Focus on what is real not what is reified

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 When high/hyperinflation hits, I will be focussing on what is real, as fiat money will no longer represent anything of value.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.

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