We kicked off our annual Agora Financial Symposium in Vancouver yesterday. As always, debates were heated, drinks were had, and one speaker warned:
“We’re all freaking doomed!”
You guessed it, dear reader. The great and mighty Mogambo made an appearance as the first day of the conference wrapped up.
“And why are we all freaking doomed? INFLATION!” he bellowed, to many a startled conference goer. “The world’s greatest evil.”
So, perhaps the Mogambo is a bit melodramatic, but the points he made were valid. “Monetary inflation leads to price inflation...causing EVERYTHING you buy to cost more: stocks, bonds, houses - even food.
“All excesses of new money and credit drive up prices - but not wages.”
And a lot of what the Mogambo had to say fits in directly with a topic we’ve been writing about in these pages: the Crack-Up Boom.
Ludwig von Mises originally coined the term, describing the Crack-Up Boom as an occurrence that happens when the generally ignorant masses catch on to the “deliberate policy of inflation.” Meaning that while prices of everything in our world go up, up, up...the average consumer looks on blissfully, believing that eventually, prices will drop.
“But then [the masses] become suddenly aware that inflation will go on endlessly. A breakdown occurs. The Crack-Up Boom appears. Everybody is anxious to swap his money against real goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them,” the Mogambo said.
“Gloom and doom ain’t what it used to be,” Bill Bonner began his speech this morning, eliciting a chuckle from the over 700 attendees.
“Back when we had a lot of trouble...the Great Depression...the Cuban missile crisis...people had sense of appreciation for that trouble.
“To put it another way - there is nothing like a long run of good luck to destroy a person.”
Some would argue that this is the major problem in America today - being ill-equipped to deal with rainy days. Like it says in Empire of Debt, Americans believe these delusions: that you can get something for nothing...that this generation can consume and stick the next with the bill...and that house prices will forever go up, just to name a few. “And the big problem with that is: when you don’t appreciate trouble,” continued Bill, “you go looking for it.”
So what do you want at the end of a Crack-Up Boom? Gold. Something tangible...that doesn’t lose value and can’t be created out of thin air - or by flipping a switch on a printing press.
While the yellow metal basically sits on the sidelines doing nothing, when the dollar starts hitting record lows, but your grocery bill...electricity bill...and kids’ tuition is getting higher and higher, these lazy lumps of metal start looking pretty darn good.
“When the Crack-Up Boom cracks up,” Bill finished up his speech, “you’ll find no happier person than the one holding lumps of gold that are doing nothing.”
The Daily Reckoning Australia
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Comment by reckoning fan on 26 July 2007:
'when the dollar starts hitting record lows, but your grocery bill…electricity bill…and kids’ tuition is getting higher and higher, these lazy lumps of metal start looking pretty darn good'
I have heard you guys saying stuff along those lines many times. What I'm a little confused about is what exactly you mean by that.
Are you simply saying when you need the cash you can sell your bits of gold -that have kept their buying power relative to items- to pay your bills, or are you predicting a total abandonment of the dollar, a time in which we all revert back to using gold as a currency in itself?
Sorry this is probably a really stupid question.
Cheers!
Comment by Andrew on 14 August 2007:
Dear reckoning fan,
I would suggest that no question is so stupid that it can’t be asked. It is the questions that are not asked that are more likely to cause you trouble. In answer, I start with an observation: every fiat currency ever used in the history of the world has failed and become worthless. There are no exceptions. The major difference is how long it takes.
Anything we currently save in our currencies is confiscated by the ongoing erosion of inflation, and taxing of any interest paid. So we are constantly looking for ways to preserve our wealth. This encourages increasingly reckless speculation, as people look to beat the system. Instead of toiling and saving, people leverage themselves into property, shares, racehorses, art … anything that is hoped will increase in price at a faster rate than cash.
By contrast, gold has retained value over thousands of years. It is beautiful and scarce. It is independent of the promises of elected officials. It pays no interest. Yet it’s price goes up and down unpredictably and it costs you to store it. So why on earth would you bother? Investors who bought gold in 1980 have watched its price decline for two decades. With ongoing inflation, gold has never surpassed its high during that period. Gold for these people has not been the happy investment story that we all want for ourselves. So why should be bother?
Regardless of whether a currency is abandoned or not, economies always need some means to transact dealings. Governments would not endorse gold in such a way, as that would be a tacit acknowledgement of the abject failure of their policies. So we assume that a central bank and the use of some type of some type of fiat currency will be enforced.
If we do get to this point of abandoning a currency, Gold is likely to be beyond the control of the manipulators and will be much closer to its market value, which many of us hope is a multiple of its current price. We who hold it will be in a much better position to buy what we need, be that double digit yielding bonds, investment properties, viable businesses, or simply the essentials of daily life.
Whatever monetary perambulations take place, you can be sure it will not be in your best interests to trust the authorities to deal fairly with your assets and savings. In my view, Gold is not an investment. It is a hedge against inflation, against currency devaluation, against monetary disaster of all degrees. We buy it not because we’re familiar with what to expect tomorrow … but because we don’t know what to expect, and trust that history will vindicate us … preferably within our lifetime.