God, Gold, Guns & Butter, and Cold Hard Cash

Tamela Rich, who is a brilliant talent, wrote a thought-provoking blog recently. Part memory lane stroll, part analysis of the symbolism of “The Wizard of Oz” with a smattering of finger-wagging at Glenn Beck (who is a total tool, in my view), it’s a great post. I’d encourage you to read it yourself.

I commented on her post there, saying that I’d have more to talk about here on my blog. Because her post was so rich, there’s so much to talk about so it can be kind of hard to whittle things down and focus on some key ideas. But one thing I want to delve into is one of the things we’ve all seen on TV by now: those ads imploring you to sell your gold for cash. She used one with Glenn Beck, so I’m going to up the ante by using an ad with not one, but two has-been celebrities. Actually, one washed-up celebrity and one that’s deceased:

Not to be outdone, there’s the Mr. T Gold Indicator, courtesy of Minyanville and one of their chief Minyans, Kevin Depew. It has all of the things I look for in a technical indicator: it’s easy to use and even easier to laugh at.

But what should we make of all of the talk about gold? It’s clearly been on a tear over the past year, recent pullback notwithstanding.

As Tamela points out in her blog post, gold has historically been used as a hedge against inflation. Plus, as gold as always been used as a currency unto itself, it’s safe to use as a payment/settlement mechanism all on its own.

The problem with gold, or any other commodity for that matter, is that settlement of a transaction can be unwieldy. I mean, can you envision paying for your house with 200 ounces of gold ($240,000 purchase price with gold at $1200/oz)? That’s walking around with 12 and a 1/2 pounds of gold.

As I pointed out in a recent post, the real reason for fiat currency’s existence is the ability to settle transactions with a  mechanism that is easy to carry, easy to account for. Until the ideas of fiat currency and credit had taken hold, we lived very much in a barter-based world. Where we have gotten ourselves into trouble – and brought the rest of the world into this mess because the dollar is the world’s reserve currency – has been in the overextension of credit. We have gone completely apeshit with the idea of borrowing from the future to pay for the present, largely on the belief that we would always grow our way out the debt obligation.

Here’s the problem: how can anyone expect us to grow our way out our debt obligations, when debt is growing faster than the long run average growth rate of GDP? The long-run average growth rate is about 3.5%.

Meanwhile, debt growth has been at a much higher rate.

What needs to change is our spending. GDP growth will be what it’s going to be. We can’t change that. But we can sure change how we think of borrowing and the use of credit. And that’s the real secular trend to be focused on. Because through tighter control of credit, control of inflation/hyperinflation risks we see before us will be greatly reduced.

But this is all being juxtaposed against a deflationary backdrop. All you need to look at is the latest Flow of Funds release from the Fed to see that even though we have benefited from a sharp rally in equity values from March ’09, the net worth of households is still a good deal lower than 2 to 3 years ago:

With such a deflationary context, gold loses its luster as a hedge against inflation, simply because there’s no inflation in the prices of goods and services to hedge against. In such a scenario, gold loses some purchasing power while cold, hard cash makes gains in its purchasing power.

Which explains why there are so many commercials out there trying to get people to sell their gold for cash. For them, the current situation is about raising liquidity – not about holding onto assets that are illiquid.

This presents us a ‘wishbone world:’ two scenarios, with plenty of pulling and tugging on both sides, all to see which side gets the bigger half of the wishbone.

Let’s just hope someone doesn’t lose an eye in the tug o’ war.



Filed under finance, government, macro, Markets, Way Forward

2 responses to “God, Gold, Guns & Butter, and Cold Hard Cash

  1. Professor, you really extended the conversation with this post.

    Your points on GDP vs debt brought up an old question on GDP calculation. In your view (or in views you might recommend) how accurately does GDP reflect the productivity of the KIND of economy we have in the 21st century?


    • Tamlela, you bring up a very interesting question: How well does our measurement of GDP reflect our, well, GDP? Or our economy? It’s something that needs to be thought through more.

      Interestingly enough, The Heritage Foundation had a seminar on that very topic back in December (maybe November). I have some presentations from that seminar I can offer up as starting points for a discussion, but it’s a very good and highly relevant discussion for us to be having.

      Sadly, I just don’t think these conversations get the attention they deserve. Maybe this can start to change that.

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