Is Gold Money?

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The Daily Reckoning | Tuesday, July 26, 2011 A snapshot look at Uncle Sam's credit card, "valid through 08/02/11," More on Bernanke and the "Is gold money?" question, Plus, Bill Bonner on politicos, liberalis and conservatoris, paralysis inside the Beltway, and plenty more... ------------------------------------------------------- Advertisement The Biggest Gold Story in 50 Years? It's not often that we get opportunities like this one. In fact, this is the only time I can think of. But recently, the world's largest uranium company just handed over billions of dollars' worth of gold to a tiny mining outfit... for just $250k. The size of the deposit is already being called "the most exciting gold story in the past 50 years"! But before the find is reflected in the company's share price – launching it several hundred percent – find out how you can secure your share. Subject to Limit Keeping Pace With a Declining Empire Joel Bowman Reporting from the Agora Financial Investment Symposium in Vancouver, Canada... Somebody slipped Uncle Sam's credit card under our hotel door this morning. Well, almost. The image, as captured on the front page of Canada's The Globe and Mail's business section, showed the "National Credit Card of the United States of America...member since 1776...valid through 08/02/11." The accompanying story, "Austerity Key to US Debt Talks," gives a few of the troubling details. Here's a list of "put it on the plastic" transactions Uncle Sam rang up on your behalf just last year, as provided by that Globe and Mail piece: US federal spending Fiscal year 2010 (in billions of US dollars) Discretionary $660 Other mandatory $416 Net interest $197 Medicare and Medicaid $793 Social Security $701 Defense Department $689 TOTAL: $3.456-trillion Now compare that to... US tax receipts Fiscal year 2010 (in billions of US dollars) Social Security/Social insurance $865 Corporate income $191 Other $140 Excise $67 Individual income $899 TOTAL: $2.162-trillion As you can see, there's a bit of a discrepancy there. Well, a bit more than a bit. For every dollar the government spent in 2010, it was only able to steal roughly 62 cents through taxes. The rest came from the kindness of strangers with last names like Wong and Kim. Now, why would a Wong bother lending money to the US, you ask? A better question might be for how long will Wong lend? And what happens when Wong's kindness runs out? You'd think such questions, and the uncomfortable answers they beg, would be enough to make politicians second guess their spending habits, tighten their belt a tad, shape up. Ha! Don't make us laugh! Thus far, the United States has incurred an impressive $14.3 trillion in public debt, "subject to limit," as they say. Put another way, that's about $46K per citizen, or $130K per taxpayer. At current rates, those figures will jump to $22.9 trillion by 2015; $70K per citizen, or almost $190k per taxpayer...assuming there are still working stones from which the politicians on Capitol Hill can extract blood four years from now. And that's not even factoring in the exponential growth debt expansion tends to deliver toward dying days of a typical Empire. In 2007, for example, that debt stood at about 36% of America's GDP. Today, that same little monster has grown to reach 70% of GDP. All that in four years; one Olympiad! They grow up so quickly, don't they? Even so, that's some pretty gnarly spending, even by politicians' own standards. And what do these geniuses have to show for all of their greasy- mitted stimulus spending, for their various bailout programs and phony-baloney make-work schemes? What, in other words, does a few trillion dollars worth of other people's money – some stolen, the rest begged and borrowed – buy you these days? More jobs? A rebound in the housing market? A new suit and tie? Any measure of honest, good-for-something growth? A – dare we even say the word – "recovery"? Not from the looks of it. Not even by the government's own accounting! The US economy probably grew at about a 2% annualized rate during the second quarter, a report due out this Friday is likely to show. That's roughly 1-2% slower than it needs to grow just to keep pace with population expansion, just to add enough jobs to avoid going backwards. Which begs another question: What does a declining Empire look like, a giant, lumbering colossus of warfare misadventures and welfare promises? The grim picture will already look familiar to Fellow Reckoners, who've been patiently, if not painfully, listening to us rant and rave about the US debt crisis for years. Addison even penned a special "US Credit Card" report for his Apogee Advisory readers, detailing what is likely to happen when America's not-so-fantastic plastic is finally cut up...for good. (You can view it here if you have not already done so.) Granted, the video is not an easy one to watch...infrastructure in decay...state "services" breaking down...the onset of economic and social depression...truly a Third World picture in many ways. But what do you expect, Fellow Reckoners? Isn't this exactly what happens when the sun sets on Empires? All once-great Empires fade into history at some point or another. Some go out with a polite, embarrassed whimper. Others, harboring more militaristic aspirations, go out with a bang. Which kind of "Imperial Suicide" will this be, we wonder? Bill has more on that below, but first, here's today's guest essay... Tiny US Wildcatter Discovers $1.2 Billion Alaskan "Oil Jackpot" And this explosive exploration company acquired this "Oil Jackpot" for a mere $4.5 million – a monster 99.6% discount! It's one of the best market buys in the history of the oil industry. Early investors could make huge gains off this once-in-a-lifetime oil bargain. Click here to find out how. The Daily Reckoning Presents Is Gold Money? Charles Kadlec Is gold money? That question, directed to Federal Reserve Chairman Ben Bernanke by Congressman Ron Paul in last week's hearings before the House Financial Services Committee, strikes terror in the heart of all central bankers. Bernanke looked stunned and then answered, "No: Gold is an asset." The rising price of gold reflects global uncertainties, he explained. "The reason that people hold gold is as a protection against what we call tail risks: really, really bad outcomes." The daily headlines report those potential risks: governments needing bailouts, from Greece to Harrisburg, Pennsylvania; the possibility that the euro will splinter; runaway deficit spending in the US. With every headline, it is becoming increasingly apparent how much the governing class has overreached. Those who believe in government are simply running out of other people's money. For example, President Obama's call to reverse the tax break given to owners of corporate jets in his 2009 stimulus bill would supposedly raise $300 million a year in revenue, enough to cover less than two hours of current deficit spending. Even if the Federal government could tax 100% of personal income in excess of $250,000 a year, it would collect little more than half of the revenue needed to balance the budget. These real world results mock the conventional wisdom that given the power to spend, borrow, tax and print money, elite public servants can manage the economy and protect the average individual against the vicissitudes of life. Instead, government itself has become a source of systemic risk, and a direct threat to our prosperity and liberty. At the center of this political upheaval is the quality of money itself. "Is gold money?" is a showstopper because it raises the questions: "What is money and what power should government have to manipulate its value?" The answers to these questions reveal how our most basic trust in government has been betrayed. When you or I accept dollars in exchange for providing goods and services, we do so trusting that when we spend those dollars, they will be accepted for an equivalent amount of goods and services. That's how money frees us from a barter economy. Trust is always an assessment of some future action. Making a grounded assessment requires us to understand who is making the promise, what action they are promising, and whether they are sincere and competent to fulfill their promise. When an individual, company or government has a good credit rating, we are saying that we trust they will keep their promise to pay off their debts in the future. So it is with the value of money. Today Bernanke is making the promise effectively to "do his best" to achieve the Fed's dual mandate of achieving maximum employment and stable prices. I do not doubt that Bernanke and his colleagues at the Fed have done their best. Here are the results: Three million fewer men and women are employed today than 2.5 years ago, when the Fed began an unprecedented era of monetary ease marked by zero interest rates and two rounds of massive, quantitative easing. The 12-month advance in the Consumer Price Index has been above 2% for the past five months, hitting 3.6% for the 12 months ending both May and June. Bernanke promised in his interview last December on 60 Minutes that the Fed "...would not allow inflation to rise about 2% or less." Yet the Fed has taken no action, nor articulated any policy change, that would fulfill his promise of price stability. A poll conducted by Rasmussen last week indicates that the American people are losing trust in the Federal Reserve and in the future value of the dollar. Fifty percent of those polled reported they are "very concerned" about inflation, and 79% said they were at least "somewhat concerned." Is gold money? Technically, no, in that gold does not circulate as a medium of exchange. But, as trust in the paper dollar continues to erode, and the incompetence of the governing class to manage the economy becomes more evident by the day, there is growing interest in and support of making the dollar as good as gold. A gold standard works because the US government, rather than the Chairman of the Federal Reserve, stands behind a promise that is explicit – a dollar is worth a fixed weight of gold. This promise can be verified every minute of the day by observing the current rate of exchange between the dollar and gold, and, under a classical gold standard, by exchanging currency at a national bank for gold coins of a fixed weight and purity. In addition, a gold standard provides a transparent set of practices to keep the promise. A rise in the price of gold signals too many dollars, triggering quantitative tightening. A fall in the price of gold signals too few dollars, triggering quantitative easing. Since these Fed actions are made daily and at the margin, such adjustments are not disruptive, but produce stability and trust. Finally, a gold standard produces trust in the dollar because gold has the unique characteristic of maintaining its buying power over time. For example, if today's dollar were worth 1/35th of an ounce of gold, as it was under the post World War II Bretton Woods system, a barrel of oil today would cost less than $3 a barrel, just as it did in the 1950s and 1960s. Steps to restore gold's legitimate role as money are afoot. In Utah, gold and silver coins are now legal tender and exempt from sales and income taxes. The Swiss Parliament soon will hold hearings on creating a parallel, "gold franc." And, the central bank of Zimbabwe is considering replacing its worthless currency with a gold-backed Zimbabwe dollar. The question: "Is gold money?" terrifies central bankers because it highlights their inability to provide a currency that is better than one whose quality is guaranteed by a fixed rate of exchange into gold. Between Aug. 15, 1971 – the day President Richard Nixon suspended the promise that a dollar was worth 1/35th of an ounce of gold – and Feb. 1, 2006 – the day Bernanke was appointed Fed Chairman – the dollar had fallen to 1/569th of an ounce of gold. Today, it is worth a teeny tiny 1/1600th of an ounce of gold. An acceleration in the dollar's decline and the inflation, political and economic turmoil that would follow are among those "really really bad outcomes" that people are trying to escape. Restoring the promise that a dollar is worth a fixed weight of gold would guarantee its value and eliminate the "tail risk" of monetary disorder that individuals, businesses and government all over the world increasingly have reason to fear. The benefits of price stability, low and stable interest rates, an increase in high paying jobs and the spread of prosperity would redound to the benefit of all. Regards, Charles Kadlec for The Daily Reckoning Ed. Note: Mr. Kadlec is a member of the Economic Advisory Board of the American Principles Project, an author and founder of the Community of Liberty. Is This His Most Controversial Prediction Ever...? When he urged you to buy gold back in 2002...when it was $258/oz...people simply laughed. When he urged you to STAY AWAY from the housing market in 2004...people called him "crazy" and a "kook." But he was dead on with both those predictions...and more. Now he's issued his most controversial warning yet. It's a detailed timeline of an event that he says, "will dramatically affect every American's quality of life..." You may not agree with everything he has to say in this presentation. But you won't be able to deny the outcome. Click here for his most controversial prediction of his career...and then make up your mind on whether he's right or not. Bill Bonner Political Paralysis Brought on By Government Spending Bill Bonner Reporting from the Agora Financial Investment Symposium in Vancouver, British Columbia... Dow down 88. Oil nudging against $100. Gold setting new record highs... And "Washington gripped by paralysis." That's what the papers say. We've seen the "Washington Paralysis" so often, we were beginning to think it was a new disease, discovered on the banks of the Potomac. Like Hong Kong Flu. Or Delhi belly. "Paralysis" describes what most people see as America's biggest weakness. We just wish it had a better grip. The politicians can't get together and make up their minds. The theme is particularly common now because the debt ceiling hangs over the nation like...well, like a debt ceiling. Once the ceiling is hit horrible things will happen. The politicians will only be able to spend what they raise in tax revenues. They'll have to live within their means, in other words. If that isn't the end of the world, we don't know what is! Why is it the end of the world? Because the country has gotten used to spending money it doesn't have and probably never will have. It spends the money on Medicaid and unemployment benefits and so forth. The feds send out 80 million checks a month. Without an increase in debt, millions of people won't get their stolen money. Of course, for all we know many of these government programs may be laudable, high-minded and in accordance with God's Own Plan. If Jesus were around, he'd surely vote for the full budget as presented by the earnest people running the country. That is, if he were fool enough to get mixed up in politics in the first place. Listening to CNN en Espagnol we discovered, among other things, some of the fine work of the Department of the Interior. The Spanish- language, paid-for commercials tell listeners that forests are good things and that if they've got forests or want to plant trees they can get money from the government. And of course, the world we be a better place as a result. And of course, these advertisements would probably be suspended if the feds couldn't borrow money. And all because of paralysis in Washington. If only the pols could get up out of their wheelchairs and walk! They could come together and hug each other on the floor of that big building with the dome roof – the one that looks for all the world as though it was inspired by similar edifices of the Roman Empire period. Then, they could shake hands and agree on further currency and credit debasement. Political paralysis is a good thing. If homo politico liberalis can't come to terms with homo politico conservatoris, well at least they couldn't get up to any mischief together. The rest of us could go on our way...creating and disposing of wealth...without too much interference. It is a lack of paralysis we fear. Such as the extraordinarily limber Congress of 1913. Those guys couldn't find anything to disagree on. They passed the Federal Reserve Act with scarcely a polite conversation, let alone an active debate. They passed a lot of other obnoxious legislation too – including imposing an income tax and cutting the states out of Congress by requiring direct election of Senators (they used to be appointed by the states). Then, there was the Congress that came to Washington with Franklin Roosevelt. What a jolly time that must have been. Backslapping, instead of backstabbing. Raising their hands together...all 'ayes' on setting up Social Security, the SEC, and the NHA. In just 100 days of 1933, they put in place the WPA, the CCC, the NYA, the NRA, the PWA and the FERA. There was hardly a single letter of the alphabet that stirred up a controversy. They found common cause on every one of them. Skipping over a lot of accord, we come to the 21st century, and there we find George W. Bush and his team on Capitol Hill. Practically the entire Washington establishment was on the same side again...beating with one heart...breathing with one lung...thinking with no brains whatsoever. Get along, go along; with few exceptions they went along with the looniest war in US history and the most ruinous spending ever. And then, if that wasn't bad enough, hard on their heels came Barack Obama and the Congress of 2009. Whoa...there was a little discord there...which caused a slight arthritic palsy...but no paralysis! Despite the creeping rigor mortis on the Republican side, the president was able to push through a massive, hugely expensive bill that changed the nation's entire health industry. How we could have used a little more paralysis then! But now paralysis works against us. Not in the way the media thinks, of course. Now, the course of the empire is set. We will spend our way at home...and bumble our way abroad....to our own destruction. That is the course that has been set. The pols will move their creaky bones...maybe they already have...to raise the debt ceiling so they can stay on course. Then, little by little, one by one, they will come to their senses and see the brick wall in front of them. But they will be paralyzed...stuck...locked on target. They will be unable to change course...unable to save themselves...or the empire. Empires are like automobiles without reverse. They can't back up. There. That's our prediction. We're sticking with it unless and until events prove us wrong. And more thoughts... As Congress becomes more and more paralyzed, the can-do military machine becomes more popular. We see it in our churches. And we see it in our airports. Jillian Tett, a reporter for The Financial Times, had the same reaction we did: "In Europe, it is rare even to see anyone in military uniform, far less to venerate them in symbolic terms. US airport crowds, however, are often dotted with fatigues, and it is common to hear the airport [loudspeaker] declare that 'members of the military and their families' can...board before anyone else. "I am starting to see a dark underside to these announcements..." We explained yesterday how the middle class got 'thrown under the bus.' It was just part of the imperial bargain. The US military got to throw its weight around in Europe and Asia. The foreigners got to sell us stuff...thus undermining American manufacturing. In the last 10 years alone, for example, a third of all remaining manufacturing jobs were lost. Now, the few jobs that are being created are no longer middle class jobs. They are low-paying service industry jobs. Hotel cleaners. Hospital orderlies. Car parkers. People who provide services to the old...or the rich. In 1980 more than half of all jobs were middle class. Now, the total is only 42%. Meanwhile, the percentage of lower class jobs grew, from 30% to 4. Here's yet another glimpse at where this leads. From The New York Times: Consumers in the US are increasingly using credit cards to pay for basic necessities as income gains fail to keep pace with rising food and fuel prices. The dollar volume of purchases charged grew 10.7 percent in June from a year ago, while the number of transactions rose 6.8 percent, according to First Data Corp.'s SpendTrend report issued this month. The difference probably represents the increasing cost of gasoline, said Silvio Tavares, senior vice president at First Data, the largest credit card processor. "Consumers, particularly in the lower-income end, are being forced to use their credit cards for everyday spending like gas and food," said Tavares, who's based in Atlanta. "That's because there's been no other positive catalyst, like an increase in wages, to offset higher prices. It's a cash-flow problem." After-tax income adjusted for inflation fell 0.1 percent from January through May, according to figures from the Commerce Department. The drop came as Labor Department data showed energy prices rose 8.2 percent and food climbed 2 percent during the same period. The value of an average transaction on credit cards outpaced the gain for debit cards, showing consumers are increasingly relying on borrowing to pay for gasoline and other necessities, Tavares said. The figures are in synch with data from the Federal Reserve. Revolving credit, credit card balances, increased by $3.37 billion to $793.1 billion in May from an almost seven-year low of $789.8 billion in April, figures from the central bank showed. The gain was equivalent to a 5.1 percent increase at an annual rate. The use of credit cards is a "smoking gun" that indicates some consumers, including the long-term unemployed who have lost jobless benefits, are resorting to other sources of cash flow just to "get by," said David Rosenberg, chief economist at Gluskin Sheff & Associates Inc. in Toronto. The Tea Party is a reaction to this. People in the middle classes feel as though they've been ripped off. They don't understand by whom, why or how...but they've got a feeling someone is making a profit at their expense. "Remember what Warren Buffett says," our weekend guest reminded us. "If you're in a poker game and you can't identify the fool at the table...you're it. Well, these Tea Party people feel like they're it. And they're not too happy about it." Barack Obama is probably a one-term president. Not that he's a bad egg, especially. But when a large percentage of the voters feel like victims, a well-mannered community organizer and law professor is not likely to last long as their leader. The masses want someone to translate their agony...their feeling of being victimized...their resentment and their desire to get something for nothing. They want a champion. Someone who simplifies things...and gives them voice. And what will that voice say? Will it explain the theory of competitive advantage or the rule of reversion to the mean? Will it describe how the US got so far ahead of the rest of the world and how it is only natural that the rest of the world now catches up? Will it elucidate the causes of excess credit expansion and let the middle classes know that they were jackasses for going along with it? Will it talk to them honestly, explaining the need for huge cutbacks in military and social welfare spending? We don't think so. Instead, it will rally them around the home team – America's men at arms. It will turn on the printing presses and treat anyone who opposes this agenda as a traitor. Are we being too negative, dear reader, too pessimistic...too gloomy? We hope so. Regars, Bill Bonner for The Daily Reckoning ------------------------------------------------------- Here at The Daily Reckoning, we value your questions and comments. If you would like to send us a few thoughts of your own, please address them to your managing editor at joel@dailyreckoning.com In Defense of the Empire Ever since 9/11 "defense" industries have been peddling the idea that Islamic terrorism is a threat to national security. Their spirits must have lifted when they first heard the news from Oslo over the weekend. Finally, after 6 years of relative quiet, here comes more evidence that there really are some Islamic terrorists! Debts Make a Deal 100 Basis Points to Armageddon China: Where Money Is Treated Best I am sure that Mr. Pento is right because every country on the Face Of The Planet (FOTP) is desperately creating more and more money, and the money will eventually find its way to the place where it is treated best and/or has the best prospects, which is, in this case, Bob. Oops! I meant "China." Buying Gold on the Price Inflation Guarantee Awaiting the "Zero Hour" of Available Credit Jim Rogers: The US is the Largest Debtor Nation in History In his latest interview with The Wall Street Journal, famed Quantum Fund co-founder and investor Jim Rogers tells it like it is, as usual. Among other choice snippets, Rogers remarks that the current debt talk negotiations are simply a scam and a charade, and are just trying to get publicity. Shelton: Why Can't We Just Have Money That Works? 2011 Halftime Report: Oil Outlook Remains Strong The Daily Reckoning: Now in its 11th year, The Daily Reckoning is the flagship e-letter of Baltimore-based financial research firm and publishing group Agora Financial, a subsidiary of Agora Inc. The Daily Reckoning provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas. Published daily in six countries and three languages, each issue delivers a feature-length article by a senior member of our team and a guest essay from one of many leading thinkers and nationally acclaimed columnists. 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