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Saturday, March 12, 2011

Japan and the Black Swan and Gold

It would be only too easy to jump on the Tragedy of the devastation in Japan and say: "See that's why you buy gold."

This type of logic draws a specious connection between disaster and the function of gold. Too many people view gold as a doomsday possession whose value becomes activated when misery rains down on humankind. Nobody sitting on a hoard of gold in Japan is any better off today than they were yesterday. And in fact, the price of gold didn't budge one dime in response to the disaster in Japan.

However, Japan's monetary health was on life support before this disaster. Japan currently runs a budget deficit that's 200 percent of GDP. Japan ran up massive debt in a massive property bubble twenty years ago and has been fighting the result with massive Quantitative Easing (Read: negative rates fostered by the Japanese Central Bank buying massive quantities of Japanese Government Bonds) ever since.

Now Japan must face this tragedy without any Reserves set aside. They will have to go much more deeply into debt. Hard to conceive for a country drowning in debt. If they had run a 10 percent surplus, year in and year out, then this disaster, as horrible as it is, would be perfectly manageable.

And this is at the core of the Black Swan Theory, which says that events like the one that just occurred in Japan are unforeseeable; they don't show up in any of the economic planning models used by Governments and Banks, and they occur with alarming frequency. THEREFOR, every prudent government (and family) must accrue SAVINGS (Read: Reserves: Budget Surpluses) in order to survive Black Swan Events.

Gold only becomes valuable in the absence of this type of prudent fiscal planning. It's not the disaster that makes gold valuable. It's the DENIAL that this type of disaster is part of the fabric of life.

The Absurd government projections for growth, revenue, and GDP are almost always wrong. Because they don't take into account any sort of Black Swan Event of any magnitude.

They do this in First World Countries with Reserve Currencies because they are used to printing money to throw at disastrous events. The debts mount. The events hit. And tipping points are reached.

This is where Gold comes in. When all other currencies fall, gold rises. Not because it thrives on disaster. Because it represents savings that can not be debased in an environment that has denied the value of savings.

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