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The Inflexibility of Alex Dumortier

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May 09, 2011 – Comments (67)

This is my rebuttal to Alex Dumortier's article “Warning! Gold is now 3 times overpriced!” Let's skip the introductions, since you can get the background by reading Alex's original article, my response, and aforementioned “3 times overpriced” article.

Quoting directly from Alex's article:

It's all about inflation
Gold enthusiasts -- including my challenger -- are always going on about the runaway growth in the money supply and they extrapolate wild price targets for gold on that basis”

This is not a good start. Besides vectoring his opponent with the term “wild price targets” (particularly amusing in an article that prices gold at $475!), I have made no price targets for gold. Never have. Never will. Prices are subjective and arise from the interaction of market actors. It is a fatal conceit to think you can determine the proper price of any economic good.

It's also a petty criticism.

On the other hand, it is correct to say that I am always going on about the money supply. It is also correct to say that Alex completely ignores it. I notice that Alex didn’t post any charts of money supply growth. Here are charts of Base Money, M1, and M2 growth. I allow the reader to decide if this is something worth “going on” about.

Base Money

M1

M2

And my personal favorite, Excess Reserves

Here's the trillion dollar question: What does Bernanke do with the excess reserves?  If he made a bonfire, I can assure you the price of gold would plummet, perhaps all the way to $475.  But why pay interest on them - something no other Fed chairman has ever done - if they aren't going to end up in the economy?  In fact, why pay interest on them at all?  It's the banking equivalent of sticking money in your mattress.  Does your mattress pay interest?  Mine doesn't.

Alex continues:

"However, it makes more sense to focus on inflation, since that is what investors should be concerned with when they evaluate an asset as a store of value. In plain terms, nobody cares about the size of the money supply when they are spending accumulated savings. What they care about is whether their savings buys the same, fewer, or more goods and services than they used to. Why focus on a proximate cause (the money supply), when you have a measurable variable (inflation), which is exactly what you're after?"

In the long run, excess money supply growth is the only cause of (price) inflation. If I were a lawyer, I could insist that it be ruled a proximate cause, i.e. that there is sufficient evidence to rule it the cause of the injury despite being unable to deliver a scientific proof. But we’re not preparing a legal brief. In economics, the only long run cause of price increases is excess money supply growth.

In that light, here is a proper analogy to describe Alex’s advice:

You arrive at the doctor with a gun shot wound. Dr. Dumortier orders a transfusion, but does not address the wound itself. You protest and he replies, “Look! You are losing blood. That is the important issue to a person that wants to stay alive. Why bother yourself with the proximate (i.e. the real) cause of your problem? Stop going on about that gaping exit wound in your lower back and stay focused on your blood level.”

Any investor that cares about protecting wealth needs to be cognizant of both proximate causes and metrics used to measure the damage. Inflation metrics attempt to measure the damage caused by runaway money supply growth. To focus on the metrics while ignoring the cause is a denial of the cause. Is Alex in “cause denial?” The proof is in the pudding. In two consecutive posts about gold prices, Alex has failed to do any monetary analysis. I think he’s afraid of what he might learn.

"My updated $475 fair price estimate for gold is based on the long-term average of inflation-adjusted gold prices going back to 1833 (I use the same methodology here to show that silver is also a massive bubble.) My challenger wants to exclude any data prior to 1971, arguing that fixed-price regimes are irrelevant to this analysis, even declaring that "there is no historical mean price of gold." I entirely agree with that last statement -- if we are referring to nominal prices. However, the data suggests that inflation-adjusted prices do have an average that looks pretty stable (see graph below). This is consistent with a notion that is very dear to gold investors -- that of the yellow metal as a stable store of value.

Real vs. nominal
Under classical and managed gold standards, the nominal price of gold was fixed, but that didn't prevent real gold prices from adjusting. Real gold prices varied with the supply of gold, the allocation between monetary and nonmonetary gold and the returns on real assets, including stocks and bonds. The fact that real gold prices were less volatile prior to 1971 is not reason enough to throw that period out. Changes in volatility regimes aren't incompatible with the existence of a stable average."

Lack of volatility was NOT my reason for suggesting that Alex exclude pre-1971 inflation-adjusted prices. I pointed out the lack of volatility in an attempt (fail) to knock some sense into Alex. I understand CFA’s don’t need to know anything about the gold standard and how it worked. We are not on a gold standard anymore and I suspect none of his clients care about it. But if you are going to build a mean price table using gold prices from 1833-1971, perhaps you would want to know just a little bit about the period you are studying. Just a little bit.

I pointed out the lack of volatility and explained price behavior (in real, inflation-adjusted terms) as a teaching tool so that Alex and my readers would understand the chart and how the gold standard worked.

The gold standard (and I am going to put this in all caps with bold letters so maybe, just maybe, he’ll see it this time) REGULATED THE SUPPLY OF DOLLARS!

There, I feel better. This must be what it’s like to have a student that is so set in their ways; they won’t even consider other methods.

What regulates the supply of dollars today?  Take a look at those money supply graphs again.  Appearantly, nothing does.

Maybe some of my readers have followed me long enough to remember the debates I had with pro-Fed supporters regarding the pros and cons of the gold standard (more properly known as the Gold Coin Standard.) They usually went something like this:

Fed supporter: “David, you ignorant sl*t. The problem with the gold standard was its inflexibility.”
David in Qatar: “Listen you baboon’s arse. That inflexibility was only a problem for the government and bankers. It was a wonderful feature for the common American.”

No matter which side of that debate you call yours, one thing should be clear to you. Alex Dumortier has no idea what any of us are talking about.

The inflexibility of the gold standard is the reason that his inflation adjusted chart shows few volatile price movements prior to 1971 and no price movements anywhere close to the volatility of post 1971. The slight pre-1971 movements were a result of the varying reserve requirements regulated by the government. Anything under 100% reserves will cause gold’s real, inflation-adjusted price to rise and fall relative to the fixed price. America never had 100% reserves, hence, the small amount of volatility.

That red line Alex has drawn across his chart? It is meaningless. There was no mean price of gold from 1833-1971. There is no existence of a stable average. There was a fixed price, which varied from the inflation-adjusted price due to the limited, but real ability of the banks and government to extend the supply of dollars without a corresponding increase in the supply of gold. This is what my opponent calls a proximate cause of (price) inflation. It is the cause of (price) inflation. That ability to extend the dollar supply was checked inherently by the system (e.g. price specie flow mechanism, balance of payments, bank runs.) The inflation-adjusted price of gold went up because of excess dollar supply growth and then the inflation-adjusted price of gold went back down as the systemic forces regulated the supply of dollars.

What about the factors that Alex listed (supply of gold, allocation between monetary and nonmonetary, and the return on real assets) for inflation-adjusted price movements from 1833-1971?

1. The supply of gold under a gold standard only causes the inflation-adjusted price of gold to move if the supply of dollars does not move in step. Historically speaking, rising gold supplies in relation to dollars was rarely an issue (there was a large influx of gold to America from 1914-1917… for what should be obvious reasons.) The problem usually was the other way around (dollars being increased without a corresponding gold increase.) Obviously this is not a primary factor in gold’s real price movements from 1833-1971. Strike one.

2. The allocation between monetary and nonmonetary gold changes as a result of the changes in the inflation-adjusted price of gold, not the other way around. If the value of monetary gold increases, i.e. it can buy more goods, grandma has an incentive to smelt her necklace. If you are on a gold standard and grandma smelts her necklace to make a gold coin, it can only have a lasting impact on the inflation-adjusted price if a new corresponding dollar amount is not eventually created. The reason granny smelts her necklace in the first place is because of changes in the gold’s value relative to the dollar (or changes in the inflation-adjusted price.) Strike two.

3.  Under a gold standard, changes in the return on real assets is primarily a result of the relationship between the supply of gold and supply of dollars, not a cause. Strike three.

I have no idea why Alex felt the need to point out his chart was inflation adjusted. I addressed that thoroughly in my first post. He needs to stop staring at his chart and study monetary history. I fear that his inability to comprehend my first rebuttal is my fault, but I am not a professor by trade. I work on computers and computers don’t ask questions unless you tell them to.

Let's move on. Alex's next target is his standard attack on low-hanging fruit: the conspiracy theorists....

"Inflation is understated?
Another objection that gold enthusiasts raise constantly is the notion that the consumer price index published by the Bureau of Labor Statistics no longer provides an accurate picture of inflation because of some technical changes in the calculation methodology. I don't think that gold enthusiasts' criticisms of the CPI withstand scrutiny; in fact, some of them are based on outright falsehoods."

We can devote a series of articles to the inflation metrics currently in vogue with mainstream economists. From the Austrian School point of view, inflation is subjective and dependent upon the “shopping basket” and subjective value scales of each market actor. Econometric inflation analysis assumes objective utility - the concept that your satisfaction can be measured to a statistical certainty - and a few hand specific “shopping baskets” that purport to represent the average consumer. Obviously, this is ridiculous (and makes me 34% more annoyed.) There is no such thing as objective utility and there is no average consumer.

Alex ran a CPI conspiracy “debunking” article a while back and I probed him on objective vs. subjective utility. Like the gold standard debate, I suspect that he had no idea what I was talking about. So if it makes him feel better to assign the conspiracy theory label to my rebuttal, have at it. My rebuttal has nothing to do with inflation being understated.

If I could be charitable, I would. Gold might be in a bubble. But you could never determine it using Alex's methods. His way is fancy guesswork that confirms his bias. He wants to believe gold is in a bubble, and in order to confirm that belief he ignored the crucial points in my rebuttal. Here, I'll prove it to you:

Alex Dumortier, please answer the following question: “Looking at your inflation-adjusted chart, why is there not a single price movement from 1833-1971 that is equal to or greater than the 4 price movements I pointed out (early 70s, 1980, late 80s, and present) in both volatility and peak?”

Luck? Just a hell of a bunch of smart guys back in the 1840s? Didn't give in to all that bubble mania?

The correct answer is because the gold standard (say it with me) REGULATED THE SUPPLY OF DOLLARS!

Coming Up Next

In my next post, I'll look at some more interesting issues. Is there a mean price for any economic good? What are some of the primary factors that cause gold to rise in price?  How many gold bubbles have there been since 1971, world wide?  Can we use an inflation metric from 1971 to present to prove gold is in a bubble? 

I will leave you with this to chew on.  The following is a chart of the value of the USD versus other trading partners since 1973.  Even with the destruction of currencies around the world, America's dollar value has lost 50% since its high in the early 1980's against other major currencies.  This is the primary reason that gold is at $1,500 today.

I apologize for making this a two-part installment, but that is a lot to cover and it's been a tiring week.

David in Qatar

67 Comments – Post Your Own

#1) On May 09, 2011 at 2:21 PM, whereaminow (61.23) wrote:

Here is Alex's chart that I am referring to. Notice the neat red line.  That's "science", folks. Keynesian style.

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#2) On May 09, 2011 at 2:34 PM, TheDumbMoney (44.36) wrote:

I have absolutely no dog in the fight as to what the real "value" of gold is.  Because I have no clue, I don't buy it, it may be wildly over- or under-valued for all I care.

I do take issue with your charts pertaining to money supply.  You say:  "I notice that Alex didn’t post any charts of money supply growth. Here are charts of Base Money, M1, and M2 growth. I allow the reader to decide if this is something worth “going on” about."  Then you post a bunch of scary charts.

Discussion of the "money supply," base money supply, and even M2 are utterly meaningless when quoted in isolation, as you do, divorced from their context.  Money supply only has meaning within the context of the equation of exchange, MV = PQ.   Here for example is a link showing what happened to velocity during the most recent decade, through 2010.  See here.   When I see this, and understanding that equation, and also understanding that we are 1) still witnessing wage deflation; and 2) still witnessing large-scale consumer deleveraging, I see very, very little risk of any significant inflation.  Most major economists would agree, including those at the St. Louis Fed, where you got your charts.

I confess I didn't read down through the whole article, so if you did acknowledge any of these things later, then my apologies.

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#3) On May 09, 2011 at 2:38 PM, kdakota630 (29.90) wrote:

One of your best, David.

However, the biggest surprise of the entire article is that I had no idea that Fed supporters all sounded like Dan Aykroyd.

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#4) On May 09, 2011 at 2:39 PM, whereaminow (61.23) wrote:

dumberthanafool,

I put no stock in MV=PQ, which is an Irving Fisher-Chicago School approach, nor in what any "major economist" says.

David in Qatar

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#5) On May 09, 2011 at 2:39 PM, whereaminow (61.23) wrote:

However, the biggest surprise of the entire article is that I had no idea that Fed supporters all sounded like Dan Aykroyd.

Yes! I love it when people catch my outdated jokes.

David in Qatar

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#6) On May 09, 2011 at 2:46 PM, TheDumbMoney (44.36) wrote:

Fair enough, I don't ask for everyone to be a conformist, I just think everyone at least needs to acknowledge when they are diverging from "mainstream" economic thought.  (I see this most commonly among the advocates of Modern Monetary Theory, with the worst offender being a blogger named Pragmatic Capitalism/Cullen Roche, constantly acting as if MMT is the default, rather than a very marginal and minority theory.)  

To me, rather than rejecting MV=PQ, a better argument for inflation is simply that Fed policy causes inflation in other parts of the world, which will eventually show up via raw materials inputs in some U.S. inflation.

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#7) On May 09, 2011 at 2:54 PM, TMFAleph1 (96.00) wrote:

Gold enthusiasts -- including my challenger -- are always going on about the runaway growth in the money supply and they extrapolate wild price targets for gold on that basis”

Hi David,

Thanks for putting this together. I'll be taking at look at it in more detail when I get the chance. I'm also preparing a lot more material on gold.

Just one quick clarification: The sentence is ambiguous, but I only meant to "tar" you with the first part of the statement that I quote above i.e. You reason on the basis of the money supply, but I accept that you have not produced any price targets on that basis. However, I have seen many price targets from gold enthusiasts calculated on this basis; in fact, I may even have referred to one myself in an early article on gold.

Best,

Alex Dumortier

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#8) On May 09, 2011 at 2:59 PM, whereaminow (61.23) wrote:

dumberthanafool,

I find the MV=PQ metric to be very crude, and a rather silly way of saying money in equals money out.  I can do a future blog on econometrics and be more specific as to my criticism on each of them.  I don't mean to be short with you, but I just don't have time right now.

TMFBullnBear,

No offense was taken. I used it as an opportunity to make the reader think about price formation in a non-mainstream way. Obviously, judging by writing, I don't mind a little (albeit very nerdy) trash talk.

People calculate price targets because their clients like it.  Stock brokers do it.  I see no reason why TMFSinch, for example, would not be allowed to do it.  I don't, because I am not selling my advice.... so I don't care about my clients lol.

David in Qatar

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#9) On May 09, 2011 at 3:00 PM, catoismymotor (35.95) wrote:

David,

Name the Aykroyd movie from the quote. No cheating!

[Milbarge and Fitz-Hume hear a sound]
Emmett Fitz-Hume: Did you hear that?
Austin Millbarge: Yeah. It's a dickfer.
Emmett Fitz-Hume: What's a dickfer?
Austin Millbarge: To pee with.

Cato

P.S. - Your rebuttal to Alex's post is in a word Epic. I'll have to read it a second time to absorb more of it.

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#10) On May 09, 2011 at 3:01 PM, whereaminow (61.23) wrote:

cato,

Spies Like Us.

Challenge me, brother!

David in Qatar

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#11) On May 09, 2011 at 3:02 PM, tfirst (35.96) wrote:

Never argue with an idiot, passersby won't be able to tell who is who....

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#12) On May 09, 2011 at 3:03 PM, kdakota630 (29.90) wrote:

whereaminow

I have my moments.  Glad I'm good for something.

Also, to both you and Alex, I am (and likely many other Fools) very much enjoying this debate between you and Alex because of the information provided as well as keeping it classy at the same time, like two boxers beating the crap out of each other but are still able to hug at the end of a well-fought fight.

Plus, congrats on 13 recs before this blog even hit the main blog section.

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#13) On May 09, 2011 at 3:16 PM, catoismymotor (35.95) wrote:

You want a challenge?! Prepare to reap the whirlwind! {Ominous Laughter}

Dr. Keats: Note the intense overreaciton. That's the 'roids talking.

And now for a softball...

Dr Ray Stantz: Hey. Does this pole still work?

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#14) On May 09, 2011 at 3:17 PM, whereaminow (61.23) wrote:

cato,

LOL, you got me on the first one. Is it that Army movie with Steve Martin, whose title escapes me?

The second one is my favorite comedy of all time, and one I can watch on mute and recite the lines myself, so yeah, that was a softball.

David in Qatar

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#15) On May 09, 2011 at 3:25 PM, catoismymotor (35.95) wrote:

The first quote was from 50 First Dates with Adam Sandler and Drew Barrymore. Mr. A had a small role in it. It is one of my wife's favorites.

 

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#16) On May 09, 2011 at 3:26 PM, whereaminow (61.23) wrote:

Good one! Never would have guessed it.

David in Qatar

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#17) On May 09, 2011 at 3:28 PM, ikkyu2 (99.40) wrote:

You're right; he's wrong.  Hardly any room to debate it. Hope you're enjoying making these explanations for others, not sure there's much other utility.

When regarding precious metals, comparing money or historical prices pre-1971 to post-1971 is simply ridiculous.  We would call that 'apples to oranges.'

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#18) On May 09, 2011 at 4:34 PM, TMFAleph1 (96.00) wrote:

@ikkyu2

Watch this space, an analysis based strictly on 1971-forward data is coming (among other things)...

Alex Dumortier

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#19) On May 09, 2011 at 4:47 PM, rfaramir (29.63) wrote:

 

Loved this: "Econometric inflation analysis assumes objective utility... and makes me 34% more annoyed."

 

Illustrating absurdity by being absurd.

 

This part had me confused for a bit: “If the value of monetary gold increases, i.e. it can buy more goods, grandma has an incentive to smelt her necklace. If you are on a gold standard and grandma smelts her necklace to make a gold coin, it can only have a lasting impact on the inflation-adjusted price if a new corresponding dollar amount is not eventually created.”

 

Who creates (eventually) that new dollar amount? Do you mean paper dollar? That was done immediately: grandma went to the US Treasury, turned in some gold jewelry, and was issued either a newly minted gold coin or new printed $20 bill (they are equivalent so long as her deposited gold is kept in 100% reserve to back that bill). Or if you mean that grandma herself ‘counterfeited’ a gold eagle by melting down her own jewelry and striking her own eagle, I’d say that is still equivalent: if her gold eagle is indistinguishable from a US minted one, then she just saved them the work. Either way, the money supply has increased by one gold coin, which DOES impact prices, but NOT inflation-adjusted prices. Her new money enters the economy and produces a tiny bit of inflation. In a small town, maybe a measurable amount.

 

And it isn’t limited to grandmas converting jewelry to coin with a little labor (done by her or our friends at Treasury). A gold miner converts a hole in the ground (“with a liar at the top”) with a lot of labor into new money also. His incentives are the same as grandma’s: the monetary value of gold (the goods and services each ounce purchases) is higher than his effort of producing it. On the margin, in the long run, these are about equal, making gold production a near non-factor in terms of their impact on prices in the market. This is a good thing and is the intended result of a gold standard. The only reason the gold mining entrepreneur risked his venture was that enough other entrepreneurs had produced so much more consumer goods and services (i.e., gentle but noticeable deflation) that the value of gold had risen enough to make his risk a likely good bet (resulting in a little countering inflation).

 

Since we are talking about real commodity money, this is not a pernicious effect. When it gets pernicious is when the money supply is expanded at zero cost (fractional reserve banking and fiat printing both do this, and they are separate: you can have either, both, or neither).

 

One last note on grandma’s act of introducing new money: it is indistinguishable from a saver deciding to spend some of his saved money. She just had it saved in a wearable form, a necklace. A general change in the population’s time preference (how much to save versus spend) will make a change in prices very similar to an increase in the money supply. But again, it is not pernicious so long as we are talking a real commodity money. If time preferences have really changed, interest rates rise (because of the savings no longer invested), the structure of production changes (more consumer goods are desired and fewer capital goods), and employment changes (more ‘where’ than ‘whether’ but unemployment does increase some during shift and then recedes back when the change in time preference is fully accommodated). In the long run, the free market (including 100% gold reserve banking) adjusts for people’s preferences, making everyone better off, in the ways they desire, to the maximum extent imaginable.

 

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#20) On May 09, 2011 at 5:06 PM, ETFsRule (99.94) wrote:

"On the other hand, it is correct to say that I am always going on about the money supply. It is also correct to say that Alex completely ignores it. I notice that Alex didn’t post any charts of money supply growth."

...

"In the long run, excess money supply growth is the only cause of (price) inflation."

I agree 100%.

Luckily, the analysis of money supply growth vs the price of gold has already been done for us.

Maybe when you're done debating with Alex, you can follow the links I posted earlier to see why gold really is in a bubble (by the way, it's overpriced by about 50%, not 66%).

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#21) On May 09, 2011 at 9:01 PM, Munchies101 (99.24) wrote:

Whereaminow, 

Very nice write up, there is one comment I would like to add about inflation.Money supply is very important in the equation of inflation, but is only a variable. Here is the equation for inflation:

M x V = P x Q

Where M in the money supply and V is the velocity of which the money translates through the economy. Velocity is a very important half of the equation for many reasons. Money supply is irrelevant if it isn’t exchanged through the economy. If we have $100trillion but only $50billion of it is actively traded, then the other amount is less of a variable in our equation.

So when BullnBear was saying it was only a variable, it is because inflation is the result of two separate numbers. Although the money supply makes up half of our equation, it is only important in the context of the velocity of which it is traded, and vice versa.Sorry if this was already brought up but I didn’t see it.

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#22) On May 09, 2011 at 9:05 PM, Munchies101 (99.24) wrote:

Important to note though it is good to think of the money supply as potential inflation, because if it is dumped on the economy that would result in massive inflation. If money is hoarded however in pockets, inflation will not happen.Look at companies balance sheets and you see many companies are doing this. If they do pull the trigger it will be a spiraling effect though.

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#23) On May 09, 2011 at 9:15 PM, Munchies101 (99.24) wrote:

I'm so sorry, I just saw my entire arguement above :) Of course its post #2.

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#24) On May 10, 2011 at 12:18 AM, whereaminow (61.23) wrote:

rfaramir,

Thanks for the comment. I admit that the part in question was poorly worded and comes off quite confusing. I was having trouble putting my thoughts into words and was rushed a bit by other projects.  I appreciate you adding clarification to this issue, since in my view you are an expert.

ETFsRule,

I read the links you posted on my last rebuttal and I found them very interesting.  In fact, I have favorited quite a bit of his work and will reference a lot of in a my next post on this subject.  I have to add, however, that I did not read where Van Eeden proves gold is in a bubble.  He does say in 2008 that he felt gold was overvalued relative to the money supply, but that's a heck of a lot different than saying gold is in a bubble.  Since 2008, of course, base money has tripled and a lot of that is simply sitting at the Fed earning interest.  As I indicated above, if I felt there was any reason to believe that money would not eventually make it inot the economy, I'd take a more conservative view on gold.  

Munchies101,

I agree with you on (price) inflation potential.  The scary part for me is that we already experiencing some of that (price) inflation in America in spite of a great deal of money sitting on the sideline.  Shrewd data watchers have been warning us for months that prices are ticking upward at an accelerating rate.  What happens if velocity picks up now?  What happens if the excess reserves move into the economy?  That's a difficult question for me to ponder.

David in Qatar

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#25) On May 10, 2011 at 12:31 AM, whereaminow (61.23) wrote:

On the subject of bubbles

If anyone is interested in doing some web research, I have a question.  In past bubbles, what has been the typical increase in production of the good in question during the price rise?  For example, in the housing bubble, output (houses constructed) rose at unprecendented rates, yet while this was happening prices continued to soar.  The same can be said of tulip bulbs.  The same can be said of stock offerings in the late 1920s and the dot com bubble. The number of new stock offerings soared yet the prices continued to rise.

Can anyone find any hard numbers on these?  I will be doing this research later in the week.  

Also, if anyone knows offhand the output of gold miners in relation to historical output, I'd appreciate that.  If it turns out that gold output is soaring at a yoy rate never seen before while prices are rising, that would be indicative of a gold bubble.

David in Qatar

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#26) On May 10, 2011 at 1:44 AM, TMFAleph1 (96.00) wrote:

@David

Also, if anyone knows offhand the output of gold miners in relation to historical output, I'd appreciate that.  If it turns out that gold output is soaring at a yoy rate never seen before while prices are rising, that would be indicative of a gold bubble.

Gold Statistics, U.S. Geological Survey

The figures for 2010 and Q1 2011 must be on the interwebz somewhere; I'd check the World Gold Council website, for example.

Alex Dumortier

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#27) On May 10, 2011 at 3:23 AM, whereaminow (61.23) wrote:

Thank you Alex. That's a good place to start.

David in Qatar

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#28) On May 10, 2011 at 6:25 AM, whereaminow (61.23) wrote:

This statement in my blog is a bit nonsensical to the first time reader and I want to clarify:

Prices are subjective and arise from the interaction of market actors.

I didn't mean to imply that you can view a price as subjective.  The proper way to say it is that prices are formed through exchange based on subjective values of market actors.  I kind of truncated that thought into a sentence that makes little sense.  I apologize for that.  I know my regular readers understand what I was saying, but a first time reader will not.

David in Qatar

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#29) On May 10, 2011 at 7:50 AM, XMFSinchiruna (28.01) wrote:

whereaminow

Also, if anyone knows offhand the output of gold miners in relation to historical output, I'd appreciate that.  If it turns out that gold output is soaring at a yoy rate never seen before while prices are rising, that would be indicative of a gold bubble.

I want you to rethink that statement very carefully, lest you fall into the same trap that you ascribed to Alex with respect drawing sweeping conclusions from historical data without examining the complete and proper context of those data.

 

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#30) On May 10, 2011 at 8:15 AM, GeneralDemon (26.33) wrote:

Also, if anyone knows offhand the output of gold miners in relation to historical output, I'd appreciate that.  If it turns out that gold output is soaring at a yoy rate never seen before while prices are rising, that would be indicative of a gold bubble.

I would also caution that this may be meaningless when approaching a time when the following two factors coincide: post-peak cheap oil and post-peak easily-mined gold/silver. These are near (within 15 years or so).

Great read David, as usual.

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#31) On May 10, 2011 at 8:16 AM, outoffocus (23.72) wrote:

whereaminow 

Re: Bubbles

I want to first preface that I do not believe that gold has reached bubble territory yet.  

However, I do believe that it will reach bubble territory at some point.  While in previous bubbles, the resulting oversupply from overproduction accelerated the crash, I think in this case, because gold and silver's rise is mostly a monetary phenomenon, the resulting crash would also have to be a monetary phenomenon. In other words, gold will not crash due in an increase in supply of gold, but rather a (extreme) decrease in supply of dollars.  Until then, gold and silver may continue to experience mini corrections and continue to head up.  But as long as the printing presses keep going I dont see any major crashes in gold and silver anytime soon.

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#32) On May 10, 2011 at 8:25 AM, XMFSinchiruna (28.01) wrote:

whereaminow

First of all, this was a terrific write-up as always!

@ comment #8: People calculate price targets because their clients like it.  Stock brokers do it.  I see no reason why TMFSinch, for example, would not be allowed to do it.  I don't, because I am not selling my advice.... so I don't care about my clients lol.

That is not how I view it at all. I had my $2,000 price target for gold in place well before I began writing for TMF. I have no terminal price targets for gold and silver. My $2,000 and $100 marks are exclusively investment targets ... prices that I personally consider imbued with an enormous cushion of conservatism, and prices which will influence my exit strategy. I can not imagine investing in precious metals without having price targets in mind, but to each their own. :) 

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#33) On May 10, 2011 at 9:06 AM, whereaminow (61.23) wrote:

TMFSinchiruna,

I want you to rethink that statement very carefully, lest you fall into the same trap that you ascribed to Alex with respect drawing sweeping conclusions from historical data without examining the complete and proper context of those data. 

Way ahead of you. The next question that would have to be asked is whether or not such behavior is a defining characteristic of a bubble or a coincidence of recent bubbles.

I raise this issue out of curousity, and as something to be investigated. With everyone speaking about bubbles as if they know one when they see one (clearly they never do), I think it's important to understand exactly what an economic bubble is.  That is something I plan on addressing in future posts.

First of all, this was a terrific write-up as always! 

Thank you!

That is not how I view it at all. I had my $2,000 price target for gold in place well before I began writing for TMF. I have no terminal price targets for gold and silver. My $2,000 and $100 marks are exclusively investment targets ... prices that I personally consider imbued with an enormous cushion of conservatism, and prices which will influence my exit strategy. I can not imagine investing in precious metals without having price targets in mind, but to each their own. :)  

I apologize for putting words in your mouth, so to speak.  I know you have been "called out" to explain your price targets before, and I just find that to be silly since no one else has to explain theirs.  Why does a gold bull have to explain his price targets, when everyone other investment guru gets to throw around dozen of price targets a year?

However, I will diverge with you on the subject of investing in precious metals with a price target in mind. I will set this aside for the moment, since I could probably write another blog-length comment on that and then spend the next two days discussing it with you. Perhaps in the coming months I can offer that up for our readers.  Different methodologies are important, even when they come to the same conclusion.  

 GeneralDemon,

I would also caution that this may be meaningless when approaching a time when the following two factors coincide: post-peak cheap oil and post-peak easily-mined gold/silver. These are near (within 15 years or so).

Great read David, as usual.

Thanks GD!  I will be cautious in my approach before I decide either way.  Give me time to research my ideas and then I'll offer my conclusion.  

outoffocus,

I want to first preface that I do not believe that gold has reached bubble territory yet.  

However, I do believe that it will reach bubble territory at some point.  While in previous bubbles, the resulting oversupply from overproduction accelerated the crash, I think in this case, because gold and silver's rise is mostly a monetary phenomenon, the resulting crash would also have to be a monetary phenomenon. In other words, gold will not crash due in an increase in supply of gold, but rather a (extreme) decrease in supply of dollars.  Until then, gold and silver may continue to experience mini corrections and continue to head up.  But as long as the printing presses keep going I dont see any major crashes in gold and silver anytime soon.

I suspect that you are right, that the increase we are seeing is a monetary phenomenon.  It's what has motivated me to dedicate so much time to studying monetary issues.  However, I would like to do some data analysis as well and incorporate as much as I can into future blogs on the subject.  

David in Qatar

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#34) On May 10, 2011 at 10:52 AM, ajm101 (32.37) wrote:

You don't have to be a "Fed Supporter" to think that Gold is a bubbly pile of nonsense.

All of this is just a very elementary logic error - that either Gold or the USD has to be a good investment.  Neither of them is.

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#35) On May 10, 2011 at 11:31 AM, ETFsRule (99.94) wrote:

David:

I'm glad to see that you found it interesting. Van Eeden is a smart guy.

He doesn't use the word "bubble" himself, but I think that's what his results indicate. The most recent data is here. His model gives a value of $886 for 2011, so the broad money supply would need to grow by 60% for today's gold price to be justified.

And those excess reserves that you mentioned are considered cash, so they are already included in the money supply. If that money gets spent it may cause higher inflation, but it wouldn't represent an increase in the money supply.

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#36) On May 10, 2011 at 11:49 AM, TMFAleph1 (96.00) wrote:

@David

If it turns out that gold output is soaring at a yoy rate never seen before while prices are rising, that would be indicative of a gold bubble.

Keep in mind that mining is not the only source of monetary/ investment gold. At a certain price level, there is a strong incentive to convert jewelry into monetary/ investment gold.

Alex Dumortier

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#37) On May 10, 2011 at 11:54 AM, PeteysTired (< 20) wrote:

When the Federal Reserve buys treasuries or another countries debt is that considered an increase in the money supply per the definition of from the Federal Reserve?

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#38) On May 10, 2011 at 5:03 PM, mtf00l (43.86) wrote:

I enjoyed this very much and will check back for future comments.

Thanks!

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#39) On May 10, 2011 at 5:07 PM, rfaramir (29.63) wrote:

ETFsRule wrote:

"And those excess reserves that you mentioned are considered cash, so they are already included in the money supply. If that money gets spent it may cause higher inflation, but it wouldn't represent an increase in the money supply."

It's not their being 'spent' that makes the excess reserves a threat. It is their being lent out. They will be lent in a fractional reserve fashion, meaning that each dollar in reserve will be the basis of about 9 more dollars in new deposit accounts created by loans capitalized by that reserve dollar.

It is only the fact that the Fed is actually paying banks interest on their reserves at the Fed together with their fear of loaning money in the current climate that keeps those dollars in excess reserves. They are a nuclear warhead ready to go off at the first sign of a real recovery (nowhere in sight at the moment).

Speaking of end game scenarios, Chris Barker's $2000/oz price for gold is not a "terminal" price because a realistic price for gold when the dollar goes "terminal" cannot be stated. A) It's probably at least $40,000/oz by today's money supply measurements; B) who knows how many more dollars will be printed by the time we give up the dollar as a medium of exchange; and C) the correct answer when the dollar is worth zero is infinity, which is not very useful except as a way of saying don't own them at that time.

Then again, a zero value dollar may not be the end game. A return to a gold-backed dollar is the end I hope for. But even if it happens, there's no way of knowing now how many dollars will have been issued per ounce in the Fed's vault at the time that gold resumes backing those dollars.

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#40) On May 10, 2011 at 5:19 PM, TMFAleph1 (96.00) wrote:

It's probably at least $40,000/oz by today's money supply measurements.

At the very least. I think it might be closer to $1 quadrillion/oz. 

Ladies and gentlemen gold bugs, the bid is $40,000/ oz against you. Who will trump this bid? Going once, going twice...

Alex Dumortier

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#41) On May 10, 2011 at 7:33 PM, rfaramir (29.63) wrote:

Alex,

I thought I headed the bidding off by already claiming infinity! No such luck. If we were to return to a 100% reserve gold standard backed by the gold in the Fed's vaults, how many dollars are there currently outstanding for each of those ounces?

That's actually two separate questions: how many ounces will back the dollars, and which definition of 'dollar' will be backed.

First, how many ounces are there: wikipedia claims the US has 8,133.5 tonnes but the Treasury claims 261,498,899.316 oz (which I calculate to be 8965.676548 US 'short' tons, so the 'tonnes' are presumably metric?)

But the 'government' (i.e. Treasury, on behalf of the government) is not the same as the Federal Reserve, and what we call 'dollars' are Federal Reserve Notes. So how much gold does the Fed have? 13,452,783.620oz (248,046,115.696 are held by the Treasury at its US mints) So there are two different answers, depending on who is doing the backing: the Fed (13.45Moz) or Treasury (261.5Moz).

Second, how many dollars exist depends on the definition: M0, M1, M2, M3 (no longer reported), MZM, or TMS (True Money Supply). To make long story short, M0 and M1 are too small, M2 and MZM may be too large, M3 is hopefully too large (as it was over 10Trillion in 2006 when they stopped reporting it). By "too small", I mean people will definitely hold dollars according to the more liberal definitions and want to exchange them for gold, so they won't be accepted by the people. By too large, I really just mean bigger than TMS. Salerno and Shostak argue that those (larger) definitions count some categories twice, especially MMMFs: "MMMF shares are excluded from TMS precisely because they represent equity shares in a portfolio of highly liquid, short-term investments which must be sold in exchange for money before such shares can be redeemed."

So, on to the numbers, if TMS is chosen as the 'dollars' to be backed by gold, it was over 6Trillion in early 2010 and trending higher already (before QE2). It would be between 7T and 8T, now, I would guess. M2 was over 8T already in early 2010, trending higher but not as rapidly as TMS, so say between 9T and 10T. M3 was over 10T in 2006, and had risen 3T in 5 years, so if it had only risen 3T in the last 5 years, that would put it at 13Trillion dollars.

The lowest reasonable dollar quantity figure (7Trillion) divided by the highest ounces (261.5Moz) yields $26768.64/oz. The highest dollar quantity (13T) divided by the lowest ounces (just the Fed backing gold, not the whole US: 13.45Moz) yields 966500/oz. I think reality would be much closer to the lower figure, but again, those are current numbers, and we are nowhere near realizing 100% gold backing of our currency. It will only get worse from here until we stop inflating our money supply. In particular, the current (estimated) just under 1.5Trillion in excess reserves at the Fed * 9 means the potential to add up to 13.5Trillion to any dollar definition above M1.

Anyone think we're done inflating right now?

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#42) On May 10, 2011 at 7:44 PM, TMFHousel (94.21) wrote:

"If we were to return to a 100% reserve gold standard backed by the gold in the Fed's vaults ..." 

But we're not.  

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#43) On May 10, 2011 at 8:08 PM, whereaminow (61.23) wrote:

"If we were to return to a 100% reserve gold standard backed by the gold in the Fed's vaults ..." 

But we're not. 

I don't remember him seeing we are.

Ladies and gentleman, reasoned analysis meets non-sequitur.

This is what happens when paper bugs run out of arguments and trade in reason for snark.

David in Qatar

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#44) On May 10, 2011 at 8:09 PM, whereaminow (61.23) wrote:

lol

seeing=saying

but you know what i mean

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#45) On May 10, 2011 at 8:14 PM, TMFHousel (94.21) wrote:

"I don't remember him [saying] we are." 

"A return to a gold-backed dollar is the end I hope for." 

 

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#46) On May 10, 2011 at 8:26 PM, TMFAleph1 (96.00) wrote:

This discussion of theoretical gold values based on a full backing of the currency is eminently useful for those of us who live in Zimbabwe.

Alex Dumortier

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#47) On May 10, 2011 at 9:45 PM, whereaminow (61.23) wrote:

Morgan,

Difference between hope and certainty.  Nice try though.

Alex,

Feeling a bit overwhelmed by simple math?  Need to snark too?

David in Qatar

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#48) On May 10, 2011 at 9:59 PM, TheDumbMoney (44.36) wrote:

David, until this evening, you had been doing so good with not insulting people on this thread, now I'm disappointed.  (As a matter of fact, you have been much better recently in general.) 

I do like "paper bugs" though; whether or not that's yours, that's funny and clever.  It made me try to think of alternatives.  If people who like books are bookworms, and people who are into gold are goldbugs, then maybe people like me who like paper money are fiatflies?   No, that doesn't work.  Fiatfairies?  Too homophobic sounding.  Paperpushers?  Taken.  Yup, paper bugs works best.  I'm using it!!

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#49) On May 10, 2011 at 10:04 PM, whereaminow (61.23) wrote:

dumberthanafool

This isn't my first trip to the hen house. When Alex and Morgan start losing their arguments they resort to ad hominem and non sequitur.

Paper bugs. Hmm, well after years of being called a gold bug by non-thinking conformists like Alex, don't expect any sympathy from me.  I could do a lot worse.

David in Qatar

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#50) On May 10, 2011 at 10:17 PM, TMFAleph1 (96.00) wrote:

When Alex and Morgan start losing their arguments they resort to ad hominem and non sequitur.

Where is the ad hominem attack or non sequitur? I am utterly serious when I say that pricing gold on the basis of a full gold backing for the dollar is absurd and irrelevant except in a purely theoretical context.

Also, I'd appreciate not being labelled a "non-thinking conformist". It's easy to call each other names, but I don't think you know me well enough to put that label on me.

Alex Dumortier

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#51) On May 10, 2011 at 10:24 PM, whereaminow (61.23) wrote:

Alex,

I propose Alex's Law as a corollary to Godwin's Law. The longer a thread goes the probability that you will use the term Zimbabwe or conspiracy moves to 1.

If the gold in the Fed's vault is meaningless, why do they have it?  Why sit on all that gold, never add to it, never do anything with it?  Why not sell it, if it has no value?

David in Qatar

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#52) On May 10, 2011 at 10:40 PM, whereaminow (61.23) wrote:

All this fun aside, Alex and Morgan, rfarmir is possibly the sharpest commentor I've ever come across on my blogs. He knows commodity money and the gold standard inside and out.  Instead of insulting his intelligence, why not consider what he has to say?

After all, he clearly spent some time putting together comment #41.  Should I just stand aside while you mock his response?

David in Qatar

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#53) On May 10, 2011 at 11:29 PM, TMFAleph1 (96.00) wrote:

OK, here's a serious comment: There is no discussion regarding the amount of monetary gold to use. None of the gold belongs to the Federal Reserve; all of it belongs to the U.S. Treasury, but some of it held at the Federal Reserve.

Therefore, the figure one should use for monetary gold is 261.5 million ounces of gold. Dividing the latest figure for M2 by that quantity yields a price of $32,482/ ounce.

As I alluded to earlier, this figure has no practical significance ...unless you believe there is some significant probability that the U.S. ends up being another Zimbabwe. That is apparently where we differ.

Alex Dumortier

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#54) On May 10, 2011 at 11:54 PM, whereaminow (61.23) wrote:

Who said anything about Zimbabwe?  Why do you keed bringing that up?  Is that the only country that has experienced mass- or hyper-inflation in the past 20 years?

Perhaps this is a defense mechanism, where you assign a characteristic to your opponent rather than addressing their criticisms.

http://en.wikipedia.org/wiki/Hyperinflation#Examples_of_hyperinflation

Plenty of modern countries and democracies have suffered from hyperinflation or mass-inflation.  It is always devastating at some level.  By consistently equating criticism of the central banking system with Zimbabwe, you purposefully marginalize your opponents.

I see right through it.  I also realize that you do this because you have not the slightest clue about Austrian School theory - about acting man, economic calculation, capital structure, subjectve value, etc etc - and so restorting to the Zimbabwe line is an acknowledgment of your inferior position.

David in Qatar

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#55) On May 11, 2011 at 12:41 AM, TMFAleph1 (96.00) wrote:

 David,

I've been pretty civil with you, particularly when one considers that the title of your thread is The Inflexibility of Alex Dumortier.

If you want the last word that badly, here you go: I acknowledge my inferior position. Perhaps we can all get back to more important things now.

Alex Dumortier

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#56) On May 11, 2011 at 12:52 AM, whereaminow (61.23) wrote:

I would prefer that you take rfarmir more seriously. I have a great deal of respect for him.  Beyond that, I don't have any problem.

As for the ttile of the blog, well, you have to admit that it was clever :)

Like I said, banter back and forth doesn't bother me. I just hate it when people mock or insult my friends.

David in Qatar

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#57) On May 11, 2011 at 12:51 PM, mtf00l (43.86) wrote:

+1 whereaminow

for referencing wikipedia! =D

-1  TMFBullnBear

for surrendering... =D

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#58) On May 11, 2011 at 1:43 PM, rfaramir (29.63) wrote:

 

Alex is right here: "unless you believe there is some significant probability that the U.S. ends up being another Zimbabwe. That is apparently where we differ."

 

This IS where we differ, and I assert that it is Alex who needs some education on this matter. (In many other areas, I know I need education.)

 

No fiat currency has any inherent value. Each has the exchange value that market participants impute to it and no more.

 

No fiat currency has lasted very long. When people begin to doubt the “full faith and credit of the United States” and perceive others as doubting it, it will fall like every other has. There is no predicting when this will happen. It is a natural market phenomenon, a result of human actions. Each of us is in charge of and responsible for our own actions, not those of others; those we just have to live with.

 

Other than bumbling on with the status quo, the only two ends of our currency, logically, are abandonment (zero value) and re-backing with a real commodity (though gold is the only likely one, silver is possible and SDRs are proposed). The status quo, leaving the quantity of dollars susceptible to the whims of largely unaccountable persons with much to gain from increasing it, is untenable. The Federal Reserve exists to inflate the money supply, and inflate it does, and inflate it always will, at whatever rate it thinks it can get away with. The mandate to ‘stabilize prices’ lets it steal our purchasing power at the rate that science and entrepreneurs increase the quantity of goods and services that can be profitably produced; or, in other words, we would have gentle price deflation as the quantity of goods and services rose faster than the quantity of money, so they increase money to take that prosperity away ‘invisibly’ at about the rate it is generated. The mandate for ‘full employment’ allows them to inflate further, in order to overcome the power of labor to increase wages (which would increase unemployment) by surreptitiously decreasing real wages through debasement.

 

So, we’re back to the two ultimate ends of our currency: the hopeful and conservative one is re-backing (with gold let’s assume), the ‘scary’ one is abandonment. I gave my numbers for the conservative option (and for the record, I believe you are correct to use the whole quantity of gold for the denominator). The scary option has no numbers possible. It is what happens when the rulers hold onto power against the will of the people, demanding they use worthless money by force to the bitter end. It might end our form of government if that force is pushed so far that it is actively and successfully resisted. The people will use something else: barter, other fiat currencies if they are all that’s available, and solid money when the opportunity presents itself. Gold and silver foreign coin were used at our founding, as England did not allow us to mint here. It worked for us then and it could work again. Foreign coins and privately minted rounds in the hand are more dependable than paper promises in the bank’s bush, for sure.

 

To believe in an extended life span for the status quo (maybe not infinite, but say the rest of our lives, damn our grandchildren), is to believe that unlimited power will be self-restrained. To believe that the debt ceiling will stop being raised at some point (the main method and reason for increasing the money supply is to fund government debt), which is to believe that American politicians will stop buying votes with our money, which is to believe that Americans will vote for politicians who will enforce austerity. We will get a look at how that works out for the politicians in Europe, soon.

 

Hope all you want for the next crop of politicians to be angels. Personally, I doubt it.

 

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#59) On May 12, 2011 at 10:24 AM, mtf00l (43.86) wrote:

rfaramir,

You may never see this however, I'm inclined to agree.

That said, I believe the "money masters" have many tricks in their bag to prolong the end longer than we could ever imagine.

I also believe the "money masters" are not missing the facts presented against fiat currency and can at the edge of the cliff turn things around and still benefit from whatever outcome comes to pass.

For example;

http://news.yahoo.com/s/nm/20110512/bs_nm/us_goldman_china_fund_2

I found a reference to this on one of Altry's blogs.  This is a direct link.

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#60) On May 12, 2011 at 2:14 PM, rfaramir (29.63) wrote:

More along these lines can be found in this excellent article: http://mises.org/daily/5273/Macro-Confusion-Inflation-Commodities-and-the-Fed

In particular, note that increased employment does NOT increase general prices, as the Keynesians falsely believe. Once you really think about it it makes sense: each employee makes more stuff than they cost to employ (or they wouldn't be employed), so they increase the supply of goods more than they have salary to spend, which reduces general prices, not raises them. On, the other hand, additional government employees who produce nothing and are paid with newly created dollars can accurately be said to contribute to rising prices.

 

mtf00l,

I do follow blog posts like this, at least for a few days afterwards. The "money masters" have a lot of things they can do, but even more that they just think they can do. Market timing is hard for everyone, and getting out without affecting the market while you do it is harder the more you have (e.g., multi-billion dollar hedge funds and the small silver market).

Regarding the article, it is interesting. I don't know who is exploiting whom in that: Goldman, with US insider connections, or the Chinese government firm they are dealing with. A pox on both their houses! I suspect that it's the private Chinese investors who will "have their faces ripped off" as the Morgan Stanley (and presumably GS) employees like to say about their clients. http://www.derivativesstrategy.com/magazine/archive/1997/1197fea5f753.asp?print

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#61) On May 12, 2011 at 3:49 PM, mtf00l (43.86) wrote:

This one statement says so much;

"each employee makes more stuff than they cost to employ (or they wouldn't be employed)".

Thanks for the reply.

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#62) On May 12, 2011 at 4:00 PM, CluckChicken (34.03) wrote:

"each employee makes more stuff than they cost to employ (or they wouldn't be employed)".

Strange I can think of entire departments that make nothing, in fact if they provide any positive value to the bottom line there are some law enforcement agencies that would like to know.

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#63) On May 12, 2011 at 6:01 PM, mtf00l (43.86) wrote:

CluckChicken,

Ok, I'll bite... What?

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#64) On May 14, 2011 at 10:33 AM, skypilot2005 (< 20) wrote:

"On May 11, 2011 at 12:41 AM, TMFBullnBear (90.06) wrote:

 David,

I've been pretty civil with you, particularly when one considers that the title of your thread is The Inflexibility of Alex Dumortier.

If you want the last word that badly, here you go: I acknowledge my inferior position. Perhaps we can all get back to more important things now.

Alex Dumortier"

I find this post to be particularly interesting in light of the fact the author of the post recently penned an article having the title “Warning! Gold is now 3 times overpriced!”.

David,

Possibly, you need a license or permit to use provocative headlines here at TMF.  Do you want me to call Monday and check?  I’ll ask for the Article Titles Police extension.

As always, I enjoy your post.  I don’t always agree with your conclusions but have a high degree of respect for your thought process.

I don’t mean to be presumptuous but, if you want, feel free to use any of the following for titles.  I’d be honored:

Sky Pilot is a Dirt Bag

Sky Pilot missed 2nd Alimony payment in a row

Etc.

Fool On

Sky Pilot

 

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#65) On May 16, 2011 at 12:15 AM, rfaramir (29.63) wrote:

mtf00l,

"each employee makes more stuff than they cost to employ (or they wouldn't be employed)".

A better statement would probably be along the lines of "promotes the company's production to a higher degree than his cost." Some don't produce by themselves, but assist others (God bless secretaries!).

I was going to say "and you could add 'on average'", but really it is applicable to every employee that is gainfully employed. There's always entrepreneurial mistakes and values other than profit (like nepotism), but strictly speaking, every employee has to be worth more employed than not or they won't be. The only way "on average" would apply would be over time, as in, someone you can't just hire seasonally, but only makes a seasonal contribution, with that contribution large enough to make them worthwhile keeping all year.

CluckChicken,

 

"Strange I can think of entire departments that make nothing, in fact if they provide any positive value to the bottom line there are some law enforcement agencies that would like to know."

Entire government departments, sure. Not in the private sector. Even things like Legal Departments, as sickening as it is, benefit the company by reducing costs by fighting lawsuits or preventing lawsuits (by keeping your operations on the straight and narrow) or suing when the company has been damaged. They may be a big cost sink, but if the company thought they were a bigger sink than benefit, they'd be gone. Many companies don't have them, in fact.

 

So what are your ideal profit-decreasing departments that companies have and law-enforcement makes sure you do? 

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#66) On May 16, 2011 at 2:47 PM, mtf00l (43.86) wrote:

rfaramir,

Thanks for expounding for CluckChicken.

Res ipsa loquitur.

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#67) On May 16, 2011 at 4:30 PM, kdakota630 (29.90) wrote:

David, I hope you're still following this.  Check this out:

http://www.foxbusiness.com/on-air/stossel/blog/2011/05/16/philly-police-harass-threaten-shoot-man-legally-carrying-gun

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