The hype and nonsense Bitcoin and gold has blasted through the troposphere into the stratosphere. I suppose hype could get higher. The next target is the mesosphere.
Some of those residing on terra firma are tired of the hype. I am one of those.
Let’s kick off the discussion of gold hype although Bitcoin is far worse.
Inflation in 15 Minutes
James Rickards says Inflation Could Be Caused in 15 Minutes.
The Fed can cause massive inflation in 15 minutes. They can call a board meeting, vote on a new policy, walk outside and announce to the world that effective immediately, the price of gold is $5,000 per ounce.
The Fed can make that new price stick by using the Treasury’s gold in Fort Knox and the major U.S. bank gold dealers to conduct “open market operations” in gold. They will be a buyer if the price hits $4,950 per ounce or less and a seller if the price hits $5,050 per ounce or higher.
They will print money when they buy and reduce the money supply when they sell via the banks. This is exactly what the Fed does today in the bond market when they pursue QE. The Fed would simply substitute gold for bonds in their dealings. The Fed would target the gold price rather than interest rates.
Of course, the point of $5,000 gold is not to reward gold investors. The point is to cause a generalized increase in the price level. A rise in the price of gold from $1,000 per ounce to $5,000 per ounce is really an 80% devaluation of the dollar when measured in the quantity of gold that one dollar can buy.
This 80% devaluation of the dollar against gold will cause all other dollar prices to rise also. Oil would be $400 per barrel, gas would be $10.00 per gallon at the pump and so on. There it is — massive inflation in 15 minutes: the time it takes to vote on the new policy.
Don’t think this is possible? It has happened in the U.S. twice in the past 80 years. You may even know some people who lived through both episodes.
The first time was in 1933 when President Franklin Roosevelt ordered an increase in the gold price from $20.67 per ounce to $35.00 per ounce, nearly a 75% rise in the dollar price of gold. He did this to break the deflation of the Great Depression, and it worked. The economy grew strongly from 1934-36.
The second time was in the 1970s when President Richard Nixon ended the conversion of dollars into gold by U.S. trading partners. Nixon did not want inflation, but he got it.
If gold went up five times, would oil rise by five times?
Let’s put Rickards theory to the smell test.
Gold Since 1989
Oil Since 1989
Gold vs Oil
|Asset||August 1990 close||August 2000 Close||January 2016 close||August 29, 2017 Close|
|West Texas Crude||39.51||30.84||33.75||46.37|
Gold vs Oil Synopsis
- In August of 1990 gold closed at $402.50. As of August 29, gold was at $1315.20.
- In August of 1990 oil closed at $39.51. As of August 29, oil was at $46.37.
- Gold rose 226%. Oil rose 17%.
Thus, a rise in the price of gold of 500% does not mean oil will do the same.
Yes, it is “possible”.
However, the entire discussion is absurd because the Fed is highly unlikely to do what Rickards says. More importantly, even if the Fed did what Rickards said, the charts show the results may not be as hyped.
Rickards’ point about Roosevelt causing inflation by devaluing gold is debatable.
What Really Ended the Great Depression?
Heritage writer Stephen Moore accurately addresses the question What Really Ended the Great Depression?
I’ve written before about the historical lie that President Franklin Roosevelt’s New Deal programs ended the Great Depression. After seven years of New Deal-era explosions in federal debt and spending, the U.S. economy was still flat on its back, and misery could be seen on the street corners. By 1940, unemployment still averaged 14.6 percent. That’s some recovery.
It is true that, as the war started, economic output surged, and unemployment fell. But periods of all-out war are very different than peacetime. Is it any surprise that unemployment fell dramatically when nearly 12 million Americans joined the military?
From 1942-45, America was not a free market economy; we were an all-out wartime economy – with the normal laws of economics suspended.
But a war is no way to fix an economy. Countering ISIS is not a jobs program. During World War II, when we built ships, tanks, aircraft, dropped bombs and sent our troops into harm’s way, we weren’t creating wealth.
A war is no more stimulating to an economy than a burglar stealing your money, the Japanese tsunami in 2011, Hurricane Katrina or a tornado that levels an entire town. Without such calamity, the resources spent reconstructing (or destroying, in the case of war) would be spent purchasing useful, life-enhancing products or investing in technology and capital equipment needed to boost economic output.
In the 1940s, government spending did, indeed, surge. The federal share of GDP rose from under 12 percent in 1941 to over 40 percent in 1943-45. In other words, almost half of everything that was produced in the nation was to fight the war. Domestic spending on many FDR New Deal programs in education, training and social services dropped more than 90 percent.
The real issue is what caused the economy to surge after the war was over.
This story also is not covered in the history books. Shortly after his third reelection in 1944, and at a time when the outcome of the war was no longer in question, FDR and his domestic advisers plotted a new New Deal with such spending items as national health insurance. The Keynesians were sure that the massive postwar drop in government spending would catastrophically tank the economy.
Paul Samuelson, the dean of neo-Keynesians at that time, warned in 1943 that, unless wartime spending and controls were extended, there would be “the greatest period of unemployment and industrial dislocation which any economy has ever faced.” Business Week magazine predicted unemployment would hit 14 percent with the postwar cuts.
Here’s what happened: Government spending collapsed, from 41 percent of GDP in 1945 to 24 percent in 1946, then to under 15 percent by 1947. And there was no “new” New Deal. This was by far the biggest cut in government spending in U.S. history. Tax rates were cut, and wartime price controls were lifted. There was a very short eight-month recession, but then the private economy surged.
Personal consumption grew by 6.2 percent in 1945 and 12.4 percent in 1946, even as government spending crashed. Private investment spending grew by 28.6 percent.
The less the feds spent, the more people spent and invested. Keynesianism was turned on its head. Milton Friedman’s free-market advocacy was validated.
In 1946, the unemployment rate averaged below 4 percent and stayed that low for the better part of a decade. This all happened during the biggest reduction in government spending in U.S. history, under President Harry Truman.
CPI Great Depression
What really ended the Great Depression was not the New Deal, not gold confiscation, not World War II.
Rickards said “end deflation” not end the depression, but even by that narrow measure, Rickards thesis is extremely questionable.
The supreme court overruled Roosevelt’s inane farm policy in 1938, the dust bowl ended in 1939, and WWII started September 1, 1939.
Returning to the Hype
With that history lesson out of the way, let’s return to the hype.
for The Daily Reckoning
P.S. For the past several months, my team and I have been vetting this very special gold opportunity on behalf of my readers…
It could potentially pay you back as much as 30 times your money over the long term, if not more.
To be clear: This deal won’t be for everyone. There are specific qualifications to invest in it, for example. If you DO qualify to get in on this deal, however…
I guarantee it’ll be one of the most exciting and potentially lucrative investments you could ever make.
The copy writers were clever enough to say “potentially lucrative” but the copy is still BS. No one can “guarantee” investment excitement.
Moreover, in my experience, the more one is “excited” by allegedly sure things, the more one is let down if not obliterated by the idea, often through excessive leverage.
New Case for Gold?
There is no “New Case for Gold“. There is a case for gold that’s the same as it has always been.
Sure, there are as strong as reasons now as there have ever been: Bigger and bigger bubbles, negative interest rates, nearly unbelievable central bank balance sheets, and a banking system in Europe possibly on the verge of collapse.
These are not “new” themes, but they are new extremes in central bank absurdities.
To be fair, I like the title. The “case for gold” is not a best-selling title.
I share part of Rickards’ message. I advise people to buy and own gold.
I just do not see a need to make up stories about what the Fed might do or what the results may be.
But hey, hype sells.
When Does Gold Do Well?
Gold is not really an inflation hedge per se. Gold fell from $850 in 1980 to $250 in 2000 with inflation every step of the way.
Rather, gold performs well in specific instances, the primary one being a loss of faith that central banks have things under control.
Is everything under control? I think not and I believe Rickards would agree.
For further discussion, please see How Much Gold Should the Common Man Own?
Also, please consider my 38 slide powerpoint Venture Alliance Presentation on trends in sentiment, asset bubbles, and gold.
Coming soon: Bitcoin Hype.
Mike “Mish” Shedlock
Hello Mish, I love your Terra Firma quote. I know you are sufficiently intelligent to realize the translation.
Terra = Earth Firma = Stationary.
Yes Mish our ancient scholars, scientists philosophers knew that we live on a stationary earth.
Unless you wanted to be burnt at the stake by the vatican over 500 years ago when they fooled us about this born out of a big bang forever expanding into nothing whilst traveling a combined speed of 1 million MPH.
I think it translates as Solid Ground or Firm Ground.
That would be fine if we would stand on solid ground in all this hype but I guess that is not the case.
Erik Verbinski said:
Very good article. I think after WW2 people were positive again and that made a big difference for the economies. Also so much was destroyed in Europe, so many cities needed to be built up again which were all bombed by the US and her allies.
Michael Nevins said:
And don’t forget the “baby boom” that occurred after the war.
Stuki Moi said:
Another, under reported and under emphasized, catalyst for the performance post WW2, was that the preceding Depression and then War, went a long way towards “tossing the book” of all that came before it. Blowing out the crud. Tossing the bums out. What have you.
Such that all the new ground that had been made available by technological, demographic and other changes between 1930 and 1945, was largely virgin, unencumbered economic land. Up for grabs and an opportunity for anyone with “a hopeful heart and a willing hand.” The preceding 15 years had either wiped out, or rendered irrelevant for arge sectors of the emerging economy, the customary entrenched rent seeking classes, whose focus is always to set up legal, political and financial tollgates. To slow everyone else down, make them fork over ever greater shares of their output, and make them accept ever greater influence over their lives and livelihoods by the rent seekers themselves.
The emergence, along with a similar dynamism on a narrower scale, of Silicon Valley, arose from similar conditions. There really weren’t any rent seekers yet, in the new spaces being opened up by Moore’s law. Noone positioned to sit back and get Government to enforce “claims” they insisted on having. So innovators could move fast, free and unencumbered. Hollywood in it’s early days were similarly virgin. As were the music business in the decades following the emergence of Rock’n Roll.
Of course, the rent seekers are now very well entrenched in all sectors again. With the predictable results of slow growth, low productivity, low innovation, and reduced opportunity for a populace forced to pay an ever higher share of national output in simple rents again. With the attendant result that all economic actors, focus more and more on positioning themselves on the right side of the rent collection divide. Rather than on innovating and producing. Since any proceeds from the latter, will just be confiscated to prop up the entrenched anyway.
An interesting argument, well worth considering for its possible impact after the war. Personally, I have always felt the post-war boom was a combination of four things:
Recovery from the depression lows
Re-purposing the economic infrastructure developed during the war
Demographics, ie the baby boom
The only one of these four things still growing the economy is Technology. Demographics is actually a negative, as the baby boomers retire, and remove themselves from the workforce. Hence, the reason for relatively slow growth in most developed nations.
In 2011 gold hit an all time high of a little over $1900.
I remember it well because I sold too early at $1500.
Seems like a reasonable selling point to me in retrospect
Never sweat over top tick. I bought silver up to $16/oz. Sold in 1/4 lots, one at $30, one at $35, one at $40. Final quarter of my stack still in vault. Don’t regret any of it.
I thought inflation was an increase in the supply of money or credit – not necessarily an increase in the price of oil.
It seems to me that printing money and buying gold at a really high price would increase the money supply, especially after the miners got going.
The 850/oz POG was a one-day event. Longer term moving averages were surely much lower.
Who knows what the government or Fed will do if the debt ceiling forces a balanced budget and government shutdown with Wall Street in bubble mode..
I used to read Rickards but gave up some time ago because I think he turned into a ‘buy my latest investment idea/report/newsletter’ shill. Very disappointing, although I have to say I have been disappointed by several who seemed to be genuine but turned out to be as fraudulent at the rest. Rickards writing and thoughts are simply marketing bumf.
To you MISH I say thank you. You are one the few good guys I think.
“During World War II, when we built ships, tanks, aircraft, dropped bombs and sent our troops into harm’s way, we weren’t creating wealth.”
Agreed. But we did get the inventions of the jet plane, radar, TV, computers, international travel, mass production statistical process control, nuclear power, space travel, massive/modern factories that were easily retooled for civilian productions, etc.
And since America was barely touched – these new inventions/process could be used to create wealth once the war ended. And they were.
Most of those advances in technology were already out there in one form or another prior to the war, and would have likely happened anyway. Yes, they did get a big boost and accelerated development because of the war, but physics is physics.
And I would say that in the case of nuclear power the acceleration of development has been detrimental. Instead of allowing a natural and widely distributed evolution it has been highly centralized and hidden, with very little knowledge and far too much influence by a very small group of men. So we end up with very sketchy (but surprisingly safe) reactor designs, uninsurable by anyone but the public, and extreme lack of understanding of the physics and technology behind them. And of course completely centralized fuel systems and subject to the whims of politicians -who were more interested in creating weaponry instead of creative use.
I’ll never be a fan of gold, but Bitcoin and Gold shouldn’t be used in the same sentence. Bitcoin is nothing more than a joke whose punchline has just not yet been told.
Gold isn’t common currency at the moment so revaluing it won’t increase inflation.
Tony Bennett said:
Yeah, unless widely held don’t see much happening.
Of course, I own no gold …. other than a $5 piece I purchased from the US mint 20 years ago … and a couple of heirloom pocket watches.
I bothered to google Rickards and – just as I suspected – he was in the (sizable) Clown Brigade that thought inflation coming from QE. I knew back then ZIRP/QE would be disinflationary … and ultimately deflationary.
Jim Rickards: I think there is a definite and highly significant danger of inflation coming from QE and QE2 specifically.
That is why people hold it… not much happens to it.
Excellent article blowing away considerable BS.
Worth holding some gold to 5-10% to act as ballast against CB induced turbulence. Forget you own it and get on with life.
“Rather, gold performs well in specific instances, the primary one being a loss of faith that central banks have things under control.”
It’s the loss of faith in govt that is the primary case for gold, not the Fed.
“In August of 1990 oil closed at $39.51”
Aw, c’mon, you are one person that I expect better than this. Crude was trading in the teens prior to that month. Picking a month helicopters decided to fly over Kuwait, as a reference point, is not cool at all.
I’ve been pretty disappointed with Rickards in recent years. For someone deemed to have high credibility he’s been spouting some utter nonsense. A bit like a top actor selling out and doing mass-market movies for the cash.
Maybe he never had any credibility, I dunno, but he went even further recently and said: Crash on (some or other date). It may have come and gone now. In September last year some momentous event was to take place – the day came and went without incident.
Robin Banks said:
I think Rickards is away with the fairies if he thinks the US will revalue gold when the investment banks are up to their necks in naked short positions and derivatives.
Still, it would give Vlad’s 401k a boost.
Blockchains are what the techno-experts* at all the investment banks are using to look like the smart guys in the room. For a while it was high-frequency trading, but now everyone has a 100 Gb/s connection to the stock exchange computers so they have to show their relevance with something new.
*Hillary Clinton used the term when she was at the State Department to describe the people who were controlling the information flow into the Arab Spring countries. She described them like they were a young ragtag team of super-geeks who were able to “code” up a bunch of revolutions. In reality they were using Onion and TOR and it’s highly doubtful they’ve ever “coded” anything in their lives. These same types are all over, running projects using COTS and open source tar balls to impress the non-tech management. I think the term sounds more like a club DJ.
Just to clarify. Your connection speed has absolutely nothing to do with HFT. It is distance to the exchange, measured in fractions of a second… placing it just ahead of your transactions… coming from “Iowa”.
Blockchain is as interesting as it is complicated, so I won’t bother correcting you about that. 😉
I get that. Both points you crapped on. But I’d bet 90% of the people talking about bitcoin have no idea what it is, nor do they care. They just want to sound like the smartest guy in the room.
In this game you can say ‘might’ or could’ or ‘can’; if you say ‘will’ happen you’re an amateur.
The Great Deformation is my Bible, and David Stockman is his profit. Why, as a founder of Blackstone, former Congressman famous for slamming the Gipper when he was encouraged to lie, billionaire investor would associate himself with Gyp Joint Agora and the even seamier Rickards is a mystery. Rickards, a failed State Dept flunkey famous for insisting Hillary would win, used to espouse The Kissinger System, good for everything like Carter’s Little Liver Pills whereas Kissinger is a war criminal who helped Gerry Ford give Suharto the nod to massacre 700,000 residents of West Irian.
Wow….lot’s of charts, graphs, and data !
I wonder just how many times over the past 100 years them gubbermint boys have “recalibrated” their “formulas” for measuring all this crap.
I know one thing….that Social Security COLA (cost of living adjustment) number will keep getting “massaged” or else retirement age will be 150 for all of us.
QE causes inflation…right now limited to Wall Street and real estate. Do QE for the little people and you got all the inflation you want. Do an MMT job guarantee, increase Social Security payout, institute minimum income and you got as much inflation as you want. Neo feudalism and neo liberals, a redundancy I know, will fight that to the death.
The FED buying bonds only caused inflation in the stock market. I suspect buying gold would do the same.
It is both amazing and unfortunate that scammers like Jim Rickards can make a comfortable living promoting hype. Owning a little gold is a good insurance policy, but Rickards’ extreme hype almost makes it seem dumb to own gold.
Mish has missed the run up of Bitcoin, massively. Every investment is driven by
The mindless who chase money until they die. You can not predict what the mindless will do. From Wall Street to your neighbor
They always think they’re right because the ego is involved. Spending all day pontificating about
This or that imaginary outcome is insanity. How many will say I dont know, or I was wrong?
I say “I don’t know all the time.”
As for “You can not predict what the mindless will do.” bingo!
Since one cannot predict when bubbles will end, it’s best not to invest in them, or as some – did recommend put buying at the wrong time.
It’s not even clear now if Gundlach will win his VIX bet.
I bet he had a 100% profit in days, but he wanted 400%.
“It’s not even clear now if Gundlach will win his VIX bet.
I bet he had a 100% profit in days, but he wanted 400%.”
They were December or January Puts. How far out of the money – I have no idea. The chance he was ever up 100% on it is SOMEWHERE BETWEEN 0.0 AND 0.00. Even the recent pop in the VIX would only reflect 1 month out options, and no way did 5 month out options move close to that. Maybe up 1 vol, that far out.
Since then 4 weeks have passed and the market today is now SPX 2470, and when he made the comment it was SPX 2475. So far, he is taking it up the heiny on that bet.
Once again though, his was not a VIX bet, it was a directional option bet.
In all fairness – lots of time left, but so far..up the heiny!
You said it perfectly once before. Trying to trade options (directionally), your timing better be impeccable.
I’d add in, your just an idiot for trying.
Captain Dave said:
Paper money is fake money. Gold is money and nothing else is. Paper money is a promise to pay. Liberals make un-keepable promises by nature. But liberalism has peaked and thus so will all of their Keynesian “in the end we’re all dead so go ahead and play the Ponzi today” thinking. The new swing toward conservatism is changing the way people think about debt based existence and other un-keepable promises.
Nobody who costs averages into gold for their retirement fund will be sorry they did. Many people who trust fake paper money and fake paper “assets” will rue the day they got caught up in the global debt Ponzi.
Forget the near term, fear porn market timing aspects of it. Buy physical gold for your retirement account on a regular basis just as you would contribute to a 401k. In this way you end up with a pile of metal by retirement and government has nothing to do with it. Government cannot put capital controls on it. Government cannot tax it. YOU can choose to comply with government demands that you turn it in or pay fake cap gains on inflation but you can also choose to ignore the government because there is a big local market for physical metal coins which is simply beyond the government’s ability to police and control by force of gun.
Retirement accounts are for saving, not gambling. Speculate with your fun money if you like but not with what you consider retirement savings. With paper assets if you get out of the Ponzi in time then you will do very well but by definition not everyone can get out of markets in one piece. That’s because markets do not create value, they simply transfer it from loser to winner. Since Wall St effectively taxes markets by an amount equal to their profits, there will be a lot more losers than winners. That is math, not speculation. Those who ignore the wild craziness of markets and the liberal promise of something for nothing will be very safe and secure buying gold for long term retirement.
Hey Captain. Please tell me you’re not a financial advisor.
“Retirement accounts are for saving, not gambling.”
And you’re telling people to put it all in physical gold? Yikes!
“YOU can choose to comply with government demands that you turn it in or pay fake cap gains on inflation but you can also choose to ignore the government because there is a big local market for physical metal coins which is simply beyond the government’s ability to police and control by force of gun.”
Wish you the best of luck. Them “gubbermint” boys can play real rough when their asses are up against it, like in a “sovereign default”.
Stanley Blake said:
Captain, I don’t think it’s a good idea to get on the IRS’ bad side and I suspect that it’s easier to get caught than you might think. Who might report you? The coin dealer that you sell to or the person that you sell to might decide to report a capital loss on sale of property (down the road) and the IRS might want some info on from whom and when he bought the gold/silver. You can make some transactions with cash but it is rather limited.
I agree that owning gold/silver is good and it can be a small or large amount. You might want to diversify and buy some mining shares–sometimes they pay off in a really big way. Or you might want to hold some cash in reserve to pick up some financial values on the cheap when we have another catastrophe.
Good luck with your retirement plan.
Who do you think will profit when Draghi’s manipulation of Target 2 imbalances to eradicate
Italy’s current debt has to be paid off? Think of an Italian 5 letter word beginning with “M”
& a 7 letter Wall St word beginning with “G”…
Everyone is looking for the quick buck, and it’s out there if your an early adopter, savvy trader or just plain lucky. While it’s not safe to bet on these things, they are no different perhaps than stock prices that are wildly out of wack with earnings. I hold Gold, Silver and Crypto. Do you find metals to be overpriced? I sure don’t.
I don’t know if Rickards also says that the fed understates inflation in other stories he writes. House price are going up, rent is going up etc. (okay lately maybe less) We have asset price inflation. But this is left out of the inflation figures.
I think the fed knows they understate inflation, they are not stupid.
I read a NY Times front page from 1938. The same type clowns ruining the country now we’re doing it back then. Front page read just like today’s newspapers. Corruption, scandals, political wrangling, etc. same crap different era.
What is am asking myself is that banks when the interest rate was let say 6 pct in 2007 borrowed the max possible out to household and companies and state and local governments. Then came the crisis. Now rates are ??? let say 3 pct and they lent out again to the max. Rates cannot go up ever in this way. Because raising rate will kill them if they have to refinance.
If a family borrow now 500.000 at 3 pct it pays usd 15000 a year is usd 1250 a month. If they let interest go up to let say 4 pct that will become usd 1666 that is an increase of 33 pct. That would mean, if interest payments on the debt of the household consumes let say 50 pct a 16.5 pct inflation ???? Is this not a brilliant idea to stoke inflation at 5 pct inflation it will run at 33 pct a year for the family who spend now 50 pct on interest payment only. I assume that the wages for people at mcdonalds flipping burger will sky rocket
It seems, this time, when Cryptocurrency (Bitcoin) is banned in China, people now started to move back into Gold.
Look at the price of Gold, jumping up after Thursday 14th September 2017.