This week, Barron’s interviewed some sages of finance.
“In a total disaster,” said Peter Bernstein, “where there is a run on paper currency, you’ll get your biggest bang for your buck in gold…if everything hits the fan, gold should be worth several thousands dollars an ounce.”
Yesterday, at least some investors must have seen a total disaster headed their way. They bought gold.
But let us return to the big picture. For the last 13 years, the U.S. money supply has been increasing at about 2 times the rate of GDP. This is known, to monetary sticklers, as “inflation.” But the “inflation” that most people think of is the kind you see at the gas pump and supermarket checkout counter. Nobody squawks when the sticklers’ inflation raises house and stock prices. But nobody doesn’t squawk when it raise consumer prices.
The monetary inflation of the last 13 years caused only modest consumer price inflation – for many reasons often described in these daily reckonings. To wit, China was making things cheaper. Wal-Mart was selling them cheaper. And the dollars spent by consumers in America tended to end up in the pockets of investors in Asia and Arabie, not in the U.S. domestic money supply.
But all good things must come to an end…especially things that are too good to be true. And now, the great bubble in credit has been popped – and everyone’s squawking. The financial industry is in decline – and will probably not recover in our lifetimes. Inflation has given way to deflation. Just look at what happened to Lehman Bros. Hardly more than a year ago, investors had an asset worth $45 billion. Now they have nothing. What happened to that $45 billion? It disappeared.
In California, the average house has lost about $120,000 (we are just guessing, but probably not far off) in market value. What happened to that $120,000? It disappeared.
The Chinese stock market has disappeared half of investors’ money. The oil market has disappeared nearly a third of producers’ fondest hopes for future revenues. Jobs have disappeared. Sales are disappearing. Growth rates are disappearing. Bonuses have disappeared. And it is happening all over the world. Thanks to a globalized economy, the entire globe gets to suffer a slump.
But what’s really new? This is what always happens when boom turns to bust. Asset values disappear. And with them, the money supply itself contracts. People spend less freely. They lend less recklessly. More money stays tucked away for longer periods in pockets and bank accounts. Prices fall. Many assets turn out to be worthless and many people go broke.
Investors buy gold to protect themselves. Gold never overstates its earnings, understates its liabilities or declares bankruptcy. When everything else goes to Hell, gold is still there…still doing its job.
Of course, the feds try to prevent nature from taking her course. They counter a natural correction with further unnatural deception. They lend at lower rates than those set by willing buyers and sellers. They spend even more recklessly than usual – often going to war in order to stir up financial activity.
Today, for example, the Federal Reserve honchos will meet. The bank already lends to Wall Street at less than half the rate of consumer price inflation. The betting on Wall Street is that it will lower its key interest rates again – so that it can lend to Wall Street at even better rates. That’s one reason why Merrill wants to sell itself to the Bank of America – so that it can take advantage of more of this free money.
Of course, when there is a serious correction, the financial authorities also make a great show of repairing the damage, supposedly caused by greed and the lack of regulation. Typically, there are a few show trials…a few rich people are ruined and run out of town…and new programs and regulations are put in place which tend to delay recovery and make the next bust-up even worse.
But among one of the feds’ tricks, one is particularly dangerous: they can print money.
Yes, dear reader, when the going gets rough, the feds turn on the printing press.
That’s when owning gold really pays off. More on this…as the story develops…
Markets and Money