What Didn't Change When Nixon Cut the Gold Link

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The Daily Reckoning | Wednesday, July 27, 2011 Another look at risk and where you might expect to find it, Debunking Richard Nixon's golden bugaboo four decades on, Plus, Bill Bonner on debt debate brinksmanship and more... ------------------------------------------------------- Obama's Burning Shame Revealed Here... This is the unspoken, burning shame that could kill Obama's presidency... It could spell the end of his short political career... It's all revealed in this extremely urgent and controversial documentary report. A World of Opportunity Risk Investing from Myanmar to Florida Joel Bowman Reporting from Agora Financial's Annual Investment Symposium in Vancouver, Canada... "Why don't you move to Myanmar for six or eight months," a friend suggested a few months back. "Seriously. You go down there, get a feel for the place, buy a bunch of beachfront real estate and wait for the military junta to collapse. It's a long term play, sure, and it's pretty speculative. But it's not as crazy as it sounds, really. "Vietnam and Thailand have long been exposed to the region's tourism industry," he continued. "They're already developed, more or less. But the real bargain in that part of the world has got to be Myanmar. It has an enormous coastline and, unlike Vietnam and Thailand, dynamite fishing hasn't destroyed the coral reef there. "There are literally hundreds and hundreds of miles of pristine, untouched beaches. It's truly paradisaical...and paradises usually don't stay untouched forever. Someone eventually comes in and makes good for the place. Then prices really go through the roof. Play it right and you could end up sitting on the next Phuket, the next Nha Trang. An entrepreneurial individual could really clean up. Think about it." We recalled this advice yesterday, while talking to another mate here in Vancouver. Our Vancouver friend was telling us about a real estate bargain in another risky part of the world: Florida. "Four blocks from the beach...in Delray...three bedrooms...$75k," he told us. "And there are plenty of others just like it." "Sounds like a bargain," we replied. "But do you really want to dive into the US real estate market? Now?" "In all honesty, I think we could see another ten, maybe fifteen percent drop in housing. But in places like Florida, like Nevada and Arizona, where prices have already come down so far, a drop of that magnitude isn't going to break the bank." Good point. Depressed real estate in certain key parts of the US might offer a pretty attractive risk profile for property speculators. How far can a $75k house fall, after all? Provided you're not loaded to the hilt with debt, provided you can cover up front expenses, settle in cash, a little bottom fishing might be a reasonable idea. Who knows? But what do Burmese beachfront lots and Floridian vacation homes have to do with investing, you're wondering? Quite a bit, actually. In many ways, it cuts right to the heart of this year's conference theme – Fight or Flight: Your Capital at Risk. Do you stick it out at home, dig in your heels and "fight." Or do you pack up your belongings and head for some exotic, dynamite-free zone abroad? Where's the risk...and where's the opportunity? "I'm from The People's Republic of California," announced Rick Rule, perennial favorite at the Agora Financial Investment Symposium, from the podium yesterday. "You think there's no political risk there? Or how about Australia, where they've decided that companies that invest decades of time and capital into bringing resources to market, often during periods of marginal profitability, must now pay windfall profits taxes for the privilege of doing business there. And that's on top of all the usual taxes and bribes they must already pay there." Rick was making the simple but important point that risk profiles change over time. Places that were previously thought of as "safe bets," as "market friendly," may not be as safe and friendly as they first appear. These places would include Australia, much of the US and, as Rick put it, "Albertastan" here in Canada. Conversely, many frontier markets offer opportunities most people will never take the time to investigate. Doug Clayton, managing partner at Leopard Capital, echoed Rick's point. Doug looks for opportunities in markets few people bother considering. He offered four "sunrise" economies in his presentation. All have attractive demographic trends, boast robust national resource profiles and offer cheap labor. And they're all growing at about two or three times the pace of the world's "developed" nations. Doug made the case for, wait for it...Bangladesh, Haiti, Cambodia, and Ethiopia. Sound crazy? Good, Doug says. Who wants to buy into a popular market anyway? Isn't that the whole point of investing, going were most fear to tread, getting in early and then cashing out when the herd arrives? Food for thought... "So you'd spend a few months of the year in Delray?" we asked our mate. "That would be the idea, yeah. We're just looking at the moment, but there really are some attractive deals. We'll see, I guess." "Worst case scenario," added his wife, "we've got a vacation home in Florida, right by the beach." "Not terrible," your editor agreed. "But tell me, have you thought about Myanmar?" [P.S. For a full write up of this year's investment symposium, including speeches by Rick Rule, Doug Clayton, Addison, Bill and the rest, don't forget to check out Jim Amrhein's daily roving reporter dispatches. Here's his latest.] In today's guest column, BullionVault's Ben Traynor looks at a different kind of home-grown risk; one that sprouted up in, would you believe it, the United States of America. Enjoy... Do You Stay or Go? That's the question we're asking at this year's Agora Financial Investment Symposium in Vancouver, Canada. And, after listening to just two days of incredible presentations by the world-class line-up of speakers here, the answers we're hearing, may surprise you... Of course, we understand that Vancouver isn't right around the corner for most of you. That's why we've decided to record the entire line-up of speakers and make them available to you on both MP3 and CD formats. So even if you weren't able to join us at this year's event, you don't have to miss out on a single piece of advice or recommendation. And right now, while the event is still going on, they're available at a nice discount. Click here to get yours now. But hurry, the price will go up shortly after the conference ends. The Daily Reckoning Presents What Didn't Change When Nixon Cut the Gold Link Ben Traynor "Let me lay to rest the bugaboo of what is called devaluation," Richard Nixon told his fellow Americans on August 15, 1971. The 37th President had just announced the US would "temporarily" close the gold window – ending the convertibility of Dollars into gold that had been key to the postwar Bretton Woods system. What didn't change in 1971, though, was every bit as important as what did. Because the Dollar remained the world's reserve currency – a "privilege" that, four decades on, looks increasingly like a curse. When he made his address, Nixon was keen to allay fears he was undermining the Dollar's value by cutting the link to gold – especially given the apocalyptic warnings (both in the press and inside the White House) of how disastrous such a move would be. His pitch? "If you want to buy a foreign car or take a trip abroad, market conditions may cause your Dollar to buy slightly less. But if you are among the overwhelming majority of Americans who buy American-made products in America, your Dollar will be worth just as much tomorrow as it is today. The effect of this action, in other words, will be to stabilize the Dollar." Any British viewers that day would have found it eerily reminiscent of prime minister Harold Wilson's "Pound in your Pocket" speech four years earlier. Nothing would change besides the entire monetary structure. And now, back to your scheduled programming with Bonanza. Here in 2011, it's now been 40 years since the "temporary" suspension of Dollar convertibility. Has the Dollar been "stabilized"? Clearly not. But what's worth noting is how much faster the Dollar's domestic purchasing power has fallen in the last four decades – freed from gold – than it did in the 40 years before Nixon's announcement. Between August 1931 and August 1971, the consumer price index – as measured by the Bureau of Labor Statistics – went up by 170%. Since 1971, the CPI has risen 453%. Of course, Nixon tried to spin his economic reforms – the gold window closure was accompanied by a wage and price freeze and a 10% import tariff – as necessary for "building the new prosperity". The logic was clear. A devalued Dollar, aided by the import tax, would increase America's international competitiveness, while wage and price controls would prevent these policies feeding through into higher inflation. At least, that was the plan. As we know, it didn't turn out too well on the inflation front. But higher rates of inflation aren't the only phenomenon we've seen since the early 1970s. The irony is, Nixon hoped to solve another problem by closing the gold window – the US trade deficit. "The United States has always been, and will continue to be, a forward-looking and trustworthy trading partner," he reassured the world on that fateful August evening. Within a minute, Tricky Dicky announced the 10% tax on imports. Nixon hoped to improve America's trade balance. Indeed, that was one rationale behind devaluing the Dollar by de-pegging it from gold. But it didn't work: The United States has not run a trade surplus since 1974. It has consistently imported more goods and services than it has exported. Most countries cannot do this for long. They need the revenues from exports to pay for imports. The US is different, because it issues the world's only reserve currency, which is used to settle most international trade. France's finance minister under president Charles de Gaulle, Valéry Giscard D'Estaing, described this in the mid-1960s as America's "exorbitant privilege" – the ability of the US to fund its trade gap by the creation of new Dollars, in which its imports are still denominated. With gold convertible for Dollar bills, this "privilege" risked emptying the United States' huge stockpile of monetary metal. But freed from that gold obligation in 1971, isn't the privilege actually still a curse today? The US was in a tricky position throughout the Bretton Woods era. Its problem was summed up by what became known as the Triffin Dilemma, after Belgian economist Robert Triffin. Because as the global economy expanded, he explained, more and more Dollar liquidity was needed to oil the wheels of international trade. And the US was the sole issuer of Dollars. So the only way the rest of the world could obtain Dollars was by exporting more to America than it imported – all but ensuring the US would run a trade deficit. Of course, the US could seek to match its exports to its imports – but that risked a seize-up of global trade if foreigners could not get hold of sufficient Dollars to settle their trading with other, non-US parties. That was one part of the Triffin Dilemma. The other concerned the link to gold, fixed at $35 an ounce. As more and more Dollars entered the system, so the ratio of Dollars to gold increased, putting upwards pressure on the Dollar gold price. The London Gold Pool – whereby central banks clubbed together to keep gold prices down by co-ordinated gold sales – was set up in 1961 to address this problem. However, the system fell apart after France pulled out – De Gaulle preferring to swap his Dollars for gold rather than vice versa. The open market gold price rose, accelerating the drain on US gold reserves, as arbitrageurs realized they could swap $35 for an ounce of US government gold and sell it for more elsewhere. The fixed exchange regime of Bretton Woods, resting as it did on a $35 an ounce gold price, was unsustainable in a world of ever- increasing Dollar liquidity. Nixon had three choices – close the gold window, risk setting off a global deflationary spiral, or give away the United States' remaining stockpile of metal. He closed the window. The Dollar, however, remained the world's reserve currency. This meant the US was now in a position – both at home and abroad – to really go to town exploiting D'Estaing's exorbitant privilege. And looking back over the last 40 years, it looks like that's exactly what successive administrations did. We hear a lot today about "imbalances" in the global economy. One of the biggest imbalances is that the monetary unit of international trade is issued by a single nation. Gold was giving a strong signal of this disequilibrium half a century ago. Nixon, however, either misread the signals or willfully ignored them. Instead he blamed the Dollar's travails on "international money speculators". By doing so, he pushed the world onto a whole new monetary system, one whose ultimate backing is the "Full Faith and Credit" of the United States government – and nothing more. It's a worrying irony that a system resting on such "faith and credit" was mid-wifed by the man responsible for Watergate. Regards, Ben Traynor, for The Daily Reckoning Joel's Note: Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK's longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics. The Last Stock You'll Ever Need... New video briefing reveals shocking, untold story. This could rival the great market stories in history. See for yourself, right here. Bill Bonner More Debt for Your Money Bill Bonner Reckoning from Vancouver, Canada... We're here in Vancouver at Addison's "Fight or Flight" investment symposium. More on that as the week progresses... Yesterday, stocks went down another 90-some points on the Dow. Oil stayed just under $100. And gold is still hitting records. According to the papers, investors are on the edge of their seats. They're waiting to see what happens in Washington. Everybody knows that a default would be disastrous. That's why everybody also doesn't worry about it; 'they won't let it happen,' they say to themselves. "Neither side budging," is a subhead from yesterday's New York Times. It is widely assumed – even by us – that they're going to budge soon. Otherwise, all Hell will break loose...and they'll be blamed. The Democrats are afraid they'll be blamed more than the Republicans. The Republicans are afraid they'll be blamed more than the Democrats. And neither side really has the guts or gumption to play this game of chicken to the end. Instead, they'll budge. And they'll come up with a solution that will be every bit as effective as the European's solution to the Greek debt situation. "Hogwash," is how Felix Zulauf describes the European solution. It is a political fix...not a market solution. The market was discounting Greek debt by half. The politicos gave it a 20% haircut, lent more money, and kicked the can down the road again. Hogwash is what we'll get in the US too. Even worse. No discount. And a bigger kick. The real solution is the one neither Democrats nor Republicans can tolerate – letting Mr. Market sort it out himself. Mr. Market is a pro at this sort of thing. He'll get the job done. He'd probably write down the value of all debt...and toss out the stuff that can't be repaid. In a few months, the crisis will be over. Then, the economy could stage a real recovery. "Bill, are you saying that there wouldn't be grave consequences to a US default? How can you be sure it wouldn't trigger a full depression?" Hey, we're not sure of anything. And we wouldn't be a bit surprised to see a depression. Unemployment would probably soar. House prices would collapse even further. Stocks would probably get sawed in half. And GDP would go negative in a big way. What's more, real interest rates would be higher...investors would be wary of US government debt, making it harder for the feds to continue their old free-spending ways too. Atlantic Magazine lists "13 ways a debt ceiling breach would destroy the economy." It's the usual claptrap. Default would send interest rates up. Higher interest rates would make recovery harder, and so forth. And don't forget that the feds send out 88 million checks a month. If something were to happen – such as a default, which kept people from getting their checks – it would be a serious blow to the economy. Without this consumer income, the economy would go into a kamikaze dive. All true. And all nonsense. We don't doubt that a default by the feds, even a technical, temporary default, could cause the economy to sink. But the way we see it, the economy still needs to reckon with all the problems it encountered in the crisis of '07-'09. The problem was debt. There was too much of it. Until it shakes this dust off its sandals, it can't build on a firm foundation. The authorities tried to deal with that problem by adding more dust. More debt. A new GAO study shows that in the '07-'09 crisis, the feds put out an amount greater than the entire GDP of the nation in order to stimulate the economy. What did it get for all that money? Nothing but more debt. Why? The Keynesian stimulus model stops working when the economy shifts from adding debt to destroying it. Then, you can put out all the additional cash and credit you want. It won't do any good. Households are reluctant to borrow; first, because they don't have the income or the collateral to support it, and second, because they've already got too much debt and are eager to get rid of it. When the economy goes into a credit contraction, trying to add more debt is like pouring whiskey down the throat of a passed-out drunk. It's not the kind of medicine he needs. He needs to dry out. And get rid of the debt. That's what a depression...a default...a bear market...and higher interest rates can do for an economy. The sooner the better. And more thoughts... We've been putting the pieces together. Last weekend, we noticed that the "Imperial Agenda" was part of the reason the middle class is going broke. Cheap credit helped finance the middle class spending spree. It also helped finance the empire. Without artificially cheap credit, neither the federal government, nor US households, would be in the mess they're in today. And now the empire follows its own inevitable course. Bread at home. Circuses abroad. The voters won't give up either one. As for the bread at home, 44 million people now get food stamps. One of every four children gets them. The US Treasury sends out 88 million checks every month. And 51% of the public now gets some of its money from the feds. Overseas, the circuses get bigger, more costly, and more absurd. The US is now involved in 6 military adventures in the Mideast and North Africa, if you include its intervention in Yemen and Pakistan. It maintains bases all over the world. And it now costs $1 million to keep a single US soldier in the field in Afghanistan. How long can it afford the costs? The federal government gets roughly $2.2 trillion in tax revenue. It spends roughly $3.6 trillion. You can see for yourself, the feds have to borrow nearly 50 cents for every dollar in revenue. But wait...we'll 'grow our way out of debt' just like we've always done in the past, won't we? Uh...no. Not this time. Because the last time the US had this much debt was immediately after WWII. "After" is the key word. WWII had a beginning and an end. The homeland population made sacrifices during the war so they were ready to spend when it was over. Military spending could be dramatically cut, too, giving the domestic economy a boost. But now, the wars never begin and never end. There are no declarations of war. No debates in Congress. No surrenders. No armistices. No ticker-tape parades. We now have wars that go on forever against enemies who are never clearly identified, at costs that can't be calculated and for reasons that can't be explained. Meanwhile, at home, the feds no longer offer relief to those who are temporarily unemployed or to an economy that is in cyclical recession. Now, they give permanent support to people whose jobs are gone forever...and to an economy locked in an eternal slump. The wars go on and on overseas. At home, the recovery never comes. And the Empire goes broke. Regards, 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 Political Paralysis Brought on By Government Spending 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. In Defense of the Empire Debts Make a Deal 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 On US Credit, Rating Agencies are "Out of Their League" In the event that the August 2nd deadline comes and goes without a deal in Congress, options range from a White House constitutional challenge to the legality of the very existence of a debt ceiling to the US Treasury potentially vanishing the Federal Reserve's bond holdings. Jim Rogers: The US is the Largest Debtor Nation in History Shelton: Why Can't We Just Have Money That Works? 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. Cast of Characters: Bill Bonner Founder Addison Wiggin Publisher Eric Fry Editorial Director Joel Bowman Managing Editor The Mogambo Guru Editor Rocky Vega Editor Additional articles and commentary from The Daily Reckoning on: Twitter Facebook DR iPhone APP To end your Daily Reckoning e-mail subscription and associated external offers sent from Daily Reckoning, cancel your free subscription. If you are you having trouble receiving your Daily Reckoning subscription, you can ensure its arrival in your mailbox by whitelisting the Daily Reckoning. © 2010-2011 Agora Financial, LLC. All Rights Reserved. Protected by copyright laws of the United States and international treaties. 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