A gold brick in the wind

Truly a sign - gold by machine dispenser.

Gold, and theft by inflation

A killer graph here from Charles Hugh Smith. Interestingly, the steady real decline of average incomes begins at almost exactly the same time as Nixon shut the "gold window".

Smith's take is that "the speculative mania in housing was fundamentally a tragic last-gasp effort to make up lost ground via speculation in housing". And if housing reverts to mean, it has a long, long way to go yet.

Another letter to the Spectator

Let's see if they bin this one: (n.b. I've made a few alterations in the hour since posting)

Sir;

Your leader (“Long live capitalism”, 20 September) calls for a “kick up the backside” to the banking industry. That kick should be aimed elsewhere.

Light regulation and free markets, which the Spectator advocates, depend on the self-regulating properties of a sound money system. But like many others, the British government has long used the fiat nature of its currency-cum-credit to solve temporary problems and create permanent ones. The long-term real growth of GDP is said to average 2.5% annually, yet since 1963 the Bank of England’s own statistics show that the M4 money supply has grown by about 13.5% p.a. Over the same period, RPI has averaged about 6.5% p.a. At this rate, the banks will ultimately own everything.

For the first 5 years of the New Labour administration, M4 growth was, not exactly prudently, but less recklessly, restricted to around 8.25% p.a. However, by 2003 the FTSE had halved from its 2000 peak, and there was gloomy talk of recession; and over the next five years M4 suddenly averaged nearly 14%. Then house prices doubled; hinc illae lachrymae.

How did this happen? The system of fractional reserve lending means that banks can loan out a multiple of what they retain in their vaults. State regulators set the rules for the required marginal reserves, and when reserve requirements are halved, lending can double, and usually will; like Labradors, bankers will have whatever is put on their plate.

Knowing this tendency, the British and American governments have not merely permitted this crisis to happen, but positively created it by a deliberate relaxation of monetary controls. Worse still, they have now decided that instead of destroying excess credit by asset deflation, bankruptcies and share collapses, the monetary inflation is to be consolidated by absorption of bad debt into the public finances.

I don’t see how this can end well. Some commentators are already saying that, if passed unaltered, the proposed American financial legislation could, once properly understood, trigger a major crash in US financial shares, possibly before this letter is published.

I think the Spectator and its economically savvy readers should put on fresh pairs of winkle-pickers, and gather in Whitehall and Washington for some kicking practice.

Yours faithfully

Gold: "reculer pour mieux sauter"

A very interesting, concise post from Mish. He says deflation forces borrowed money out of speculation, so gold and silver will drop while this happens; but then - it could take some time yet - will come the rise: "The reason gold will reassert itself is that Gold Is Money."

Mish's line appears to be consistent (June 2007):"Typically gold is a counter-cyclical asset that does best in real terms when liquidity evaporates."

Gold seems unpredictable - the demand for it as jewellery is unrelated to price - but if his chart below is correct, there is an underlying trend of steadily increasing demand. New gold mined each year is only some 2% of the total still available above ground - gold generally doesn't get used up (though I have drunk Danziger Goldwasser) - so the supply cannot be easily boosted by the State in inflationary times.

Gold, or paper? Your choice.

Twang money, encore

The Contrarian Investor is also struck by the elasticity of fiat money, and how this vitiates attempts to make fair comparisons and store wealth. Gold for the long term, he thinks.

In the short term, we have this contest between credit contraction and currency expansion. I'm getting the feeling it'll be the first followed by the second, which is what Michael Panzner predicts in "Financial Armageddon".