Excellent post old buddy, It’s great to have you back in the conversation.
I want to ask you about one point that you made regarding using gold as the measuring stick for the dollar. I think this is a false, albeit very popular, argument. In this day and age, comparing gold to a currency is comparing apples to oranges.
Gold is a market asset and its market value is defined by its price in a given currency, not the other way around.
You don’t define the value of the dollar by how much AAPL stock that it can by, or any other asset for that matter. I can’t buy a loaf of bread with my Apple stock, just like I can’t buy it with gold bullion.
I think many people interpret the price action of gold in a macroeconomic context, when history (think of the 1990s) suggests that there is little to no correlation. The price of gold has everything to do with Wall Street profits, just like tech stocks and home prices did in the past. Like other assets, its price is correlated to credit-fueled market speculation, not the value of the dollar.
And speaking of correlation…
People buying gold to protect themselves from inflation are contributing to higher prices throughout the commodity sector, especially food. Wall Street has us by the short hairs. These days you don’t even have to play the markets to lose your money to the big boys.
Thanks for reading…Jeff
Admittedly, it has been almost 10 years since I’ve trapsed around international airports, but a funny thing comes to mind, Gold was listed on every currency exchange window.AAPL wasn’t.
Now one could argue, "Well Gold is a commodity that is traded on many exchanges such as the NYMEX."
And I could argue back that WTI Crude wasn’t listed on currency exchange window next to AAPL either.
But, I’d rather not argue. If you look at gold as an asset like IPE— which Amazon bought a 30 percent share of before it realized that pets dot com was in the gravel shipping buisness and people became opposed to paying 45 bucks to have UPS ship a 5 dollar bag of cat litter to the same zip—I understand your view.
I don’t share it.
But I realize it is your view.
Mine is different. I feel gold is a currency and has been for 6,000 years.
As Egon von Greyerz says, ‘We;ve never, until now, had a situation where ALL soverign countriew were bankrupt and printing all at one time.’
Time is a harsh judge of right and wrong—we’ll see who is right, I wish us both well.
" The price of gold has everything to do with Wall Street profits, just like tech stocks and home prices did in the past. Like other assets, its price is correlated to credit-fueled market speculation, not the value of the dollar."
and,
"People buying gold to protect themselves from inflation are contributing to higher prices throughout the commodity sector, especially food."
This thinking is so backwards that it boggles the mind. Correlation does not imply causality. The value of the dollar is ultimately tied to how many dollars (paper and credit) are emitted by the central bank. Indeed, all the emission (liquidity) is fueling the stock market… and it is also causing the prices of Gold and Silver to rise as more (costlesslly) emitted dollars chase the limited ( by nature) stocks of Gold, Silver, and oil. Since most CB’s are emitting their own credit money at a rapid pace (http://www.ritholtz.com/blog/2012/01/living-in-a-qe-world/) … it is hard to see the depreciation while comparing the value of one currency against another (ala DXY)… this is why you must view the value through the lens of real assets, and this is why the PM’s are so heavily manipulated (for now)… in order to distort that lens of last resort (or maybe oil is the true lens of last resort, since Western bankers don’t control that cartel). As Chris said in the interview… markets don’t provide meaningful information anymore… neither stocks or bonds.
Blaming a Gold buyer for causing higher food prices… I don’t even think that deserves a response.
Thank you Erik for passing along your ideas and experiences. I loved your simple point about how the markets are cheering the way TPTB are dealing with symptoms, but not the structural causes of this crisis.
[quote=SingleSpeak]
Erik, you can have a pot-pie at my place anytime, no charge. Looking forward to the Financial Sense interview.
Erik looking for black swan, Chris postulates perhaps a dark brown would suffice, I’m thinking off-white could possibly do the trick at this stage.
SS
Niceto have Sherman on the board. [/quote] Things are so far out of whack and seem to be teetering so precariously, that a single black sparrow could land on the top of the pile and bring it all crashing down. One man's opinion... Thanks for the interview. Always interested when Chris and Erik get to talking... Viva -- Sager
The value of the dollar is ultimately tied to how many dollars (paper and credit) are emitted by the central bank.
In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold.~Greenspan autographed the original sometime in the 2000s for Dr. Ron Paul and told him he believed in everyword he wrote, JAG knows Paul's kid so maybe he can score me a copy of that autograph?I find it amazing how people understand counterfeiters should be arrested because they debase our dollar, or "dawler" as my favorite Canadian female reporter calls it, (and I think I made her cry when I emailed her a "Your a moron" email with a link to all the comments she got on 0-Hedge). But anyway, when Bernanke decides to print people think because he is smart that it won't debase the currency and that holding paper is a good idea. http://youtu.be/HTzMY5lYlJk Thanks Travlin & Single Speak
Davos – Welcome back. It is good to see you here again.
Erik – Thanks for sharing your views. They are always interesting.
Travlin
Erik,
How has Canada scored in your world tour study?
David
[quote=Jim H]The value of the dollar is ultimately tied to how many dollars (paper and credit) are emitted by the central bank.
[/quote]
Sorry Jim, but you are so wrong on this one it’s a shame. The credit that the central bank creates is a pittance compared to the credit created in the banking system, especially the shadow banking system.
And before you counter with age old "money multiplier" farce, try reading something that isn’t marketing on a goldbug blog.
My dollar today buys a lot more house than it did in 2005.
Price inflation is relative to who gets the credit and what they buy with it. The only people gettting credit in America are the investment bankers who invest in the commodity and equity markets.
Have a good one…Jeff
Clearly, inflation has been exported by Ben Bernankster, and Erik (with a k not a c) found himself paying $90 bucks for a salad and a chicken pot pie ( SUPER-DUPER HYPER-INFLATION), and that is unfortunate (Truth: plain silly). I believe however that Mr. T paid too much, and should have left the table , and politely (or not) went somewhere else.
BOB
Mark BC,I want to thank you for responding to my previous post. You warned me about Dutch Disease several months ago when I was asking questions about Canada. I appreciate your frankness.
Sorry to make your worse fears come true, but my family is set to migrate to Canada from the US next month. We are not fleeing the US out of desperation. Our migration has been planned out over eight years and we are excited about starting a new life in Victoria, BC.
We saw a long time ago that the US was making some bad decisions and that Canada offered a better future for our children. Our goal is to obtain duel citizenship so that all four of us will have the option of living in both countries.
Of course I am curious to learn more from you.
Do you have any further words of wisdom that wish to share before we depart on our journey?
I am seeking truth and reality, not just pretty pictures.
David
I’m surprised by how much the Chicken Pie has dominated the conversation! For the record, I never described Donovan’s on the Beach as a "working man’s" restaurant. That description found its way into the base post by Adam, probably because I was not as clear as I could have been when I described the restaurant. What I meant to say was that it was more a casual dining than a fine dining restaurant based on what I know of that industry’s terminology, and it certainly wasn’t the fanciest place in town. When we walked in we were thinking it was going to be "burgers on the beach", but it turned out to be a gourmet casual affair instead. But it was a LONG way from a Michelin-starred fine dining restaurant.My $57 price quote was in USD. The actual price was $54 AUD. I notice on their website that the menu now says $46AUD - I’m not sure if the price came down since we visited or if that’s just an old menu on the website.
Donovan’s was clearly not the most thrifty option available, but my intended point was that the problem is across the board. For example, last night we stayed in and ordered Pizza here in New Zealand. Two individual-size (~12") pizzas were $25 and $27 (one was veggie, one had meat toppings), and there was a $9.50 delivery surcharge. We’re staying in an upscale town without a lot of competition, so I’m sure there must be cheaper pizzas elsewhere in New Zealand. But one way or another, our "cheap night staying in" involved a $61.50 payment to the Pizza guy.
Erik
…I am so relieved to know that here in America we can still eat rather cheaply, and compared to most everywhere our price for a gallon of gas is still on the cheap side too (Yes, I am aware of how heavily we subsidize our gasoline).
$61.50 for pizza!!! What the %$#%$^*&&()**)()+ Man!!! LOL
Was the pizza pie bigger than the chicken pot pie?
I can’t wait for the next episode of Erik and his Lady’s excellent adventure.
BOB
Your dollar buys more house because housing is still in the process of mean reverting off a huge mortgage credit fueled bubble, and there is way more housing stock than is needed, or affordable by the populace… so this will probably continue. Housing is not a good reference point for the buying power of your dollar. Rents are going up though. If the CB’s were not enabling the status quo through all their outright printing and dollar swaps, then dollars would be a pretty good place to be for savings. Until that time comes, I will remain a Goldbug, and you can choose to be a Paperbug if you like.
I understand how fractional reserve banking works… what the CB’s are creating now is high powered money that can, and probably will be the tinder for the ultimate hyperinflationary firestorm… this coupled with all the dollars that have been emitted abroad, and that will ultimately find their way back to our shores in the end game.
I am not a banker, but I sure as heck took advantage of this cheap credit with my new 3.87 % 20 year fixed mortgage.
Your dollar buys more house because housing is still in the process of mean reverting...
Bernanke says here that "Housing is no longer a safe investment". Probably the only thing he ever got right in his life. Housing has a lot more to fall.
- Last I recall shadow inventory was 1.6 million…
- BUT there were 3.5 million seriously delinquent mortgages (over 4 months late) as of January of 2012.
- So we’re looking at 2.6 million shadow inventory, probably by years end. They can’t (really wont) cram all 3.5 million in this year.
- I suppose regular inventory is what? 2.27 million I think in 2011. Like I said, my RE finger is off the pulse.
- So back of the envelope we have 1.6m+1.0m+2.3m=4.9m and many more too follow.
- Of course, an easy way about this is there are about 70 million homes in the U.S. and 12% of them are vacant. So inventory is 8.5 million, or will be soon.
Here is what Moron Bernanke wrote in his crud book, good for kindling if you don’t get the electronic edition.
Now here he is on CNBS contradicting what he published in his book years after it was published.The “debt crisis” touched all sectors. For example, about half of all residential properties were mortgaged at the beginning of the Great Depression…
The proportion of mortgaged owner-occupied houses with some interest of principal in default was in none of the twenty-two cities [surveyed] less than 21 percent (the figure for Richmond, Virginia); in half it was above 38 percent; in tow (Indianapolis and Birmingham, Alabama) between 50 percent and 60 percent; and in one (Cleveland), 62 percent. For rented properties, percentages in defaul ran slightly higher.
2005: http://youtu.be/HTzMY5lYlJk
And we can even add to this if we so choose.
During the FOMC 2005 meeting these (ehems) were laughing about the housing bubble that this ehem chairman was lying (when he was at the White House (pre-Fed Chairman but post Llyodd Blankfein's housemate at Winthrop in Harvard)) on CNBS about.
“–I offer one more piece of evidence that I think almost surely suggests that the end is near in this sector. While channel surfing the other night, to the annoyance of my otherwise very patient wife, I came across a new television series on the Discovery Channel entitled “Flip That House.” [Laughter] As far as I could tell, the gist of the show was that with some spackling, a few strategically placed azaleas, and access to a bank, you too could tap into the great real estate wealth machine. It was enough to put even the most ardent believer in market efficiency into existential crisis. [Laughter]~David Stockton, Dec. 13, 2005, economist and Fed comedian.
And wait...there's even more!
Remember this guy?
Education: Julliard School. Hitler taught us the world needs more artists, even if their art (ehem). N.Y.U. B.S. economics, M.A. economics, dropped out of Columbia (to follow Burns to DC to learn how to chase power and powerful positions). PhD N.Y.U. His NYU dissertation—removed upon his request when in 1987 he became Chairman of the Fed. One copy remains out there and it includes a discussion of soaring housing prices and their positive effect on consumer spending. It even anticipates a housing bubble and collapse. He noted that homeowners were refinancing for larger amounts than their original mortgages, monetizing their appreciation and then spending the excess cash on goods and services. Economists had missed this trend. He also wrote in his now secret dissertation,
“There is no perpetual motion machine which generates an ever-rising path for the prices of homes.” …”break in prices of existing homes would pull down the prices of new homes to the level of construction costs or below, inducing a sharp contraction in building.”
_________________________________________________________________
The entire problem is that most people don't have a clue what deflation is. FY2006 30% of the buyers were sub-prime, they're gone. The negative externalities derivatives created wiped out about as many prime borrowers.
People run around saying money dried up, there is no credit. Bee-s! The buyers are GONE. It is supply and demand. Not "deflation."
It pains me because I have a lot of good friends who are deflationists. They are incredibly uber-intelligent, but they have this one flaw being able to wrap their minds around this and the bottom line is that in this sense they are different from horses.
With interest rates so low why would anyone purchase real estate in the US as an investment? It can ONLY go down! Why not take advantage of something that will hold its value and maybe even appreciate? There’s millions too many houses. They are made of plywood. They rot and get looted when not maintained by OWNERS. I can understand if you want to refinance your own house but I sure wouldn’t buy one for investment. I look at all these glass condos going up in my City of Glass, gawd why would anyone pay half a million bucks for a closet?
I got an electric car and I think that within 10 years (more likely 2) when we see where gas prices are going it will have turned out to be a very good investment. There are very few electric cars in the world right now.
My head hurts just watching…get me a copy of that Greenspan autographed 1966 Ayn Rand Objectivist piece from your doctor frined and maybe I’ll forgive you.
First I would like to say it’s nice to see some of the old-timers on this thread. If you guys actually stick around, it would make CM.com a more interesting place.
As for the question of if gold is money, the truth must lie somewhere in between. Gold certainly has a history of being money but it is hard to say that is what it is acting like as now. Maybe it is in the process of reemerging as money but it is hard to see how that can fully happen when it is measured against an entity that can be created without cost and then is taxed on the basis those artifical gains.
One thing is for certain, it is not as simple as Jim saying "The value of the dollar is ultimately tied to how many dollars (paper and credit) are emitted by the central bank. ". One look at a chart for monetary/credit growth vs gold price between 1980 and 2001 should make that pretty obvious.