Politics, the economy and Gold

 

As the US becomes increasingly politicized and polarized the economy is inevitably effected.

A major issue that is often neglected is the fact that the United States Economy enjoys the global advantage that accrues to the world's reserve currency: the US Dollar.

For a country that has run massive deficits for over 50 years and has also run a massive current account deficit for nearly as long - the one thing that has kept inflation and interest rates relatively in check has been the dollar's reserve status.  Until recently.

Because so many global contracts settle in dollars: many natural resource contracts as well as many large financial contracts and most financial derivatives (a quadrillion dollar OTC market) every country has need of US dollars and every country carries dollars as part of their reserves so the bid on dollars has been high keeping the dollar interest rate low.

This entire construct is predicated on the stability of the US Justice system that will enforce the integrity of dollar dominated contracts.

Until recently this system has been the bedrock of US financial superiority.  Until recently.

The other contingency that has kept interest raters and inflation low is the fifty year movement towards globalization.  Until Recently, cheap labor, cheap production costs, competitive sourcing have all been a deflationary power.  Until recently.

Finally the third huge contingency that has floated the US advantage is the fact that Paul Volker raised rates to nearly 19 percent to crush the inflation of the 70's.  He was able to do so in part because of the total independence of the Fed combined with that fact that the US was a creditor nation with low debt.  So the high rates were not crippling.  For the last 50 years every increasingly politicized Fed Head has simply lowered rates to iron out economic problems.  Until rates hit ZERO.  Recently.

Now, all the things that kept the dollar in control and rates and inflation in check have reversed.

The world is deglobalizing. The US - and every other first world county - is a massive debtor nation. And the US justice system is under constant attack by the Trumpist wing of the Republican party which insists that the US Justice system is corrupt and can't be trusted.

Add to that massive supply chain disruptions from covid and a war in the world's largest grain and oil producing region and you have a perfect storm for inflation.

The very worst thing we could do as a nation under the circumstances is politicize the inflation problem.  It is not a political problem but the result of several 50 year trends violently reversing all at once.  

This creates massive instability.  To politicize the problem magnifies the instability.  

We are in the process of politicizing this problem.  And in doing so we will tear down faith in the last institutions where faith has held: the Justice System and the Fed.  This reaction in a massively polarized country will serve as the coffin nail that tips the country from a place where international businesses prefer to write their contracts in dollars to a place where international business decides that dollar denominated contracts no longer provide the necessary stability.

That will be crushing for the dollar.  But great for gold.

GOLD"S BEST FRIEND

 

The great secret of gold is that is it the ultimate hedge against INSTABILITY.  And whatever you think about Donald Trump, love him or hate him, you have to admit he is the greatest force for INSTABILITY to hit the western world since Hitler.  

When he came into office in 2016 gold was at about $1200 per ounce.  When he left office after four of the most unstable years in this nation's history gold had soared to $2000 per ounce.   That's a great friend for gold,

But the force of Instability has continued unabated since Trump left office, as more and more politicians embrace the love of instability that is Trumpsim.    And perhaps his greatest gift to Gold is stacking the Supreme Court with a group of partisan hacks who have managed in one short year to destroy the credibility of America's Greatest institution of stability.

America's entire competitive edge in the world as an economic power has rested on the respect the entire world has had for the stability of America's Justice system.  

Why?

Because the world knows that when you do business in the United States of America your contracts will he honored.  That is Stability.  That has been our competitive edge.

You can talk all you want about American Innovation and competitive edge blah blah blah, but the one thing that keeps the dollar stable in the face of massive deficits and a massive current account deficit (Both tremendously exacerbated by Trump) is our most stable judicial system.

Investors know worldwide that when they invest in the US their investment is governed by our rock steady judicial system.  A judicial system that until now can not be tainted by partisan politics that will dicker with your invesment according to parisan politcal whim. 

That is our edge.

Trump rocked that edge by pulling unilatterally out of previously negotisated international contracts.  Yet the international business community still had faith in our courts.

It would be premature to say that faith has been lost.

But for the first time in the modern business era that faith is in question.  With the Supremd Court being tinted with the stink of partisan politics, the international community has to wonder about how inviolate their conracts in the US will be going fowards.  If the party in power decides the courts should abrogate certain contracts - will they do so?  How can you be sure?  And if you're not sure - why accord the dollar a special status?

And that is Trump's biggest gift yet to Gold.

To be sure, the price of gold reacts slowly to this.   But it does react.  Over Time, as the loss of faith in our institutions - the hallmark of Trumpism - continues the price of gold rises.  But nothing will help the price of gold like the loss of faith in the US Justice system.

Bank on it.

A BRIEF HISTORY OF GOLD AND STABILITY/INSTABILITY

 

Comprehensive written records of human activity go back to about 3000 BCE in Egypt, Sumer, and Mesopotamia.  Undoubtedly there was writing somewhat before then but it has been lost to us on account of some kind of massive flooding event that destroyed records before this time.

The earliest records are largely of two sorts, a) cosmology and prayer/curse literature and B) transactions.  From the transactional literature (this much grain was harvested and turned into this much wheat and traded for this many cows etc) we know that Gold and silver and certain base metals were used even in these early times as forms of money.  

Gold was used especially for large trade inolving governments.  Sophisticated units of weights were used to measure the gold which could then be traded for other valuable commodities.

It wasn't until about 700 BCE that gold (often mixed with silver to form electrum) was cut into small units of account that could be used by individual traders for smaller transactions.  This practice proved to be so convenient that retail trading posts (shops) opened up all across western Asia where this practice originated.  (Present day Turkey).  

In about 550 BC Croesus of Lydia originated the first Bi-metallic coinage system.  Within a hundred years, this system had spread thoughout the western world.  

400 years later as Rome conquered the known world the system of metallic coinage, with Gold being the most valuable and sought after metal,  became the standard of trade throughout the known world.

By this time there had arisen a class of private citizen that had become extremely wealth and powerful by being adept traders - rather than skilled warriors.  This trade economy also necessitaed the birth of a class of lawyers and judges to draw up contracts and settle disputes - and citizen class to serve a juries.  The economies of this period were quite similar to our own.  Gold was thought of as the glue that held these economies together - because privately owned gold conferred a security to private wealth that could only be challenged by Emperors who controlled vast armies.  

This lasted through the Byzantine Empire, through the medieval period, through the Italian Renaissance and through empires domintaed by the British, French, Dutch,  and Spanish.  Through two world wars and up until 1971 when Richard Nixon closed the gold window and the world converted to Dollars.

Still, after 1971 all major governments of the world kept Gold as a reserve currency of last resort in order to stabilize their wealth should their fiat currencies encounter periods of loss of faith.

This was largely unnecessary as the US economy was so dominant in the world there was no serious challenge to the hegemony of the dollar.  And whatever difficulties the US ecnomy did encounter - it was the worlds' principal creditor nation which gave it the flexibity to deal with temporary setbacks.

The biggest setback occured in the late 1970's with a vicious stagflation.  THe Fed Head Volker riased rates to 18 percent and crushed inflation.  Gold soared from $250 to $750 and then fell back to $250 when inflation was crushed.  The dollar was still King.

This is where is all started to go wrong.  

With rates at 17 percent Reagan and the new Fed Head Greenspan then got the idea that the RELATIONSHIP BETWEEN THE PRICE OF MONEY AND REAL WORLD BEHAVIOR IS LINEAR.  In other words if cutting taxes from 90 percent to 60 percent stimulated positive risk taking behavior, then it should follow that cutting taxes fromf 60 percent down to ZERO should be equally simulative.  The same for interest rates.  If cutting from 18 percent to 16 percent was stimulative, then cutting from16 percent all down to Zero AND BELOW should be equally stimulative.

This is not reflective of how humans behave.  Somewhere on the way down towards zero humans stop taking risks that enhance the economy and start to take risks that are detrimental to the economy.  As money becomes cheaper than the real cost of money humans begin to recklessly gamble.  And as very very rich humans recklessly gamble the Fed has to bail out mistakes that are so big they affect the entire economic community.  

This gambling economy becomres increasingly unstable.  Because  each bailout requires more and more debt.  And each lowering of the cost of money below a stable equilibrium also fosters increasing debt.  To the point where we find ourselves today with the cost of money anchored near ZERO and debt and the Gambling impulse supported towards infinity - with infinite bailouts for the richest strata of scoiety.

Thus we move towards maximum INSTABILITY

And as Instability reaches intolerable levels gold begins to rise towards maximum value.

GOLD VS BITCOIN

 

What is the relationship between Bitcoin and Gold?

They are diametric opposites.  Despite the heavy propoganda campaign being waged by Bitcoin publicists that make the case that both Bitcoin and Gold are inflation hedges - nothing could be farther from the truth.

In fact, Bitcoin is a risk asset.  It behaves as a risk asset in that it goes up when the stock market goes up, and goes down when the stock market goes down.  It is sort of like playing an option on the stock market.  A lot of drama that feeds the gambling addiction with a promise of huge payoffs for the lucky few. Like an option it is a pure financially engineered gambling tool.  But an option can be converted into ownership of an underlying asset.  For Bitcoin, you simply own the idea.  It is pure gambling for the gambling junky.

Gold, on the other hand is thought of as an inflation hedge - but it really hedges the byproduct of inflation - INSTABILITY.  As faith in institutions crumble, as faith in the financial system crumbles. as faith in the political system crumbles - and most of all as faith in the currencies crumble - gold rises as an insurance policy for personal (and state) wealth,  Because Gold is its own underlying asset - immutable, untarnishable, with a 5000 year track record of holding its value against all forms of instability.

Unfotunately to addicts - it is so boring.  Often for years it does nothing but sit there.  Lumps of gold that do nothing, but sit there.  How dull.  Just like an insurance policy when nothing bad happens.  But when things go wrong, boy are you glad you owned some.

And best, of all as an instability hedge: Gold can not be hacked,  Bitcoin exchanges are constantly hacked, and once hacked their assets are lost forever.  And when quantum computing comes in a year or two, all blockchain will be obsolete.  But Gold can never be obsolete unitl humans are obsolete. It has been etched in the human consciousness for all of known human existence, and there is no reason to expect that to change.

GOLD AND CONVENTIONAL WISDOM

 

Conventional wisdom may usually be wrong - but it is instructive.  Right now conventional financial wisdom holds three things to be true: 

1) "The Fed is behind the curve."  Everyone says so.  By this they mean the Fed should have been raising rates at some nebulous point in the past.  Of course in the past nobody was in favor of the Fed raising rates.  But now everyone agress they should have done so

2) The Fed raising rates will do nothing to ameliorate the Supply Chain disruptions that are causing the inflation.  In other words raising rates will slow the economy, but they won't curb inflation, except on the demand side which is, right now, not at all the cause of inflation.

3) Everone seems to agree that the very last 2 trillion dollars of stimulus that helped the middle class were a mistake.  Not the preceding 10 trillion that the Fed took on its balance sheet to help the very rich, or the 3 trillion before that in tax cuts that helped the very rich.  Those 13 trillion were constructive and helpful,    The last 2 trillion just were giveaways that never should have happened.

Obviously, I think this conventional wisdom is fairly rediculous.  HOWEVER, when take together we can see a future that relentlessly unfolding:

FIRST, and most important, the idea that the Fed is behind the curve lays the groundwork for a general discontent with the FED.  Faith in the Fed to support the risk markets has been the glue holding the entire eocnomy together.  When the rainsing of rates slows the economy and inflation proves to be persistent - people will continue to criticize - and LOSE FAITH in the FED.

SECOND: Because everyone can see the supply chain disruptions are causing inflation there will be a strong call for the Fed to ease when their rate raising significantly slows the economy.

THIRD: There will be a great reluctance to bail out the middle classes and the poor - which will lead to massive unrest.

So what does that tell us about GOLD?

It tells us that the current price rise is only a prelude.  THese developing conditions will create a perfect storm for gold: High inflaion, Slow Economy, Loss of Faith in institurions, and general unrest.

INVESTING"S BIGGEST LIE - OR DUMBEST THOUGHT

 

It is a truism in investing that the markets are looking nine months to a year into the future and discounting what they see.  

That is so dumb.

The markets are comprised of many humans.  Humans look into the past for guidance as to what may happen in the future.  The markets similarly are looking into the past for guidance.

If they were looking into the future they would never crash as they do about every ten years and then get bailed out with infinite giveaways to the rich by the Fed and Congress.

So what do markets see as they peer into the past?  They see that every time they crash they get bailed out by the Fed and Congress - which are determined to enforce a socialism that protects the assets of the rich by socializing market losses and priviatizing market gains.

Understandably they see this repeating indefinitely into the future.

The fuutre we are facing now though is unique in that the amount of cash needed for bailouts have become so large there is a legitimate question of how much immediate harm will the next bailouts cause in terms of fueling an intorlerable infaltion?

The markets can not look into the future on that one, because it is not written in the past.

We will have to wait and see.

But anyone can make their own educated guess.

GOLD'S SECRET WEAPON

 

Gold's seccret weapon is no secret at all, but somehow is left out of the equation when most analysts talk about gold.

The CENTRAL BANKS of the world all store quantities of gold as a RESERVE CURRENCY.

They don't hold bitcoin, or silver, or stock, or cowry shells, or livestock, or any of the other things that your hear about serving as money.

They hold gold.  In large quantities.  All of them. 

And now that the United States has weaponized all forms of paper currency against Russia, all the central banks of the world are seeking to up their reserves of the one form of money that can not be weaponized: Gold.

Gold trades on gold exchanges in most every country of the world.  A central bank that has gold can not have its reserves confiscated or simply nullified by dercree.  They can't have their reserves hacked or cyber attacked.

And when quantum computing becomes a reality some time in the next five years, all paper assets will be vulnerable.  Especailly Bitcoin.  Gold will not be vulnerable.

This alone will be a massive driver of the gold price for years to come.

Ignorant people question whether gold is still money because you can't pay your rent with it.  But as long as the central banks of the world consider it the safest for of money - it is money in the bank.

And for the private investor it holds the same function as it does for central banks: it can not be weaponized.  Gold in your personal possession can't be hacked, or cyber attacked, or confiscated.

Yes, there was a gold confiscation back in 1930.  But citizens voluntarily complied.  That wouldn't happen today.  Not in the modern decentralized and global economy.  

Gold is the private citizen's wealth protector just as it is the wealth protector of the Central Banks of the world.