Mainstream media: stuck on stupid

Dollar Demise Refuted With 13% Gain Since 2008 – as compared to what?  Other currencies?  Or as compared to gold, oil or other commodities?

The Year U.S. Debt Beat Gold, shows 10-year treasury notes with 16.7% gain.  But this is unfair since the face value of these notes is 1.91% at year end.  That is you can only get 16.7% if you are trader in these notes.  Holders of US debt notes vs. holders of gold is a different story.  If you held gold over 2011, you outperformed treasuries.  Gold ended the year at $1,566.40 vs. $1421 at the end of last year.  That’s a 10% gain which is better than U.S. debt.

Focus on what is real not what is safe

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.

You keep using that word IV: fiat

Economics has become a pseudo-science and one of the reasons why the education bubble is real and will result in the demise of the university system.  It will collapse under its own weight of stupidity.  Here I am a university-trained PhD telling you that much of what goes on in academics is just a bunch of  fantasies created in the mind of the scholars.  In my own field it consists of such scholarly imaginations as Q, the Secret Gospel of Mark, or the anti-Semitic source theory of the Pentateuch (JEPD [pdf]).

So it is not at all surprising to me to learn that the same foolishness inhabits other fields of study, including economics.  So now a certain Prof. Willem Buiter has produced a blog post entitled, “Gold – a six thousand year-old bubble“.  Rather than just simply admit that gold has intrinsic value because of its rareness and unique properties, Prof. Buiter, that colossus of economic brilliance, concludes that mankind throughout recorded history has kept gold in a bubble.  In my view, wisdom would dictate that 6000 years as a currency would make gold the most secure form of money known to man.  But alas, then Prof. Buiter writes these lines:

Gold has become a fiat commodity or a fiat commodity currency, just as the US $, the euro, the pound sterling and the yen … [snip] are fiat paper currencies. (From Financial Times Blog, [snip because of 30 word limit imposed by Financial Times])

The term fiat actually refers to currencies with nothing, such as gold or silver, backing them.  Such currencies are predestined for failure as the temptation to make too much of it seems to derive from human nature.  On the other hand, gold has intrinsic value, so it requires no backing.  To call gold a “fiat” anything is as stupid as Nouriel Roubini saying that gold has no intrinsic value.  These economists don’t even understand what the terms “fiat” or “intrinisic” mean.  This is disgusting and pathetic and it is no wonder that the world is in such economic chaos with such dunderheads running the show.

For the correct definition of fiat currency, see Investopedia.

And now for the video clip, which I dedicate to Prof. Buiter :

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?