Wednesday, September 22, 2010

Why Gold? ... Econ 101

We hear a lot of talk about gold and gold investment... why? What's so great about gold?

Well, as we have evaluated in previous posts, our economy is over-leveraged, in other words... our wealth and our assets are an illusion. Between our private and our public debt we are living in the equivalent of a $450,000 house with $100,000 ability to pay. That is a debt bubble. Is a person rich because they live in a big house or does a man become any richer by moving into a bigger house? The answer is no. The best example of this is a commercial from a few years back...

As we have experienced recently, stimulus is having lack luster results and we are running out of options. Stimulus was our attempt to try to dig ourselves out of this debt hole by transferring the debt from the private sector to the public sector because we thought the government was big enough to handle the burden... but it is stretched to its limits.

People are not willing to lend us any more money, the feds cannot set the interests rates any lower (set low, ironically to encourage lending/ debt/ leveraging.. hello!!! Can any one say future problems?), our national credit rating is at risk, and we are being forced into
buying our own debt to continue this method.

Why does the government not go bankrupt like we do when we cannot pay for our own debt? They can print their own money they will never go bankrupt (but they can become weakened and collapse... like the Soviet Union).

How do we buy our own debt? ...We have to print new money to buy it.

What happens when we print money? ...The supply of dollars goes up and each individual dollar is worth less in relation to actual value and purchasing power.

So, we are in a recession because we could no longer handle our debt burden... we were over-leveraged. How do we get rid of our debt? We could let the irresponsible default on their debt and live frugally and pay down our own debt to get back on stable economic feet, or we could transfer our debt to the federal level and inflate our way out.

Inflate our way out?... What the hell is that? Well, if you print more dollars each dollar is worth less than it used to be, dollars of debt as well as dollars in hand. So, if you want to lessen the debt burden and do not like living frugally...print money!! (Which is what they began doing this summer)

But doesn't this effectively lower our actual wealth? Our salaries? Our housing values? ...Yes!!! Every dollar you earn will be worth less. Your wages and housing prices reflect their "bubble" values, so we will devalue them to their natural levels through inflation. (Do not expect wage levels to rise the next few years)

So, what does this have to do with gold? The value of gold, not paper gold but actual physical gold, is not tied to the value of dollars. It will hold a steady value no matter the value of currencies. So, the intention of gold investors today is to to buy gold with today's relatively 'valuable' dollars so they can retain their wealth and cash it in for many more of tomorrow's dollars at a later date. Their wealth and asset values will not be inflated away because gold holds it's value. The gold investors are betting on inflation, which historically is a pretty good bet.

You know how we hear stories about how cheap everything used to be? Candy was a penny, and a penny used to actually be worth something! Well, it takes the same amount of gold to buy candy whether it is 100 years ago or today. Well, maybe not candy, because we have gotten a lot more efficient at making candy... but you get my point, right? Gold 100 years ago has the same value today. A dollar 100 years ago, worth a lot less. I do not know if I explained it very well, but that is my crash course on gold.


On this note, what we are actually doing is not only transferring the private debt to the federal level, but also creating new debt through new programs and spending unrelated to lessening the private debt burdens.

We would be much better to just let the bubble pop and and recover on solid footing. Let the irresponsible and debt-laden reap the harvest of their own irresponsibility, rather than spread it out among all of us and then we can grow from there.

One of the unintended consequences of bailouts and stimulus is the masking of irresponsibility. It leaves the irresponsible unpunished and in place to run us into the same ditch again in the future, in fact it incentivizes them to do so. They know they can just get bailed out again.

Just know that the value of every government dollar spent irresponsibly is going to take away from the value of your dollars, because we will have to print more cash to pay for the government debt, which devalues your earnings and your assets.

Rather than debt, real economic fuel is made of savings, investment, productivity and optimism. Optimism to strive to the best of our abilities and increase our productivity, all while saving, investing and spending responsibly.

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