Gault's Gulch

June 2, 2010

Gold is the canary in the coal-mine…

Filed under: Politics — John Gault @ 3:34 pm
Tags: , , , , , ,

I have found that people who collect things–baseball cards, stamps, star wars figurines, etc.–usually have an easier time understanding the complex intricacies of monetary policy and its effects on our every day life.  This is because most people have a flawed view of what, exactly, money really is and from where it derives its value.  As a lead in to my point, let’s look at the most valuable baseball card in the world–the T206 Honus Wagner card.

The T206 was manufactured between 1909 and 1911.  Due to issues not worth delving into here, it was manufactured in extremely limited numbers–and the passage of time has reduced those numbers even lower.  As a result, if you wanted to purchase one of the 50 or so of these  famed cards still in existence, you should be ready to pony up anywhere between $500k and a cool $2 million depending on the cards history and condition.  Now, imagine if you will, a kindly old man in a Pennsylvania farmhouse who is cleaning out his cellar.  In the back corner, he discovers a long-forgotten box that belonged to his father.  It says American Tobacco Company on it’s side and it is FULL of T206 Wagner cards–thousands of them in mint condition.  What would happen to the value of the T206 if these new cards suddenly flooded the market place?  Not only would the price go down, it would go down far enough that you could start using them to make that really cool thwap-thwap-thwap sound in your bicycle spokes again…

This scenario outlines perfectly what we, as a nation, have done to our money supply.  Every time that the U.S. Treasury fires up the printing presses and creates new currency to pay for our deficit spending, they decrease the value of every dollar you currently have in your wallet.  The proof of this is right in front of us in one of the most well-known and historically sought after commodities–gold.

In 1975, gold cost about $200 per ounce.  As I write this, gold is currently trading at over $1200 per ounce.  Wow!  Gold is sure more valuable than it was 35 years ago–or is it?  Basic economics teaches us that price is a product of supply vs. demand.  If gold is 600% more valuable now than it was in 1975, then surely gold demand must have gone up dramatically–or supplies must have dropped sharply.  In actuality, however, neither of these things have happened.  Gold is incredibly stable because its uses are very well-defined, its supply is well-known, and it’s demand has remained virtually unchanged for decades.  So why the price spike?  Well, look at those prices from another perspective.  In 1975, a single American dollar was worth 1/200th of an ounce of gold.  Now, a single greenback is only worth 1/1200th of an ounce.  It is not the gold that is changing value, it is the money we are comparing it to.  This is inflation–and it happens because our government has decided that it can spend as much as it wants as long as there is ink in the printing press and paper on the rolls.  Unfortunately, this policy of deficit spending and debt-creation has devalued our currency and threatens to bankrupt the nation. 

What’s even worse than this, however, is that the government knows this and chooses to lie about it.  They tout the Consumer Price Index as the measure of inflation and shout loudly that inflation isn’t a problem.  The CPI, unfortunately, is a terrible indicator of inflation because it fails to take into account the myriad of other influences on the prices of consumer goods.  If the price of Amazon’s Kindle drops, the CPI says that this is because our money is getting stronger–instead, it’s because the I-pad is kicking Amazon’s ass.  Gold–or some other stable, predictable commodity–is the only way to gauge the strength of our currency.  It is the canary in the coal mine and I think it’s about time we all put on our oxygen masks because things are getting dark in a hurry.

When Greece started going up in flames last month, conservative pundits were busy asking the question “Could that happen here?”.  Well, the answer is no.  Greece is a part of the European Union.  It doesn’t have the ability or authority to print more currency and buy its way out of debt.  We do.  As a result, we’ll never “run out of money” like Greece did.  If you want to see where the U.S. is headed, you need to look to Zimbabwe.

When the Zimbabwean dollar was introduced as its official currency in 1980, it was one of the strongest currencies in the world.  Between 1980 and 2009, however, the Zimbabwean government engaged in monetary policy much like our own.  They spent in deficits, they incurred massive national debt, and they printed more and more and more dollars in order to pay for it all.  Inflation speeds up over time–feeding on itself in an ever-escalating spiral–until the changes in value start to become exponential.  By 2009, the Zimbabwean dollar was dropping in value so quickly that money was being burned as fuel because there was so much worthless paper in circulation that to buy firewood would have required a wheelbarrow–not to carry the wood, but to carry all the dollar bills that it would cost to buy the wood.  Finally, the Zimbabwean dollar collapsed to nothing and was abandoned.  Citizens of Zimbabwe now conduct their business with foreign currencies. 

So, why should we care?  If all our money becomes less valuable, then, sure, a loaf of bread may cost $300 but my employer will be paying me $6 million a year so it all evens out–right?  Not exactly.  Think of your 401K.  Maybe you have $500K in it right now.  That’s enough that when you retire, you could use that money to buy a nice house and still have money left over to pay expenses.  The problem is that while your money sits in that 401K account, it is losing it’s value.  As the “Zimbabwe Effect” speeds up, that $500K suddenly doesn’t have the purchasing power to buy a house anymore.  Then it doesn’t have the power to buy a car.  Then it doesn’t have the power to buy one of those horrific Double-Down sandwiches at KFC.  Ultimately, everything you’ve spent your life saving will have become worthless.

What can we do?  Well, we could convert all of our money to gold, silver, diamonds–anything durable and stable.  Maybe it’s just my pampered American predisposition, but that seems a little bit too Mad Max Beyond Thunderdome for me.  No, the answer lies in the mistakes the government has made.  We could return to the gold standard that existed before 1933.  This would fix the value of our currency to a specific unit of gold.  Second, we could allow the privatization of currency creation and let the free-market sort out the mess–the Libertarian in me loves this idea.  Lastly, we could stop laughing at guys like Ron Paul and, instead, elect them to positions that would allow them to dramatically reduce government spending, disband the Federal Reserve, and, most importantly, turn off the printing presses at the Treasury.  That is, unless we want to start using baseball cards as currency–it won’t be long before they are more valuable.

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2 Comments »

  1. Not a good idea to use baseball cards. You just need view one episode of “Pawn Stars” for the guys to explain how the market for collectibles such as baseball and other trading cards has plummeted. Right along with the rest of the U.S. economy. I’m thinking maybe we use those Double Downs you mentioned. There’s gotta be some good use for them because I surely do not plan to ingest one.

    Comment by Leary Garcia — June 12, 2010 @ 7:53 am | Reply

    • Mr. Garcia–If that is, indeed, your REAL name…

      I think that KFC Double-Downs would be hard to fit in your wallet–greasy too.

      Comment by John Gault — June 12, 2010 @ 8:24 am | Reply


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