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Ed Bugos: Much Ado About Something

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July 07, 2009 – Comments (22)

Good aticle by Ed Bugos. This article has many of the same sentiments / topics that I discuss in my Gold Post and my US Dollar Post and in this post by John Rubino. But it is a good read nonetheless and recommended.

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Much Ado About Something
by Ed Bugos - http://www.silverbearcafe.com/private/07.09/muchado.html

  

    Gold "gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head" - by a well known investor; Hint¹

Why humans would guard something that has no utility must have escaped notice there.

I'd like to know what kind of society the Martians in this allegory had. I mean, under what system of social cooperation were they able to arrive at the far superior technology required to observe humans from way off in the distance? Do the individual members exchange ideas, or goods? If not, how were they able to economize on scarce resources in order to produce their technology, or is there no such thing as scarcity in outer space? What motivates them to act? Are they centrally organized like a simple ant colony or collectively motivated like the coercive Borg in Star Trek, or is their division of labor organized by a complex but voluntary system of the free exchange of property titles, which here on earth forms the basis of civilized societies. If not, I wonder then why "anyone watching from Mars" would not also scratch their head about paying someone to guard this hoard, let alone of the concept of utility, especially to an "individual"? In fact, if such a system were so unfamiliar, what sense could a Martian make of any human action? Maybe the philosophy of exchange is not foreign to this observer.

If that were true, neither could a common medium be all that foreign. In fact, if our Martian observer knew anything of our history or of such a system of cooperation, the reasons for the puzzling activity would be no less clear to him than to any informed economist right here on earth. Corruption.

But let's fast forward the economic mumbo jumbo and cut straight to the chase. Since we're in outer space already, amongst superior beings, we may be forgiven for our excursion into a little fantasy.

Imagine that we had the technological capability to travel through time, and you signed up for an expedition that would catapult you, say, 5,000 years into the future, what would you choose as money to bring with you... assuming that you were only allowed to choose one of the following prospects?

Keep in mind that your decision could mean the difference between life and death!

   1. Gold
   2. Silver
   3. Brazilian seashell necklaces
   4. As much top grade Light Crude (Oil) as you can carry
   5. Salt
   6. Cigarettes
   7. Dutch tulips
   8. Cattle (or a lamb?)
   9. A bottle of 5,012 year old scotch
  10. Federal Reserve Note (US dollars)
  11. Euros
  12. Government bonds / bills d'etat
  13. Chinese Remnib
  14. 1923 German Reichesmark
  15. Microsoft or Apple shares, or other kind of claim on asset

I know your answer.

You already know what the Martians apparently don't. Aside from a few drunks and jail birds debating the merits between the scotch and smokes, I'd bet that most ‘humans' probably picked gold or silver.

The value of gold as the medium of exchange is a topic in itself but we don't have to go there today - we don't have to know why humans have preferred it to other goods to know that it has outlasted any of them. What other commodity, or currency, has survived as money for any similar length of time?

What has held its purchasing power better? Many of those above have been money at different times and different places, but scarcely any of them has been money as long as gold. Gold is one of the oldest, and it is still accepted where it isn't restricted by a state protected legal tender monopoly.

It was first coined at least 2500 years ago; it adorned Egyptian kings as far back as 4500 years ago; yet suddenly, in only the last three decades, it has apparently lost all of its utility, as if history vanished, and barbarism with it... as if empire and dominion, conquest and plunder, or any of those activities usually associated with the history of gold no longer exist. Indeed, for our Martian observer to be scratching his head over this implies that he must have only begun his observation in the last thirty years, and is totally ignorant about the 4500 years of human history before 1975. I'd say that's out of line with most Alien accounts, especially since widespread sightings of UFO's date long before 1975.

Gold has a monetary value, which can only mean something that is attributed by a market.

The state can say something is money but the concept of value being attached to something implies the market has a say. Allow me to contend that what this Martian observer puzzles over as a waste of resources is not the "utility" of the metal, or the question of why we bother mining it. If he only started with this utility as a given, implied by the act of guarding it, and wrote it off to some human affinity or other, what would really puzzle him is the same thing that should puzzle you: that the state would go to so great an expense to withhold such a desired thing from freely circulating. Indeed, the costs do not end with the remuneration of the security guards at Fort Knox, or wherever. They only start there.

Truth may not need the support of government, but fiat and fractional reserve bank notes do.

It takes additional resources to force individuals to accept something as money which isn't by choice; and if the integrity of this money is subject to the inflationary whims of a fractional reserve banking cartel, the costs can quickly pile up. Genuine savings are depleted, debased or frittered away... the control over the means of production compromised, inefficiencies burgeon, inhibiting progress and technological innovation, and instability reigns. Moreover, the policy undermines both the moral fabric of society and its adhesive force: the division of labor. Why would humans, as an observer who was not foreign to human history might astutely question, allow such self-defeating and costly institutions?

This, at least, is what puzzles me.

The answer is ignorance... induced by a misinformation campaign that is costly in itself.

The value of a sound money is that it prevents planners from redistributing the wealth and savings of the productive classes to the political classes in order to finance expensive unproductive agendas - or from depleting the savings of fixed income earners, or the wages of the poor... as Greenspan wrote many years before becoming a central banker: "In the absence of the gold standard, there is no way to protect savings from confiscation through inflation" (published by Ayn Rand in 1966).

Alas, the Martian observer can no longer be confused about either the utility of this metal or the reason that it is being guarded (rather than allowed to circulate). Its absence from circulation has been answered: it is part of a scheme to raid the savings of productive classes.
"It is impossible to grasp the meaning of the idea of sound money if one does not realize that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bills of rights" - Ludwig von Mises, The Theory of Money and Credit p. 454

The utility of this metal should thus be clear: it restricts the coercive elements of society and protects savings; it is but an instrument of the sound money principle... and it is interchangeable with the idea of freedom.

There is no way to understand the utility of gold - or to make sense of the entire activity described in the quote - if one does not grasp history, or these ideas.

Comedian Jerry Seinfeld, who specializes in irony, perhaps reveals the fallacy best when lamenting that if Martians were watching (human) dog owners follow their pets around with a doggy bag, they'd probably think that the dogs were in charge. Just what you need... another head scratcher.

¹ Son of a famous congressman who was a personal friend of Rothbard's and hard money advocate in the fifties

Edmond J. Bugos
GoldenBar.com 

22 Comments – Post Your Own

#1) On July 07, 2009 at 6:07 PM, cthomas1017 (86.57) wrote:

Here's a better question...  If the time machine were going to transport you 100 years into the future, which would you take?  How about 20 years? 5 years?

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#2) On July 07, 2009 at 6:22 PM, camistocks (< 20) wrote:

OK Scotty we have located the Martian gold, beem us up! BZZZZZ

Gold and silver too are the only form of money that have outlasted governments, empires, and I don't know what. It cannot be produced at will.

 if Martians were watching (human) dog owners follow their pets around with a doggy bag, they'd probably think that the dogs were in charge

This is just too funny... :-)

Good post by Bugos. 

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#3) On July 07, 2009 at 6:31 PM, kappermi (< 20) wrote:

 Well if inflation hits the carter years and it appears it will, with all of this spending, Gold will be your only savior.Within the next 5 years.

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#4) On July 07, 2009 at 7:07 PM, Tastylunch (29.25) wrote:

Wrong profile! You are killing your rec/post average! :)

man I guesssed wrong I went with cigarettes :(

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#5) On July 07, 2009 at 7:26 PM, binve (< 20) wrote:

cthomas1017, I'm going with gold as the answer to all 3 :)

camistocks, LOL! I call dibs on the Martian gold! :)

Gold and silver too are the only form of money that have outlasted governments, empires, and I don't know what. It cannot be produced at will.

Exactomundo, man. 5000 years gold has been a store of value, for 2600 years it was officially money, and now after 30 it is just a "shiny yellow rock". ... Hmmmm. I will trade "green pieces of paper with dead presidents faces" for "shiny yellow rocks" any day :)

Did you ever get a chance to check out my gold post? Lots of TA too, right up your alley. Not surprising, it was a controversial post too, especially among the TA community on Caps (very few people agree with my counts), but when is there ever agreement on anything. Thanks for the comments man!

kappermi, I agree with your sentiments and your timeframe. Both gold and commodities. But mostly gold and silver. CEF is my biggest holding.

Tastylunch, LOL! Yeah, but this was a great article and really hit a lot of the same highlights that I have in my gold post. It seemed very natural to post it here :)

Cigarettes, close but no cigar (yuk, yuk) :). Actually, scotch is a very close second to gold in my book :) Thanks man.

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#6) On July 07, 2009 at 9:15 PM, jatt22 (46.09) wrote:

good  sharing  binve . an  yea i  would  like some scotch in gold bottel  plz .  ( rec + )

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#7) On July 07, 2009 at 9:15 PM, jatt22 (46.09) wrote:

good  sharing  binve . an  yea i  would  like some scotch in gold bottel  plz .  ( rec + )

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#8) On July 07, 2009 at 9:45 PM, kstarich (30.47) wrote:

I can't believe it I actually read your post the same day you posted it!

Seriously,  In the last week I am seeing people around me who are now being effected by this downturn who normally are not effected by any downturns.  It makes me sad and angry and I know you are right...we cannot risk our futures by not holding physical gold NOW!!

On a side note I recently learned from a friend who is a retired college professor that his pension payments were reduced because the pension fund accts. were down due to market conditions. 

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#9) On July 07, 2009 at 10:02 PM, eldemonio (98.92) wrote:

A nice bottle of Highland Park 12 year would be good - but I think I would probably end up taking my IPod, a stack of Hustler magazines, and my shares in GM.  

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#10) On July 07, 2009 at 11:06 PM, binve (< 20) wrote:

jatt22, Hey, no problem :) And I can't believe I didn't think about scotch in a gold bottle first! I am so ashamed..... :) Thanks!

kstarich, LOL! No worries. I have happy to have your comments whenever :). Yeah, that is how I feel. Whether the is another pullback or not in the next 6 months is really immaterial to me. I think not having some PM exposure right now is dangerous. Maybe the outcome will be deflationary or maybe it will be inflationary. Likely it will be a combination of both. But a major / abrupt / unexpected currency crisis in the dollar has a non-zero chance of occuring and will be extremely high impact. As investors should, at their core, be good risk managers, some money should be allocated against this risk, and I think PMs are the best for that. My $0.02. Thanks!

eldemonio, mmmm..... Highland Park 12.... I am also very partial to Macallan 12, and Talisker is one of my all-time faves :).

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#11) On July 07, 2009 at 11:31 PM, russiangambit (29.25) wrote:

I was actually thinking salt. It was also used as money in some distant past. And it has quite a few uses as well. Also water, which is not listed.

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#12) On July 08, 2009 at 1:43 AM, UKIAHED (36.12) wrote:

Darn – cannabis seeds are not on the list…  I’m thinking in 5,000 years, helping the cool kids “kick it old school” could be worth some serious coin. ;)

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#13) On July 08, 2009 at 8:42 AM, Jimmy2008 (< 20) wrote:

I like silver much more than gold.

Gold has a whole lot of utilities. See http://www.marketskeptics.com/2009/07/golds-extraordinary-properties.html

Buffet is not God. It would be very foolish to follow each word of his. He could have hidden agenda for his investment. Remember that he is a vulture investor, acting for his own interests.

More than 30 years, Chinese followed Mao's teachings word by word. They had economic disasters. Now, they follow common sense.

 

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#14) On July 08, 2009 at 8:51 AM, binve (< 20) wrote:

russiangambit, Yep, salt is a good choice. Was money and is consumable. But the problem is, that consumable commodities tend not to make very good money because they are, well, consumable. Have you had a chance to read my gold post? Here is an excerpt from that post.

What is Money? Another simple question with a seemingly obvious answer. But if you haven’t seriously thought about it, I invite you to do so now. The most basic definition would be: Money is a medium of exchange. Okay, that makes sense. Instead of a true barter system, money allows for goods and services to be exchanged between groups and individuals based on some agreed up ratio, or an exchange rate (remember this, this is important). E.g. A Snickers bar is worth 2 units of currency, or an hour of Babysitting is worth 10 units of currency, etc. Okay, so if you can purchase a Snickers bar with currency, and it is exchangeable (you can trade Snickers bars with other people), then is a Snickers Bar money? Again, the answer I expect to hear is a resounding “no”. I mean that’s ridiculous right? But let’s explore for a minute why this is ridiculous.

Money needs to be a medium of exchange. And as such should have reasonable consistency among measures of exchange (e.g., the Dollar or the Euro). So the first part is true. Snickers Bars are consistent with respect to the exchange rate with US Dollars (e.g. the Snickers/USD exchange rate). You can go into any Walmart or convenience store and pick up a medium Snickers Bar for $0.99. So why can’t you exchange a stockpile of Snickers back to a convenience store for say a gallon of gasoline?

Because simply being a medium of exchange is not enough to define money. Money must exhibit other properties: 1) Money must be valued equivalently by all parties in the exchange, 2) Money must have enduring value, 3) The supply of money needs to be regulated, 4) Money must be liquid, 5) Money must be fungible. So lets step through these one-by-one and apply them to our Snickers example

1. Money must be valued equivalently by all parties in the exchange. Lets say Joe and Linda both love Snickers and Joe has 100 Snickers and Linda  has a lawn mower. Joe and Linda decide to make a trade for 90 Snickers. Now Joe needs gas for the lawn mower and Tim has some gas, Joe offers Tim 10 Snickers for a gallon of gas. However, Tim is a diabetic. What good are Snickers to him?

2. Money must have enduring value. Joe has 100 snickers and is about to make the lawn mower deal with Linda. So Joes walks up to Linda, Snickers in hand, and then they start discussing lawn mower maintenance. It is a very sunny day and by the time the trade is ready to happen, Joe finds that all of his Snickers have melted

3. The supply of money needs to be regulated. Lets say that, despite points 1 and 2, Snickers does catch on as money. Well M&M/Mars has just realized it has a way to mint money. So what if it flooded the market with a new supply of Snickers? The market would be come saturated, driving down the price (much more supply vs. demand)

4. Money must be liquid. Let’s face it, carrying around cases of Snickers to buy groceries is a bit insane. Nor could you ever have a “digital” currency based on Snickers (what is the point of eating a digital candy bar, where is the store of value in that).

5. Money must be fungible. This may be a term you are unfamiliar with. Fungibility is the property of a good where the units are capable of mutual substitution. i.e. A single US Dollar is equivalent to every other US Dollar in existence. A pound of 0.9999 Oxygen-Free High-Conductivity (OFHC) Copper is equivalent to every other pound of high-grade OFHC Cu. But unless the Snickers bars are completely pristine they are not fungible (e.g. Is a brand new unopened bar fungible with one that is opened, with a bit missing and past its expiration date?)

So this should scuttle the dreams of any of you scheming up a “Snickers-based economy”. But moreover, it should really call into question what can be used as “money” or as a “monetary asset”. A share of common stock exhibits many of the properties above. But what about a home? Is a house fungible? Is it liquid? What about a Credit Default Swap (CDS) or a Collateralized Debt Obligation (CDO)? I am not trying to tell you what is money and what is not. I have laid out the properties that money and monetary assets should exhibit. You should think about those properties and then think about the assets that are held by your favorite companies or by financial institutions when they make loans or secure debts against those assets.

Now keep in mind, I have read your posts and comments for a while. You are very intelligent and savvy. I absolutely know you are aware of all of these facts. I am just adding these thoughts above from my post because your statment prompted them, and not because I think you are not cognizant of them. As always, thank you for your thoughts and comments!

UKIAHED, cannabis seeds, now you're talking! Nice man :).

Jimmy2008, Thanks man. I do like silver a lot too. Any while silver is historically undervalued relative to gold, I still like and hold both. The reason I like both is because Silver straddles the line between commodity and money. It is much more industrially useful than gold, and so it exhibits the properties of a commodity too (read: more volatile). I talk about a lot of these aspects of both gold and silver in my gold post. Definitely check it out if you have not done so already! This is why CEF is the ideal PM fund for me: 50% gold / 50% silver. Also I address gold's physical properties, like you discuss in your link above, in my gold post. 85% of gold supply goes to investment/jewelry and only 15% goes to industry. That is because gold is money first and a commodity only a very distant second. Thanks man!.

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#15) On July 08, 2009 at 9:00 AM, lemoneater (79.19) wrote:

I was going to vote for tulip bulbs given that I could keep them viable in the specially created storage capsule on the space ship. I'm sure that 5,000 yrs in the future they would be rarer than any of the precious metals. Gold has already been built in a cyclotron, but the cost of fabricating it is currently prohibitive, but I thing the technology might advance in all that time! Tulips are harder to make and all the futuristic women would demand them for their yards:). There is a neat Twilight Zone about this man who steals and kills his way to taking gold to the future only to discover that it is a common building material of no more value than the desert sand.

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#16) On July 08, 2009 at 9:39 AM, rofgile (99.30) wrote:

Gold and Silver in 5000 years most likely will be able to be created by fusion processes, or we'll be able to mine it from sources outside of the earth.

I would go with plant seeds, or forms of life that might become extinct.  Other things that would be really valuable would be any art or artifacts from today.  Think of bringing some item like a piece of pottery, or maybe even an Ipod.

"Wow a 2010-era Ipod Music Artifact?!?  That's priceless!"  The funny thing is that like a stock market, figuring out what will be valuable in the future is quite tricky.

 Look at today - silver is worth less now than it would have been before the conquest of the Americas (and discovery of Peru's vast resources).  Simple pottery from 5000 years ago is priceless.  Paintings by Van Gogh are priceless.  Some ancient bronze coins might be worth more now than their weight in gold.

 What would be valuable is things that would not be possible to make, simply due to the fact of time - artifacts, aged scotch, probably even year 2010 cigarettes might be priceless in the future. 

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#17) On July 08, 2009 at 10:17 AM, camistocks (< 20) wrote:

binve - I admit when I saw how long the post was I gave up. I'll give it a second try and also a comment.

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#18) On July 08, 2009 at 1:10 PM, tonylogan1 (27.92) wrote:

rec

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#19) On July 08, 2009 at 1:51 PM, binve (< 20) wrote:

lemoneater and rofgile, Fair enough.

camistocks, LOL! Yeah sorry, that one ended up being a tome :). I would definitely appreciate any comments you have!

tonylogan1, thanks man :).

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#20) On July 08, 2009 at 2:30 PM, madcowmonkey (< 20) wrote:

decent charts and analysis IMO. Might be something that is up your alley.

http://goldversuspaper.blogspot.com/2009/07/ongoing-gold-stock-correction.html

 

As for the decision of which one I would take. Gold is too heavy. Silver is too shiny. But I might get somehwere riding a goat:)

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#21) On July 08, 2009 at 5:32 PM, binve (< 20) wrote:

madcowmonkey, Thanks madcow! Yeah, I checked it out. Not bad, believable analysis. Very similar to the discussion / arguments that many of us TAers on CAPS have. My count is more bullish long term and short term and I am in the definite minority. Most TA users on CAPS are very bearish on gold and believe we will have a serious correction first before we start heading up again. As usual, very little agreement (as is typical when anybody has a discussion with binv :) ).

Hmmmm... 5000 year old goat. Goat jerky? :)

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#22) On July 08, 2009 at 10:06 PM, UKIAHED (36.12) wrote:

binve

 

Just went back to your Gold Post

Re the Oil portion -


In the meantime, oil will probably put on one last show before the correction. Oil likes to extend a lot, nor does it like to stay within trendlines. I would just expect the unexpected here :)

 

Looks kind of prophetic to me – I may be early (nah, I don't think that I am) – but great job!

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