●The more federal budgets are cut and taxes increased, the weaker an economy becomes.
●Austerity is the government’s method for widening the gap between rich and poor, which leads to civil disorder.
●Until the 99% understand the need for federal deficits, the upper 1% will rule.
●To survive long term, a monetarily non-sovereign government must have a positive balance of payments.
●Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
●The penalty for ignorance is slavery.
What do you call it when masses of fools buy a useless product, hoping that later they will sell this useless product to even bigger fools? Tulip bulb mania?
Before It’s News
Why Brazil Will Keep Buying Gold – and Driving Up the Price
As a group, central banks will have bought about 500 tons of gold this year, the most in more than 40 years. More large purchases are expected in 2013.
Foremost amongst the gold buyers are the central banks of emerging economies around the globe. Recent years have seen purchases by Russia, South Korea, Mexico, India and, as most believe, China.
Another country joining the party, or in this case the carnival, is Brazil. So why is Brazil jumping aboard the bandwagon now and buying gold at a record pace?
Since 2008, Brazil has attempted to fight the appreciation in the real by buying U.S. dollars. In the course of doing so, it has accumulated about $132 billion, the world’s sixth-largest reserves.
Roughly 80% of the reserves are denominated in U.S. dollars. And, as of the end of 2011, only 0.8% of its reserves were not in the form of government bonds or other bonds and bank deposits.
An economist at the Sao Paulo consultancy Tendencias, Silvio Campos Neto, told the Financial Times, “The dollar has its problems because of monetary easing policies and fiscal uncertainties that will also exert a certain pressure on the currency, so it’s natural the country [Brazil] is on the lookout for other types of assets.”
Gold essentially is useless. A tiny bit is used in dentistry and for jewelry and electronics, but the vast majority just sits in vaults around the world, costing money to store, insure, protect and ship from place to place, and it pays no interest. Meanwhile the supply goes up: About 2,500 tons are mined each year.
It is the classic white elephant, the value of which is based on the “bigger fool” philosophy mentioned above.
Brazil et al, are Monetarily Sovereign, meaning:
1. They can create infinite quantities of their own sovereign currencies. They never can run short.
2. Thus, they do not need to export goods and services, since exporting merely is device for importing their own sovereign currency.
3. They have the power to set their exchange rates at any level, by controlling supply and demand (through currency exchanges or by increasing or decreasing interest rates).
As for gold:
4. Gold, having virtually no utility, its value is backed by nothing. Compare this with the value of the U.S. dollar, which is backed by the full faith and credit of the U.S. government.
As for Brazil:
5. If the U.S. dollar fell to $0, Brazil would not lose a penny. It merely would create the necessary reals to buy whatever it needs. Having dollars in reserve does nothing for Brazil, except perhaps as a trading convenience. Same for gold reserves.
None of this is to say that gold has not appreciated in price compared with the dollar. Gold bugs (especially those selling gold) like to talk about recent price rises, conveniently forgetting the most recent gold bubble. It occurred in 1980, when the price doubled to about $600 oz, then fell to about $300, and drifted even lower for the next twenty years.
Bubbles do that. U.S. real estate appreciated in price for more than 60 years, before the bubble burst. But unlike gold and tulip bulbs, real estate has utility. So over time, as the population increases and people acquire more dollars, demand will increase and the price of real estate will rise, unless the government causes another really big recession.
Bottom line: The leaders of Monetarily Sovereign nations buy and sell gold, under the fiction they are being fiscally prudent, when in fact they are engaging in a useless activity. Perhaps it has some psychological benefit, as in “I just can’t sit here and do nothing. People will think I’m useless. So I’ll do something that looks good, and people will think I’m wise and necessary.”
Anyway, for Brazil, this silly hobby not only is without benefit, but it also is without risk. If gold were to crash yet again, Brazil could continue whatever importing and exporting it wishes, with its only danger being leaders ignorant of Monetary Sovereignty.
While the supply of gold keeps growing, growing, growing, maybe you should buy land, especially since you are monetarily non-sovereign. As Mark Twain said, “They’re not making it any more.” And with global warming, and oceans rising, land is becoming more scarce.
Rodger Malcolm Mitchell
Nine Steps to Prosperity:
1. Eliminate FICA (Click here)
2. Medicare — parts A, B & D — for everyone
3. Send every American citizen an annual check for $5,000 or give every state $5,000 per capita (Click here)
4. Long-term nursing care for everyone
5. Free education (including post-grad) for everyone
6. Salary for attending school (Click here)
7. Eliminate corporate taxes
8. Increase the standard income tax deduction annually
9. Increase federal spending on the myriad initiatives that benefit America’s 99%
No nation can tax itself into prosperity, nor grow without money growth. Monetary Sovereignty: Cutting federal deficits to grow the economy is like applying leeches to cure anemia. Two key equations in economics:
Federal Deficits – Net Imports = Net Private Savings
Gross Domestic Product = Federal Spending + Private Investment and Consumption – Net Imports
12 thoughts on “–Russia, South Korea, Mexico, India and Brazil buy tulip bulbs to hedge against the dollar”
Interesting that you would criticize a highly conductive and corrosion proof metal as useless. If it were more plentiful and less expensive, wouldn’t you think gold would be used in more industrial applications?
Gold does not pay interest and neither do short term treasury notes and many many stocks. Name just one publicly traded company older than gold.
Land? not only does land not pay interest but the landowner must pay property tax. Land only has the utility that the zoning board allows. Where I live, nobody really “owns” the land…we merely lease it from the municipality. Don’t believe me? Stop paying the tax and see what happens.
The dollar is backed by the full faith and credit of the US government much like stock in a public company. When the public company issues more and more shares, the total value of the enterprise does not change just because there is 2x, 3x or even 4x as many shares as the year before. The shares are worth less, a result of dilution. A public company is much like our monetarily soveriegn nation in that unlimited shares may created, albeit with shareholder approval.
Personally, I think gold has great utility that goes unrealized due to high cost resulting from it’s relative scarcity.
No problem. Buy gold.
“What do you call it when masses of fools buy a useless product…”
i dunno, rodger… i’ve let go of the the belief long ago that these people are stupid. they’re doing it for SOME reason and WE are just too stupid to know.
is there a secret plan to return to the gold standard at some point in the near future? or is this yet another money-making opportunity for central bankers and their families & friends, by “printing” large amounts of money and then buying large amounts of gold to artificially boost the price? or is it a tactic by central bankers to induce the wealthy to plow their money into a “worthless” commodity like gold, instead of valuable commodities like food, land, and oil, not to mention silver.
also, notice how the “gold-bugs” don’t seem to mind all the “money-printing” when the “funny money” goes into gold and drives up the price. “funny money” is only a problem for them when it goes to the poor–the very people who actually need it.
A note from John B. Lounsbury, Managing Editor Econintersect.com
Rodger – – –
You might want to modify the numbers:
Gold rose to more than $750 and then collapsed to less than $250. This happened over a period of about 21 years (1979-2000) over which time inflation depreciated the value of the dollar ( using CPI going from under 70 to 180) by 60%. So, in inflation adjusted terms, gold lost 87% of its value. You could have bought more than 7 times as many “CPI units” per ounce of gold in 1979 as you could in 2000!
When someone says you “can’t eat gold” you can use these numbers to prove their point.
And when someone gives you the “store of value” story you can use the numbers to disprove their point.
Gold is for traders. Things with economic utility are for investors.
John B. Lounsbury Ph.D. CFP
Managing Editor Econintersect.com
Senior Contributor TheStreet.com
Highly ranked author Seeking Alpha
Gold is useless – couldn’t agree more with you but none of the countries you mentioned above are really monetary sovereign. Even though they have their own currency they do not have the institutioinal framework (legal, tax system infrastucture, domestic financial market depth, etc.) to be able to finance themselves in that currency. A lot of their domestic savings leave the country because that infrastructure is lacking (and also because there is no trust in the government that will protect the interests of private citizens). As a result of that all these countries had to borrow in a foreign currency before and now for one reason or another they are forced to maintain managed exchange rates. And that is why they are forced to mantain large fx reserves. And that is where gold comes in. Let’s put it this way, gold is absolutely useless but if we have to compare it is much more useless for a country truly sovereign like USA, UK, Japan, for example, to accumulate it than for a quasi sovereign like Brazil.
Rodger, thank you for the above post. I have long had the same thought. “Why are various governments trying to stock up on gold? What difference can it make? Gold has no intrinsic value, and fiat systems are no longer based on a gold standard.”
I thought I was missing something, but you confirmed that it is merely a fad, like cabbage patch dolls or tulip mania. Or as John B. Lounsbury says, “Gold is for traders. Things with economic utility are for investors.”
In almost every aspect of economics, the common public belief is the exact opposite of reality. Gold is no exception. Most people believe that gold gives value to money systems. The reality is the reverse.
Most people believe that a gold standard fosters stability. The reality is the reverse. (A gold standard guarantees instability.)
No nation has ever had a permanent gold standard anyway. History shows that nations have canceled their gold standard during crises, then resumed their gold standard after the crises, and gone off it again, back and forth over time. Randy Wray has discussed this at length. We finally did away with that nonsense in 1971.
Rodger you say, “Gold, having virtually no utility, its value is backed by nothing. Compare this with the value of the U.S. dollar, which is backed by the full faith and credit of the U.S. government.”
Excellent point. The entire gold trading industry is the same as an industry in trading cabbage patch dolls.
The article you referenced is full of things that make no sense. Indeed, most articles about money and economics make no sense. Many rely on the “Oz factor,” in which nonsense is only persuasive as long as it is kept hidden behind a curtain. For example, rarely is anyone ever allowed to see the inside of Fort Knox, or the New York Fed’s gold vaults. Because the worthless gold is kept hidden, the public thinks that the worthless gold has worth. Their belief is like a religion. If you explain to people why they are mistaken about gold, they become snide and angry. They use all sorts of irrelevant notions to defend their false belief.
Warren Buffet says gold is for suckers. “When we took over Berkshire, it was selling at $15 a share, and gold was selling at $20 an ounce. Gold is now $1600 and Berkshire is $120,000.”
That is, Berkshire stock appreciated a hundred times more than gold.
Check out the rest of what Buffet says about gold as a stupid investment…
People who can’t find value in a metal that can’t be destroyed certainly can’t be trusted to identify value elsewhere.
Warren Buffet is an insurance salesman. Plenty of value in insurance…for the underwriter anyway.
Buffet produces nothing. With the money earned peddling insurance he buys companies that do produce. Warren is the antithesis of his mentor Ben Graham
I rest my case.
I wonder what Noam Chomsky would say about all this?
I’m having a bit of trouble following your ideas. I’m not quite getting the drift. For instance:
Why is gold valuable? A. Because it’s a rare metal — but not so rare that we can’t find more of it.
If a country doesn’t need to worry about National debt, why did the Soviet Union collapse? Why not just keeping raising the debt ceiling? About six months ago I came across a Zimbabwean trillion dollar bill. I think you could buy a slice of bread with it — a thin slice.
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Zimbabwe. A country that confiscated all farmland then had no one who could do farming and no infrastructure for fertilizer, water, good cropland, tractors, distribution, etc. Just exactly like the United States today.
Soviet Union? Political failure within communist system. What about Russian (post-Soviet) collapse? Debt in FOREIGN currency. Zimbabwe? I think also debts owed in FOREIGN currency, also complete collapse of Govt and Economy, confiscation of govt “investments” by warlords and thugs.
Ironically, as America allows real domestic business to decline and collapse from a severe shortfall of Demand brought on by decades of Austerity (relative to real conditions, such as imports & globalization & high non-spending savings by the Super Rich), we begin to see growing “pockets of Zimbabwe” in major former industrial areas. Industrial skills have died off over decades, putting our workforce more on par with Zimbabweans. So let’s not invest in Growth and Demand with Govt spending, let’s just follow that decline to the bottom.
America? NO DEBT owed in foreign currency. The debt ceiling should not merely be raised, it should be abolished. It’s a relic of the Gold Std era when Govt promised to buy gold at mkt prices and hand out at FIXED (by official edict) (discount) PRICE to anyone with a surplus of Dollars.
That’s how the “free market” should work, right? Prices fixed by Govt edict on commodities that rich people want to buy … not consumable commodities like milk or wheat or energy. The Govt should have discount prices ONLY on commodities meant for hoarding by the rich.
See how people who oppose “communism” want the govt to provide a permanent fixed price on gold, ultra “stablitity” favoring savers regardless of the effects on actual commerce and “old-school” capitalism, without regards to actual market reactions and conditions? These a-holes criticized bank bailouts? Please. They want permanent govt supports for the rich, beyond what’s already built in.
With a fixed price on gold, Congress had to block ITSELF from issuing/spending more dollars on war OR on economic growth than the ability of the Govt to acquire gold at a sane price. Hence, a self-imposed debt ceiling. That meant America would have had to surrender to Nazi Germany … we would have run out of gold before Germany ran out of armaments. We would have hit the “debt ceiling”, and surrendered to Hitler. Except a political decision was made to abolish that nonsense, partly in 1933, based on having created a central bank in 1916, then fully and completely abolished in 1971. One good smart thing Nixon did. Gold fixed exch was no longer acting as a “peg” of stability between trading nations. The dollar peg was exploited by Washington against the Third World, but countries that abolished their commodity pegs (including British peg to sterling) were freed from THAT kind of speculative attack.