
If you have confidence in that system, you’re a sucker. And if you don’t hedge against its collapse, you’re unprepared. After the last two years, is it so farfetched to believe that the foundations of financial capitalism – based on unsound money as they are – are weak by design and will fail in a world of increasing complexity and interconnectedness?
If you don’t think it could happen, you haven’t been living on Planet Earth. Either that or you’re in a business where you want everyone to go back to doing what they were doing pre-Lehman collapse because it’s good for your business. If that’s the case, it’s fine. But it’s foolish to ignore 5,000 years of monetary history.
Yesterday we wrote about what happens when a complex network of trade and commerce begins to shrink as credit is withdrawn from the global system. Another side effect of the Lehman collapse is a bear market in trust. Trade, once free flowing and robust, becomes politicised. Trading partners begin to bicker.
Take Barack Obama’s decision to slap a large import tariff on tyres made in China. It will probably just drive up the cost of cheap tires of middle-income Americans. But it makes America’s unions happy, and Obama needs them to push through his health care agenda. China has responded with warnings about possible tariffs on U.S. poultry and auto parts exports.
It’s probably not in neither country’s economic interests to get in a trade war. But it reflects the ambiguity and hypocrisy of trade practices by both countries. There is no such thing as free trade. China subsidises production with cheap labour and produces at below production cost for some goods and services. America is happy to lose those manufacturing jobs if American shoppers get lower prices and have access to credit to make up for falling real wages.
But that whole strange relationship that has driven global growth for the last ten years has reached its use-by date. We’re not sure what’s going to replace it. But both parties are guilty of being currency manipulators and subsidisers. Formerly, their interests were aligned. Now, it’s not so clear.
And finally a note from JL in Queensland about networks, nodes, and certain monetary commodities.
“Just my two cents worth. The difference between a node in a computer network vs. a node in the financial/economic system is that the node in the network can be self sustaining (provided that it’s plugged in to electricity), whereas, most of the nodes in the financial/economic system are NOT self sustaining.
“They rely on counterparty to deliver, so that they can also perform. This is the contagion effect. Computer network nodes also exhibit this attribute, but usually only when they suffer from a virus, Trojan or the like. If not, then they are self sustaining, unlike most mainstream financial/economic nodes.
“The ONLY financial/economic node that would be self-sustaining and immune from ALL shocks (i.e. Exhibit the financial equivalent of homeostasis) is one that is 100% backed by a financial asset which is no one’s liability. I’ll leave you to guess what THAT financial asset may be.
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