Posts Tagged ‘Gold’

HEDGING AGAINST INFLATION

June 29, 2010

HEDGING AGAINST INFLATION

Behind each currency stands a central bank. Each central bank, guided by Keynesian economic theory, is inflating the currency. Money supplies in all countries are always increasing. As a result, prices increase as money loses value. That’s inflation. If you have any savings, the value of your savings is decreasing. What to do? How can you protect your savings from the erosion of inflation?

One answer is, don’t have savings. Go into debt. Spend as fast as you can to acquire real goods instead of bad money. Real goods will keep their real value. This is what our governments, also guided by Keynesian economic theory, encourage us to do. Keynes said that this is the road to prosperity.

Since the 1930s, in the USA, this has been good advice, if you’re borrowing to buy a home. The US government set out in the 1930s to make home-buying irresistible with subsidies, loan guarantees, and tax breaks. In the long run, for most people, a mortgage to buy a home has proven to be a good investment. Many of those who lost out in the recent housing bubble were those who bought a house they really couldn’t afford.

This happened because the government pressured the banks to lower their standards for credit worthiness. Others were caught out because of the euphoria of a boom. The oft-repeated statement “you can’t lose” was the consensus until the bubble broke. Home prices were much higher than the cost of building them. People paid such prices because they “knew they couldn’t lose”.

Of course the incentives to buy a home heaped on by the government pressured many to tie themselves down geographically. It limited their options to find new jobs in a recession, when it was harder to sell your home to move to a new job. Otherwise, the risk was small and the long-term gains were great because the government was subsidizing your purchase with loan guarantees, low interest rates, and tax breaks.

Supposedly, the zero risk option to escape the erosion of your savings by inflation was to buy US government bonds. You can believe that if you trust your government. But if the government decides to default on its debts, who can prevent it? And government has the option of repaying you with cheap money by inflating the currency.

In fact that is already happening. The debasement of the dollar by inflation is more than enough to wipe out the value of the interest that the bonds supposedly pay for the loan. You’ll lose a bit less than you might lose if you keep your money under your mattress. After all, this is the same government that stole all the gold that backed the dollar when we were on the gold standard back in 1930.

So what other options are there to escape the theft by inflation? Many investments can pay much higher interest than government bonds. The more interest an investment pays, the more risk of loss goes with it. Perhaps corporate bonds are the safest. The stock market can pay much more, but it takes expertise to know which stocks or bonds to buy.

I have twice invested small sums in mutual stock funds with fair success. For a modest fee (less than 2% per year) a specialist manages the fund for some goal: maximum earnings, maximum growth, minimum risk, etc. This is fairly safe in the long run (several years) and can pay with growth in excess of inflation. In the short term, the value of your fund will bounce around a bit. Just sit tight, ignore the daily static, and leave your fund to grow until you need the cash. Find a fund with a record of growth over many years, including bubbles and recessions.

Another safe long-term investment is in gold. This will show even more short-term static than stocks, but gold has inherent value and in the long run is a very good hedge against inflation. However, you earn no interest on gold, you may have to pay storage fees, and transaction fees when you buy and sell. And there’s always the chance that the government may confiscate it. They have done it before.

Let’s face it. We are powerless against the total power of government. We are their only means of support, and they will take it from us , somehow.

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MONETARY REFORM

April 30, 2010

Monetary Reform
Gold was long ago chosen by the free market, by the people, as the best money. The gold standard is a convenient way to use gold as money. This means honest banknotes (no counterfeits) and token coins in circulation, redeemable at any time in gold at face value. Face value should be stated not in discredited units like dollars, pounds sterling, francs or yen, but in ounces or grams of gold.
Banking adds convenience to the gold standard, with checks and electronic transfers for convenient payment. Honest banking would mean simply enabling easy transfer of ownership of gold from one person to another, and acting as go-between for loans of gold.
How do we get from here to there?
Many economists have proposed assorted schemes to return to the gold standard. Most of them require either the co-operation or overthrow of the government. I see no chance of any government depriving itself of the power to use us with fiat currency. Therefore, I propose a free market re-creation of a gold standard, in free competition with government currency. Here’s how I see this happening.
First, get the message to the people- they are being cheated and manipulated through the stealth tax and the government control of the money supply. Their votes are needed to force the government to give up the monopoly in the money business. This would not force the government to quit the money business; it would simply require them to compete.
Next, repeal any laws that prohibit trade and contracts in other currencies. This would make it legal to buy, sell, lend, and make contracts (loans, insurance, annuities, mortgages, etc) in any currency, including, of course, gold.
Make it legal and easy to buy back our gold from the government at the free market price.
With this freedom, the market could provide us with an honest currency, with private banks and private mints dealing in gold coins, subsidiary token coins and bills.
Can we trust these private individuals to deal honestly with us? Not entirely. However, we won’t do business with private, competing banks and mints unless they give ironclad guarantees, and develop a reputation for honesty. They have to earn our trust, as any business operating in the free market has to earn our trust. An easy route to trust would be Insurance contracts that guarantee the safety of our deposits. The insurance company would have an excellent motive to detect and eliminate any cheating.
If banks don’t abide by their contractual obligations, we, or the insurance company, can bring them to justice and try them for fraud. That’s just what we can’t do to government, and that’s why we can’t trust government with our money.
There is no telling just how such a system might evolve. The free market is forever surprising us with new ideas. It could well give us an honest currency and an end to the boom and bust cycle. I would expect banks to evolve explicit contracts on the terms for withdrawing funds, such as advance notification for larger withdrawals, and deposit insurance (but not by government) as a guarantee against fraud or failure.

WHY GOLD?

April 2, 2010

Why Gold?

Each commodity has its own advantages as money. Goats and cattle are still used occasionally as money; they will transport themselves to the marketplace, but it was not practical to spend a fraction of a goat. You had to use something else for “small change”.

Grains were easily divided down to the smallest fraction for small purchases. However, grains would eventually spoil, and very quickly if they got wet and turned moldy. For large purchases, transporting enough grain for trade became difficult.

People soon decided that metals were the most convenient form of money. Precious metals made it possible to carry enough money for large purchases. Cheaper metals made it convenient to make smaller purchases. Gold, silver, and copper coins became the commonest form of money.

This was the free choice of the marketplace, made many times in many places, and the choice withstood the test of time. Of the 3 metals, the subjective value of gold has long proven to be the most stable. Thus in the case of the circulation of coins of all three metals, coins of silver and copper can be treated as token coins. Token coins can be made of even cheaper metals, or of paper. They circulate on faith that they can be redeemed in gold.

The physical and chemical properties of gold make them useful for many things. Gold doesn’t corrode in the way that iron rusts, and copper and silver tarnish. For this reason, gold makes excellent jewelry. This would make it a best choice for many purposes, but its scarcity makes it too expensive for many purposes, so other more common and cheaper materials are usually used.

Gold is an excellent electrical conductor. It is used in microcircuit chips in very small quantities, but for distributing electric power cheaper metals are used.

For whatever reason, the free market, through many centuries, has chosen gold as the best material to use as money.

As money, the scarcity of gold is an advantage. Millions of people over thousands of years have searched the earth for gold. There is little chance that anyone will ever find a source of gold, easily enough extracted, that it will make a sudden big addition to the gold already mined and refined.

So the available stock of gold in the world increases very only slowly. This means that the price of gold depends primarily on the demand, and the value of the money used to buy it. It is not subject to the whims of banks or politicians. They can’t create gold to rob us by counterfeiting.