Tony Robbins has made a video on the United States budget. The video serves to show how far out of whack the federal budget is, and more especially, how the plan of taxing the rich so that they pay their fair share, which is the rhetoric coming out of the Obama campaign, will not solve the problem. Taxing expats, US citizens living abroad, won’t solve the budget problems either. Basically, Robbins shows, using Iowahawk’s numbers, that confiscating all the profits and all the wealth of the rich and corporations would not balance the budget, unless the US were also to stop (1) foreign aid; (2) pull out of Afghanistan and Iraq, (3) etc., etc.
Meanwhile, Cullin Roche, the Pragmatic Capitalist, calls Tony Robbins’ video stupid; he claims to understand monetary policy and says that it is impossible for a money currency issuer to go insolvent (e.g., Zimbabwe, Weimar Germany, Argentina, Chile???); rather, he says that such an entity can cause inflation. He says that this is not merely a semantic distinction. Are you buying that? I have argued that the United States government is already insolvent, but that its money creation ability makes it able to extend and pretend, to kick the can down the road, until the dollar itself becomes a meaningless symbol of value, since measuring other assets in dollars is reification. The United States has already defaulted. So have many currency issuers in history. Monty Pelerin agrees. Here is Roche’s video:
But the United States government is much worse off so far this year than what Robbins projects; it is not borrowing 40 cents on every dollar it spends but 53 cents. The debt death spiral is at work. Expect a government that is so desperate to continue to put in place desperate measures. It becomes a predator, seeking food high and low, including expat food. It is currently cannibalizing its own expats, rather than facing the fact that it must both (1) cut its budget and (2) raise taxes on all Americans living in the United States. Raising taxes on the rich and those living on foreign countries will not solve the insolvency.
Hat tip: Business Insider.
Kevin Graham, who was recently featured at the Globe & Mail, continues to write about DIY investing at his blog. Recently, he wrote against oil investing, “Five reasons that oil prices will fail“. While I agree with some of what he says, I am the sort of investor that he would criticize (and he has done so on this blog). All of my investments are in oil & gas companies or gold and gold mining companies. But I am not sure what else to do in the current investment environment.
So I wrote a comment (edited below), that I had the hardest time swallowing this one line from Graham:
“Commodity prices do not reflect reality.”
I don’t disagree that commodities could be in a bubble per se–that could be the case, and the recent rise in the oil price might see a pull back. Rather, I am bemused because it assumes that our current financial markets have anything at all to do with reality. You and I are in fundamental disagreement about fiat currency. Considering that fiat currency is a derivative and has no intrinsic value, it is curious that you could determine value of a commodity based on its nominal dollar value. This is what philosophers call reification. You are trying to determine the value of a concrete object (a commodity) on the basis of an abstraction (the value of the dollar).
In this light, Jim Grant told the story of a letter to the editor of the Financial Times, in which the author said that he finally understands what Quantitative easing is, but now he isn’t clear on what money is anymore.
Commodities are real. Money is not. When high/hyperinflation hits, I will be focussing on what is real, as fiat money will no longer represent anything of value. That is to say, my spam collection, my hoard of wine kits, and my unused toilet paper have intrinsic value, but the dollar, not so much. Commodity prices do not reflect reality, because money itself is not real. When money is debased, it is better to have something that is real than a derivative of a symbol of the collective worth of an insolvent nation.
Monty Pelerin offers some investment advice and then asks his readers what they would suggest. I responded with the following comment:
Gold mining companies may be good in the sense that their assets (NAV–Net Asset Value) are largely trapped under ground and brought to the surface at a slow rate and sold for profit; thus they will still be recovering value from the ground when money has collapsed and gold is needed as a currency. I think the same is true of Canadian oil companies, which have large stores of oil and gas in the ground (i.e., NPV–Net Potential Value)–the Cardium and Swan Hills are largely, e.g., are known quantities exploited by vertical drilling and are now offer new yield through new technologies, i.e., horizontal drilling and multi-fracking. Billions of barrels remain in the ground, and EOR (Enhanced Oil Recovery) methods, such as the injection of natural gas, that companies like Petrobakken (see this post) and Crescent Point are beginning to employ promises to produce as much as 25% more recoverable oil from the fields–this means that these companies could increase their NAV by as much as 5 times, since their current NAV is based on 5% recoverable oil. The US has a lot of oil too, but the Canadian regulatory environment remains for now a far more favourable than in the US. Yet this remains high risk, and my portfolio which consists most of these oil companies and few miners is suffering YTD.
After your last post by Ann Barnhardt, and the news coming from Gerald Celente about how his cash was stolen from his brokerage account, one wonders if any brokerage account is safe any more.
Thus, the operative word in all this is risk. Nothing is safe. Perhaps the best thing is to focus on what is “real” as opposed to what is “safe”. Fiat money is not real, for our estimation of all that is denominated in nominal currency is actually a reification–the assigning of concrete value to an abstraction. What is real? Physical gold & silver, wine kits (see Wine as Currency), spam, beans, unused toilet paper, used aluminium beverage cans. What is reified? Bonds, derivatives, currencies, the value of gold in terms of fiat currency, etc. I have a canned spam collection, Monty Python not withstanding–mind you, I like spam. It has a long shelf life and is good food during times of crisis–that’s why my Korean family from Hawaii used to eat a lot of it–it could survive the sea journey from the mainland and was a staple during WWII.
Zimbabwe money has no intrinsic value either
Gold hit $1700 in overnight trading last night, and it is time that I write a post celebrating this $100 incremental increase. This is only a mere three weeks after thanking Ben “Gold-is-not-money” Bernanke for $1600 gold. It used to be that dollars were fixed in price to money, gold and silver. Then, it was taken off the precious metals standard and become “money”–but it is what is called a “fiat” currency, a currency that has nothing real backing it. This means that the dollar has no “intrinsic value”. Nouriel Roubini and the other bright luminaries with PhD degrees have said that gold has no intrinsic value, and thus I created this series to remind them that the dollar is not money. It was once a note that gave the bearer the right to money on demand, but now it cannot be used to demand money any more.
This is a basic economic fact that I’ve known since my teen years when Carter was president and the US Federal government was likewise devaluing the dollar. It took Paul Volcker and severe interest rates and austerity to put the dollar back on track. Now the United States has suffered a belated downgrade in its credit rating from AAA to AA+ and we are seeing a renewed debauching of the currency. Still, there are those who claim that it is gold that is in the bubble, because look at how high the price is in dollars! I would remind people that the dollar has no intrinsic value, and the fact that we measure things in a currency with no set value is a form of reification–the value of the dollar is an abstraction because it is the ultimate derivative product, which has no discernible reason that it should be worth anything except that it can be used to pay debts and taxes. To measure gold, which has real intrinsic value, in dollars, which have none, is reification, the assigning of a concrete value to an abstraction.