Gold versus paper currencies in the aftermath of war

To understand the value of gold as a currency with intrinsic value versus paper currencies which have only derivative value, it is perhaps helpful to consider what happens when a war comes to a conclusion.  The victors, if they ask for tribute or war reparations, will only accept gold.  Consider that throughout history, when conquerors overtook cities, they would strip them of gold and silver and other precious real goods, such as when Alaric sacked Rome in 410.  They didn’t say, “Oh please, would you print some images of the Emperor and give them to us.”  Instead, the barbarians forcefully took away the intrinsic wealth of the city.

In our more recent past, we see that the United States has been able to force its paper currency on the losers of wars.  At the end of the Civil War, the Confederate dollar became worthless paper.  The loser cannot make the winner accept its paper.  Then, at the end of World War II, the US was able to begin to impose its currency on the rest of the world, until it became the world’s reserve currency.  Originally the US dollar was a derivative for gold; but  afterwards, Nixon took it off the gold standard, and it became a purely fiat currency.  But had the United States not won World War II, we’d be speaking German and Japanese and Yen and Marks would have become the world’s reserve currencies.

At the end of World War I, the Treaty of Versailles imposed war reparations upon Germany, mind you not in the paper currency of the Weimar Republic, the Deutsche Mark, which became so much wallpaper in a few years, as it began to fill the wheel barrows of the country.  No, the treaty required that the Germans pay back their debt in gold.  Funny, isn’t it?  How is it that the loser of a war can impose upon the winner the acceptance of a metal which has been in a 6000 year bubble?

Should Canadians boycott the USA?

I wrote the following comment at Beating the Index, after Mich asked us what we thought of an oil company operating in Texas:

Hi Mich:
I gave up my US citizenship on February 28 2011, and I am very angry with the United States and its attempt to persecute Canadian residents, about 1 million of us, with extra-territorial taxation and persecution through laws that are intended to attack money launderers, drug dealers, and terrorists. Many innocent Canadians with dual citizenship with the US have become fearful of not even being able to cross the border to visit their families now, and Canada’s finance minister, Jim Flahrety, has told the IRS to back off of innocent Canadians who are not tax cheats.

When you expatriate from a country because you think that the people running it are persecuting you, treating you in an unfair manner, do you think that’s gonna be the first place you would want to invest? I’ve decided to stop even travelling to the US, except for family emergencies where the risk reward ratio makes sense. I did invest in Texas a few years ago, but thanks again to the US Federal government, I was basically fleeced for 70K. No thanks. Never again.

I think EGL could turn out to be a good investment, but with the OWS movement and an administration that wants to tax the rich, is not nationalization of the resource sector not far off? Paint me as paranoid, but the US federal government has caused me great suffering by threatening me, someone who’s lived in Canada now 25 years, I feel like requesting my fellow Canadians to keep their money at home and to boycott the USA until they [the Yanks] can figure out that it is not right to attack innocent Canadians.

Thanks for letting me rant a little. I just think people should know about this.

Efficiency or Property Rights: Thomas Woods’ comments on the Chicago School of Economics

This was originally posted at City of God.

Thomas Woods, in his book The Church and the Market, spends a little time in the first chapter distinguishing the Austrian and Chicago schools of economics. One major difference between the schools is on the issue of central banking and monetary policy. We’ve had occasion to discuss this on the blog in the past, and I’m not particularly interested in raising it again here. However, Woods brought to my attention another difference which is of much greater concern to me, and this is over a moral issue. The difference is this:

The classic case in Chicago law and economics, famously described by Ronald Coase, is the example of the train that emits sparks that set fire to a farmer’s crops. (The example occurs prior to the introduction of diesel engines.) Either the farmer or the train will have to bear the cost of this damage. On the basis of strict liability, of course, the farmer has the right to the property in question and therefore the right to enjoy its fruits unmolested. The train should compensate him for his loss or install some kind of spark retarding device. But Chicago decides this case in such a way that overall wealth is maximized. (25)

Thus economic efficiency becomes an ethical value that is weighed against the property rights of people. The Austrians vehemently disagree with this point. They argue

that the rights of property should not be compromised in order to satisfy any wealth maximization calculus, and that as a rule strict liability should be observed. (They offer these critiques in their capacities as moral philosophers rather than qua economists, a point to which we shall return in our discussion of economics as a value-free science.) Walter Block has described it as “evil and vicious to violate our most cherished and precious property rights in an ill-conceived attempt to maximize the monetary value of production.” (26)

Woods provides one quote from a defender of Coase to make clear that the Chicago school explicitly teaches what he says they teach:

In defense of Coase, Chicago economic Harold Demsetz argues that “[e]fficiency seems to be not merely one of the many criteria underlying our notions of ethically correct definitions of private property rights, but an extremely important one. It is difficult even to describe unambiguously any other criterion for determining what is ethical.” Here is efficiency analysis with a vengeance. (26)

Now, I’m not sure any other way to describe this theory besides the words Block used: evil. Quite clearly, this is a form of coarse utlilitarianism, and one which will undoubtedly help the well-connected over against those who have little wealth. And I think this point is something where those on the left and those who support a view of property rights as natural rights (be they conservative or libertarian) can find agreement.

What does the sale of Brigham Exploration tells us about the value of Petrobakken?

Today we learn that Statoil has offered 4.4 billion for Brigham Exploration, a company with holdings in the US Bakken. Using a number of interesting methods of comparing the Brigham Exploration with Petrobakken, Devon Shire concludes that Petrobakken could be worth as much as 300% of its current market price (at close on Oct 17, $8). This kind of comparison is very interesting, because, as I reminded readers in a previous post about Petrobakken, the true value of an junior or intermediate oil company isn’t so much its market capital, but by how much an industry insider such as Sinopec or Statoil is willing to pay. Devon Shire writes:

I don’t know exactly what Petrobakken is worth. But common sense tells me that an acquirer would be willing to pay a lot more than the current share price.

Petrobakken is just like Brigham. They are both companies that have years and years of drilling locations ahead of them and both companies sit on vast amounts of oil. That is why the multiples of flowing barrel of production and EBITA being paid for Brigham are so high.

You can’t value these companies using the same approach as you do for a conventional oil and gas producer. Much of the value is in the huge land positions that these companies have in unconventional resource plays. And much of that doesn’t show up in proved reserves because most of the undeveloped acreage isn’t booked as proved reserves.

It isn’t just Petrobakken that is massively undervalued right now. The entire sector in Canada is. Pick an unconventional producer and I almost guarantee it is trading at 50% or less than what an acquirer would pay.

All it takes is some common sense to see it. And some patience to wait for Mr. Market to figure it out.

See also:  What does the sale of Daylight Energy tell us about the value of Petrobakken?

Review of Peter Grandich’s Confessions of a Wall Street Whiz Kid

Please take a look at Jonathan Chevreau’s column today; he reviews Peter Grandich’s, Confessions of a Wall Street Whiz Kid. Grandich was a Wall Street legend who realized the emptiness of his quest for material wealth. Here is an excerpt:

Early on, Grandich’s church-going was mostly for show and to accommodate his Catholic wife. But when he said his newborn daughter was healed by prayer in the 1990s, he began taking his religion more seriously. He “started to believe in God on a real, daily basis,” even though he viewed himself as a “sinner . and a big one, at that.”

Despite his wealth, he felt like most Americans that he was living beyond his means, so “super-downsized” his high-net-worth lifestyle.

Please read the rest at the Financial Post.