Sunday, January 1, 2017

Happy New Year!

Year of Hope and Change

The day I began this blog, 8/23/08, was two days before the 2008 Democratic National Convention, which nominated then-senator Barack Obama on a platform of Hope and Change. (Coincidentally (and pretty funny now in hindsight), Obama won the most delegates, but Hillary won the popular vote!):

Twenty days from now, on January 20th, we'll be done with Obama's version and, Michelle's opinion notwithstanding, we'll finally get to experience some real Hope and Change, Trump-style and...

The rest of this New Year's post is at the Speakeasy. If you are not already a member, you can subscribe by clicking here. For the rest of you, here's a Speakeasy sample from back in November, titled The Moral Case for Gold:

The Moral Case for Gold

"The 2008 crisis, I think the financial crisis — which, by the way,
I don’t think we’ve come through — is really driven I believe by
the greed, much of it driven by the greed of the investment banks.
My old firm, Goldman Sachs — traditionally the best banks are
leveraged 8:1. When we had the financial crisis in 2008,
the investment banks were leveraged 35:1. Those rules
had specifically been changed by a guy named Hank Paulson.
He was secretary of Treasury. As chairman of Goldman Sachs,
he had gone to Washington years before and asked for
those changes. That made the banks not really investment banks,
but made them hedge funds — and highly susceptible to changes
in liquidity. And so the crisis of 2008 was, quite frankly,
really never recovered from in the United States. It’s one
of the reasons last quarter you saw 2.9% negative growth in a
quarter. So the United States economy is in very, very tough shape.

And one of the reasons is that we’ve never really gone and
dug down and sorted through the problems of 2008.
Particularly the fact — think about it — not one criminal charge
has ever been brought to any bank executive associated with the
2008 crisis. And in fact, it gets worse. No bonuses and none of
their equity was taken. So part of the prime drivers of the wealth
that they took in the 15 years leading up to the crisis was not hit
at all, and I think that’s one of the fuels of this populist revolt
that we’re seeing... So I think there are many, many measures,
particularly about getting the banks on better footing, making them
address all the liquid assets they have. I think you need
a real clean-up of the banks' balance sheets.

In addition, I think you really need to go back and make banks do
what they do: Commercial banks lend money, and investment banks
invest in entrepreneurs and to get away from this trading —
you know, the hedge fund securitization, which they’ve all become
basically trading operations and securitizations and not put
capital back and really grow businesses and to grow the economy.
So I think it’s a whole area that just — and I will tell you,
the underpinning of this populist revolt is the financial
crisis of 2008. That revolt, the way that it was dealt with,
the way that the people who ran the banks and ran the hedge funds
have never really been held accountable for what they did,
has fueled much of the anger in [this]
movement in the United States."

-Stephen K. Bannon

That was Steve Bannon speaking, via Skype from LA, to a conference focused on poverty at the Vatican, back in 2014. So why should we care about this guy's thoughts on this kind of stuff? Well, he was the head of Donald Trump's presidential campaign, and now he's going to be the chief strategist and Senior Counselor to President Trump. Here's a bit more from that talk:

"The bailouts were absolutely outrageous, and here’s why: It bailed out a group of shareholders and executives who were specifically accountable. The shareholders were accountable for one simple reason: They allowed this to go wrong without changing management. And the management team of this. And we know this now from congressional investigations, we know it from independent investigations, this is not some secret conspiracy. This is kind of in plain sight.

In fact, one of the committees in Congress said to the Justice Department 35 executives, I believe, that they should have criminal indictments against — not one of those has ever been followed up on. Because even with the Democrats, right, in power, there’s a sense between the law firms, and the accounting firms, and the investment banks, and their stooges on Capitol Hill, they looked the other way.

So you can understand why middle class people having a tough go of it making $50 or $60 thousand a year and see their taxes go up, and they see that their taxes are going to pay for government sponsored bailouts, what you’ve created is really a free option. You say to this investment banking, create a free option for bad behavior. In other words all the upside goes to the hedge funds and the investment bank, and to the crony capitalist with stock increases and bonus increases. And their downside is limited, because middle class people are going to come and bail them out with tax dollars.

And that’s what I think is fueling this populist revolt. Whether that revolt is in the midlands of England, or whether it’s in Middle America. And I think people are fed up with it."

Now, you're probably wondering how I'm going to bring this around to making a moral case for gold. Well, in that talk, Bannon says the West is facing a crisis of Capitalism, and I think that all he's missing is how gold fits into the big picture. Here's how he describes it:

"That war [WWI] triggered a century of barbaric — unparalleled in mankind’s history — virtually 180 to 200 million people were killed in the 20th century, and I believe that, you know, hundreds of years from now when they look back, we’re children of that: We’re children of that barbarity. This will be looked at almost as a new Dark Age.

But the thing that got us out of it, the organizing principle that met this, was not just the heroism of our people… The underlying principle is an enlightened form of capitalism, that capitalism really gave us the wherewithal….

That capitalism really generated tremendous wealth. And that wealth was really distributed among a middle class, a rising middle class, people who come from really working-class environments and created what we really call a Pax Americana. It was many, many years and decades of peace. And I believe we’ve come partly offtrack in the years since the fall of the Soviet Union and we’re starting now in the 21st century, which I believe, strongly, is a crisis both of our church, a crisis of our faith, a crisis of the West, a crisis of capitalism. […]

I’m a very practical, pragmatic capitalist. I was trained at Goldman Sachs, I went to Harvard Business School, I was as hard-nosed a capitalist as you get. I specialized in media, in investing in media companies, and it’s a very, very tough environment. And you’ve had a fairly good track record. So I don’t want this to kinda sound namby-pamby, “Let’s all hold hands and sing ‘Kumbaya’ around capitalism.”

But there’s a strand of capitalism today — two strands of it, that are very disturbing.

One is state-sponsored capitalism. And that’s the capitalism you see in China and Russia… [and] in places like Argentina…

The second form of capitalism that I feel is almost as disturbing, is what I call the Ayn Rand or the Objectivist School of libertarian capitalism. […] It is a capitalism that really looks to make people commodities, and to objectify people, and to use them almost — as many of the precepts of Marx — and that is a form of capitalism, particularly to a younger generation [that] they’re really finding quite attractive. And if they don’t see another alternative, it’s going to be an alternative that they gravitate to under this kind of rubric of “personal freedom.”

And so I think we are in a crisis of the underpinnings of capitalism…

I can see this on Wall Street today — I can see this with the securitization of everything is that, everything is looked at as a securitization opportunity. People are looked at as commodities. I don’t believe that our forefathers had that same belief…

Now, with that, we [Breitbart News] are strong capitalists. And we believe in the benefits of capitalism. And, particularly, the harder-nosed the capitalism, the better. However, like I said, there’s two strands of capitalism that we’re quite concerned about.

One is crony capitalism, or what we call state-controlled capitalism, and that’s the big thing the tea party is fighting in the United States, and really the tea party’s biggest fight is not with the left, because we’re not there yet. The biggest fight the tea party has today is just like UKIP. UKIP’s biggest fight is with the Conservative Party.

The tea party in the United States’ biggest fight is with the the Republican establishment, which is really a collection of crony capitalists that feel that they have a different set of rules of how they’re going to comport themselves and how they’re going to run things. And, quite frankly, it’s the reason that the United States’ financial situation is so dire, particularly our balance sheet. We have virtually a hundred trillion dollars of unfunded liabilities. That is all because you’ve had this kind of crony capitalism in Washington, DC. The rise of Breitbart is directly tied to being the voice of that center-right opposition. And, quite frankly, we’re winning many, many victories. [Remember, this was 2014!]

…General Electric and these major corporations that are in bed with the federal government are not what we’d consider free-enterprise capitalists. We’re backers of entrepreneurial capitalists. They’re not. They’re what we call corporatist. They want to have more and more monopolistic power and they’re doing that kind of convergence with big government. And so the fight here — and that’s why the media’s been very late to this party — but the fight you’re seeing is between entrepreneur capitalism… and the people like the corporatists that are closer to the people like we think in Beijing and Moscow than they are to the entrepreneurial capitalist spirit of the United States.


So I think the discussion of, should we put a cap on wealth creation and distribution? … “What is the purpose of whatever I’m doing with this wealth? What is the purpose of what I’m doing with the ability that God has given us, that divine providence has given us to actually be a creator of jobs and a creator of wealth?”

I think it really behooves all of us to really take a hard look and make sure that we are reinvesting that back into positive things."

Did you spot the contradiction in his reasoning? He's talking about wealth and what to do with it, and while correctly identifying securitization as a major component in today's crisis of Capitalism, he then says the moral thing to do with our "wealth" is to reinvest it "back into positive things," and by that he means entrepreneurial things, not physical gold. But what about savers who aren't professional investors? Isn't securitization the way they reinvest their "wealth" back into productive enterprises today? Why, indeed it is! Contradiction identified. ;D

The Moral Case for Physical Gold Accumulation

One of the toughest questions is how to make a simple case for gold to the average (non-professional) investor. The minute you mention gold, most people immediately think you're an evil hoarder, probably a jerk, definitely a time misallocator with all the time you must have spent reading doom and gloom on the internet in order to get to this ugly place where you mentioned gold during an otherwise-polite conversation, and possibly even a brainwashed cult member of one of the many online gold cults.

Gold in the mainstream is said to be the coward's investment. It thrives on fear. The more cowardly investors become on the whole, the more gold thrives. Goldbugs are called antisocial by the mainstream financial press, are compared to mentally ill hoarders featured on TV, and portrayed as Gollum-like trolls.

From Barron's:
"anxiety can translate into a desire among certain investors to keep physical gold in vaults in their basements, or shoved under their mattresses. If the much-anticipated global financial meltdown or zombie apocalypse occurs, having a bar or two on hand could prove useful—if not to barter, then to at least bash a zombie over the head."

From the Financial Times:
"What gold thus represents, we would argue, is an opt out, and a cheat, from participation in the group…

Gold in this way symbolises humanity’s selfish streak…

What’s more, while gold encourages anti-social behaviour and hoarding in individuals, a fiat-based system encourages the very opposite: sharing, distribution, collaboration and cooperation."

And from billionaire Charles T. Munger, Warren Buffett's right-hand man and Vice Chairman of his NYSE-traded holding company and S&P 500 component, Berkshire Hathaway:
"Oh, I don't have the slightest interest in gold. I like understanding what works and what doesn't in human systems. To me, that's not optional. That's a moral obligation. If you're capable of understanding the world, you have a moral obligation to become rational. And I don't see how you become rational hoarding gold. Even if it works, you're a jerk."

There it is, the supposedly-moral case against gold. But is it true?

Not. At. All.

In fact, the exact opposite is true!

Once again, this time in the financial and monetary arena, we find that the politically correct mainstream view is, in fact, the exact opposite of reality. So let's get a few things straight. Then, perhaps, we can see the world as it really is, as it really works, and then we can take a really hard look at what is the best, most positive thing to do with our wealth, not just for our own financial wellbeing, but morally too.

To some people, having a positive effect on the world through the placement of their surplus wealth is more important than making a profit. Of course that's not to say that making a profit is bad. If one can both do good and make a profit, that's the best combination of all. And that's what I mean about doing the best thing with our wealth, that is both moral (aligned with the greater good) and prudent (aligned with our personal interest).

1. Okay, the first thing I want to get straight is that banks don't need our savings in order to lend money. That's not to say that they can't lend out our savings, or that they don't need any money in order to be able to lend, but they don't need our savings.

To be very clear, banks create money by expanding their balance sheets through lending. It is said that they create this money out of thin air, which is true, but a better way to look at it is that they are simply making the borrower's good credit spendable. That good credit, we could call it credibility to make it more general, already exists before the bank creates the money, so it's not really "out of thin air." And this bank credit money is real money.

Yes, I realize that banks today lend money to people with bad credit, and for non-credible purposes. That is part of the problem created by people blindly following the mainstream view when it comes to their savings. It is not a fundamental problem with our banking system. Which brings me to the second thing.

2. Banks should be profit constrained. What this means is that banks should be constrained to only prudent lending practices by their need to make a profit. What we have today, however, is two problems, both of which Steve Bannon touched upon. The first is securitization, with which the bank profits up front and then offloads to someone else the risk of taking a loss down the road. And the second problem is the bailout mentality, where the bigger the risk, the more likely the bank will be bailed out if things go bad.

These two problems, securitization and the bailout mentality, prevent banks from being constrained to prudent practices by their need to make a profit, because they allow them to make a risk-free profit, even from imprudent practices. And that's why I said today's imprudent banking practices are not a fundamental problem with our banking system. Securitization and the bailout mentality are more fundamental than the imprudent practices they cause, but even they aren't the true underlying problem. So let's take a quick look at the fundamentals behind securitization and the bailout mentality.

3. I want to be perfectly clear about this securitization problem: It is the result of too much savings in the system.

Back in the 80s, we were encouraged to put our savings into banks to earn interest. But over the years, those interest rates have dropped to zero, and in some cases, below zero. Now, think about how those banks were able to pay 5% interest. It was possible because they were lending the money to someone else at a higher rate and keeping the difference. Home loans were maybe 9% and the banks could keep the 4% difference. So, in essence, you were lending your savings to the bank, and the bank was lending it to the homebuyer. But as I said above, banks don't need your savings in order to lend money.

So as the pool of qualified home buyers able to pay 9% dried up (because they had all bought homes), interest rates had to come down. Declining interest rates expanded the pool of qualified home buyers by bringing in those who could only afford the new, lower payments. And as the borrowing interest rate dropped, so did the savings interest rate.

Eventually, the savings interest rate got so close to zero that the savers went looking for other investments that paid a yield, and the borrowing interest rate got so low that all the qualified borrowers ended up owning their own homes. Rates were so low that the only way to expand the pool of home buyers was to go after less-qualified borrowers.

Meanwhile, the savers were still off looking for other investments that paid a yield like they used to get from a savings account at the bank, and someone put two and two together and came up with the subprime mortgage backed security. Basically, they could keep expanding the pool into imprudent waters as long as the savers kept buying the bonds. And the savers would keep buying the bonds as long as the bonds kept giving them a yield. And the bonds kept giving them a yield as long as the subprime home buying borrowers kept paying their mortgages. And the subprime home buying borrowers kept paying their mortgages as long as the value of their homes kept rising. And the value of their homes kept rising as long as the banks could keep expanding the pool with more and more imprudent borrowers, but no matter how hard you scrape, all barrels do have a bottom.

4. And now I want to be perfectly clear about the bailout mentality problem. When the housing market collapsed, the ripple effects threatened to bring down the entire global financial system within about a year, and they did in fact bring down a couple of big banks. And here's the part you need to get: In a situation like this, if it is technically possible, there will ALWAYS be a bailout. Bailout is baked into the cake. Don't doubt it. Don't bet against it.

Don't get me wrong here, though, just because it sounds like I'm speaking in absolutes. With smaller events, there won't be bailouts. And there's a lot of talk right now about the elimination of cash, bail-ins, and other deflationary tactics that would theoretically favor the purely symbolic token unit over public confidence in the system. These may be floated, tested and tried in the interim, but it'll always be a big print-fest of a bailout when there's a big event. And I'm talking about the big, system-busting events, or really what are perceived to be system-busters by the powers that be. When one of these is going down, they will use any and all tools they have to save the system. And the ultimate tool is the base money printing press. Count on it!

So don't think in terms of how to get rid of the bailout mentality problem. It's overt and right in your face since the 2008 bailout, but it was there all along, lurking right under the surface. The only way to get rid of it is to shrink the system, and you aren't going to do that through regulation. Again, just like the securitization problem, it is the result of too much savings in the system.

Banks don't need our savings, and neither does the global financial system as a whole. The banks should be profit constrained, and so should the global financial system, but they aren't. And they aren't, because there's just so much passive savings in them (both the banks and the global financial system as a whole) that the active participants can earn a risk-free profit while offloading the risk of taking a loss down the road onto the passive savers. And then when that goes pear shaped, they can count on the base money printing press to bail them out, at least nominally. And there's the catch!

For a bank, a nominal bailout keeps it solvent even if the currency collapses. It's the savers that lose everything in a "nominal bailout," because their savings are denominated in a purely symbolic token that loses all value. So while they may keep or receive through a bailout the same number of purely symbolic tokens, or perhaps even multiply the number, their savings still becomes worthless.

Switching gears for a moment, I want to talk about Donald Trump's net worth. You might recall that this was one of the issues his critics loved to talk about early in the race. Donald said he was worth $9 or $10 billion, and his haters said that was a lie. Forbes said he was worth "only" $4 billion, and Bloomberg said it was $3B. In fact, some say he's not even a billionaire. In 2007, when asked about his net worth, Trump said, "My net worth fluctuates, and it goes up and down with markets and with attitudes and with feelings..."

Clearly, Trump likes to project wealth and success, and in the $IMFS world where Forbes is the scorekeeper, that means having a number. But Trump doesn't own a bunch of publicly-traded claim checks that are easy to add up. He owns equity in real property, including his brand (which is about a third of his net worth, according to a firm hired by Trump to put a dollar value on it). Like it or not, Trump owns real wealth, and until it goes to auction and actually sells, any dollar value you put on it can only be an estimate, and a very subjective one at that!

What's Trump worth now that he's going to be President of the United States? His haters argue that the brutal election has hurt his brand and lowered his net worth, but I might argue that becoming President is the kind of thing that no amount of money can buy. Perhaps it's even priceless, like the Mona Lisa? So if you add something priceless to his number, like a stint at the White House and the legacy that'll forever leave with his family, what's his "net worth" now?

Equal Footing

Most of us will never own a name brand worth $3 billion, let alone a 68-story Fifth Avenue address, or a custom Boeing 757 with our name painted in gold on the side. But when it comes to the quality of whatever quantity of wealth we acquire, physical gold (in the future) will put us on equal footing with giants like Donald Trump.

Real things, high quality physical items, are superior to stocks and bonds, currency and paper investments, when it comes to simply being wealth. For one thing, they last for generations without getting wiped out during the periodic hyperinflations and inevitable market bubble collapses. Paper investments are merely potential claims on these same real things, yet they (the claims, not the real things) do get erased periodically.

And that's really the simple point I wanted to make by bring up Trump's net worth. We live in a world where most people don't understand what wealth is. To them, wealth is numbers on a screen that can be added up with the click of a mouse, and known precisely, down to the last dollar, at every moment in time. And the debate over the value of Trump's net worth really highlights this $IMFS idea of wealth, because his is real wealth, not numbers on a screen, and it can't be added up easily.

Wealth is what we acquire and accumulate through life, and pass on to the next generation. When we look at truly wealthy giants, it is the highest quality of things that they have, which constitutes this wealth. And physical gold, in Freegold, will be of that same highest quality available today only to giants, but divisible down to amounts available to everyone. That's what equal footing means.

Trail Guide (8/26/2000; 19:16:31MT - msg#: 35569)

From my interaction with people of various far reaching world backgrounds, one thing is clear: Investors and regular workers with a Western slant do not grasp what wealth is. Overwhelmingly they see their currency and paper investment portfolios on an equal footing in value with the same "real things" that raise our living standards. Yet, in real life, they cannot be equal because these paper assets are only an exercisable future claim on our "real things in life".

FOA (05/06/01; 20:30:52MT - msg#69)
A Tree in the Making

In this world we all need much; blessings from above,,,,, family,,,, home,,, friends and good health. But after all that, one must have currency and an enduring, tradable wealth asset that places our footing in life on equal ground with the giants around us,,,,,, gold!

"We can't afford that nice furniture and art that the super-wealthy buy, so we buy low-priced crap from China that is worth half what we paid for it the minute we walk out of the store. What is going on? Is it possible to imagine a new monetary system that would put common people on equal footing with the super-rich when it comes to possessing our wealth?"
-Moneyness (2011)

"Unlike a Rolls or the Mona Lisa, gold is divisible and fungible making it the Veblen good that puts the common man on equal footing with the Giants!"
-The Shoeshine Boy (2010)

"I explained that "consumer purchasing power" was actually a declining standard of value when compared to these "high end" stores of value used by - and due to their extremely high prices, only available to - the Giants. And that the whole point of Freegold was that infinitely-divisible physical gold would finally put the average saver on equal footing with the Giants in this one particular regard."
-Glimpsing 3 (2013)

"Physical gold is the one real thing that puts Giants and "third world no ones" on equal footing. Third world no ones certainly don't buy $100M paintings, $50M balloon dogs, or spend half a million on small tables with their surplus income. But they do buy gold as a tradable wealth asset, that singular real thing (focal point effect) in which its perceived value comes from a very long history (regression effect) of broad demand (network effect) for its store-of-value function above and beyond any other services it renders as a shiny and malleable metal."
-An Eye for Gold (2013)

"What sets your gold apart from your stinky slippers and other items you possess is that it is the most tradable—tradable wealth! Imagine that! It is tradable because someone else values it too, unlike your slippers. But not only does someone else value it, but almost anyone anywhere in the world values it nearly equally, even the Giants! How many of your other possessions would measure up to the quality standards of a Giant? None, I imagine. This is what FOA meant by "equal footing". […]

There's a reason I keep mentioning other "hard assets" like antiques, fine art, classic cars and high-end real estate when talking about Giants today. That's because those items are the closest thing we have to "Freegold-like savings" today. And yet they are only accessible to the Giants because of their nose-bleed prices. But they are still quite inferior to Freegold. They are not as portable, durable or liquid as gold, but most importantly, they are not divisible like gold which, as FOA said, puts us shrimps "on equal footing" with the Giants!"
-Moneyness 2 (2012)

"Be HAPPY that our collective WILL NOT go back to a gold standard, but will instead leave gold FOR US as a stand-alone wealth reserve asset that will put anyone who holds it on an equal footing!"
-Your Own, Personal, Freegold (2009)

Okay, let's regroup for a moment. So, banks, and more broadly, the global banking and financial system, don't need our savings in order to function, lend, and enable economic growth and prosperity. In fact, too much passive savings being sloshed around in the system is precisely what is causing this crisis of Capitalism that Steve Bannon mentioned. It is literally the fundamental cause behind the securitization problem, behind the global banking and financial system not being constrained to prudence by their need to make a profit, and the imprudence which repeatedly and inevitably leads to the periodic collapses and subsequent bailouts we see today.

And it's always the savers that get crushed. Not the banks. Not the financial system. The economy gets crushed too, but it's already being crushed by too much savings. Funny, isn't it? Seems like, if we listen to Charlie Munger and Steve Bannon, that investing our surplus earnings into other people's productive enterprises would be the way we, simple savers, can contribute to growing the economy. But, ironically, in the end, we are having the opposite effect. We are crushing the global economy by smothering the banking and financial system with our passive savings, driving valuations to bubble heights, profitability into the dirt, and yields of all kinds to zero and below, which forces the active participants in the financial system into imprudent activities in search of a yield. This is bad, and too much savings in the system is the cause.

I realize I'm covering a lot of ground here, and this "too much" is difficult to quantify, but just have a look at some of the consequences of too much passive savings. Entire industries (like steel, cement, electronics, autos and shipbuilding) have been pushed into uneconomic, unprofitable overcapacity, just to service the debt from the investment flows that pushed them there. It's what Trump was talking about with China and steel. Uneconomic overcapacity! Productive capacity (manufacturing) has been forced to move east and to the third world, where labor is cheap, just to stay profitable, while Western "entrepreneurs" waste their formative years preparing to join an oversized financial industry, which does little more than churn numbers and skim off the top.

Interest rates are so low that they make no sense, especially with purely symbolic currencies, and investment prices (both stocks and bonds) are so high that the traditional reasons for buying them (yield and/or appreciation) are virtually nonexistent. Mania levels are so off the chart that companies are being developed just for the IPO, and as crazy as it sounds, it's working. Newly IPO'd tech companies are selling, in some cases, for ten times as much as their more seasoned counterparts (versus their revenue), like Apple. And that's because the passive money has already filled the prudent pool, so the imprudent active participants create these mania bubbles and then sell them off to the passive money at unsustainable prices, simply to achieve what no longer exists in traditional investments… profit.

Things are so nuts right now that governments(!) are able to sell 100-year bonds at rates as low as 2.3%. Does this sound normal? Is it even possible this is not a bubble? And the cause of this teetering-over-the-abyss state of the global financial system and painfully stagnant global economy is, once again, too much passive savings stored in the financial system.

So, no, it is not the moral thing to do with your wealth, to invest it back into the financial system that funds other people's entrepreneurial businesses. That's a myth! Just like PC, it's a perpetuated myth. It's bad for the savers' own future wellbeing, and bad morally too, meaning it's bad for the greater good and bad for society at large.

Again, I know I'm covering a lot of ground here and that some of my statements are difficult if not impossible to quantify. But you can't deny that passive savers as a group can be distinguished from professional investors, traders and speculators. Passive savers, of which most people, most of today's "investors", actually are, simply aren't professional investors, traders or speculators, and that's the simple distinction. Their professions are in other areas (doctors, lawyers, toolmakers, etc…), and yet they put their surplus income into the same arena as the professional investors, traders and speculators, with the hope that they'll be kind and share some of the skim, I mean profits, or that they'll at least be allowed to stay even in real terms.

This works until it doesn't. And unfortunately for the savers, that one time when it doesn't is all that matters. That's when they lose everything. I know that many savers are cheering the Dow at 19,000+ right now, but even when it hits 20,000, they aren't going to be the ones cashing out. So their "number" (their net worth) is just an illusion. The passive savers tend to buy in near the top, and cash out near the bottom. As GEICO would say, when you're a saver, it's what you do, because you're passive and not a professional investor. In fact, the professionals who savers hire to give them advice, or even manage their money, have an incentive to keep them in at the obvious top, even as they cash themselves out. Again, when you're a professional money manager, it's what you do.


Imagine a world where robots are doing not only all of the menial tasks, but are also doing most of the physical labor humans used to do. This is often a utopian dream, where humans no longer have to work because robots do it for them. But who owns the robots? In the utopian dream, the robots are free, and everyone partakes equally in a communist paradise of perpetual holiday living. But in a more realistic version of this possible future, the robots make human workers redundant, and the humans then have to go on the public dole and live in relative poverty.

There's a British series called Humans (which is good by the way) in which robots look and perform just like humans, and in fact are taking their jobs. You can buy (or finance) your own robot for about $30K or around the cost of a car, and it'll clean your house, watch your kids, and even do your grocery shopping for you. It's pretty neat, until your husband loses his job because the company decided that a robot could do it just as well and for less money. Now you can no longer afford your own servant robot. Here's the scene from season 2 of Humans in which this very scenario happens, which gave me the idea for this analogy:

In fact, too much savings in the financial system is quite similar in effect to this utopian (really, dystopian) fantasy (more like a nightmare). We call it our exorbitant privilege, but what that really means is that our currency, the US dollar, is overvalued by the rest of the world hoarding it, essentially as savings. This is what drove manufacturing jobs to the ends of the earth, wherever labor is cheapest (if there were robots somewhere, that's where it would go next). But we kept up our standard of living—raised it even—by borrowing what we were no longer earning.

In the process, we enslaved ourselves to the debt that forms the reverse side of the same coin that is our, and the rest of the world's, savings. You see, too much savings in the financial system requires a lot of debt. And we in the West provided that debt. It's the very definition of a vicious circle: "a sequence of reciprocal cause and effect in which two or more elements intensify and aggravate each other, leading inexorably to a worsening of the situation."

I think this is part of the reason why Trump won. Many people are starting to feel like Joe in Humans, the dad who lost his job to a robot, only here it seems like the jobs went to Mexico and China. You see, in the more realistic version of the world, it's not so great to have someone else do all the hard work for you. Eventually you hit your debt limit, and, just like with the subprime home buyers, the Ponzi stops expanding and the whole financial house of cards collapses.

Gold, And Only Gold

Now, if you at least understand the concept that too much passive savings in the financial system is bad for everyone, then the next question is obvious. Where else is there to put one's surplus wealth? And this is where we come to, essentially, the hoarding of physical items.

It would seem to make sense that you'd want to hoard items that'll be needed by someone else in the future, and the more needed the better, right? But once you think it through, you'll realize it doesn't quite work that way. Take this quote I used in The Debtors and the Savers 2012. It's a little over-the-top, but it does make the point:

"Suppose I have twelve loaves of bread, and you are hungry. I cannot eat so much bread before it goes stale, so I am happy to lend some of it to you. “Here, take these six loaves,” I say, “and when you have bread in the future, you can give me six loaves back again.” I give you six fresh loaves now, and you give me six fresh loaves sometime in the future.

In a world where the things we need and use go bad, sharing comes naturally. The hoarder ends up sitting alone atop a pile of stale bread, rusty tools, and spoiled fruit, and no one wants to help him, for he has helped no one."

Obviously we don't want to hoard bread, tools or fruit as savings, not only because they go bad over time, but because they are needed by others, either to eat in the case of fruit and bread, or to make economic goods in the case of tools. This concept extends out to almost everything, including silver. Silver doesn't rot like fruit, but it is used to make economic goods, at least more so than gold.

So when we look for hoardable wealth items, we are looking for stuff that is not needed by others for any purpose other than the purpose that is driving us. We also look for quality, because we want it to last. A good guide to follow is the wealthy giants of the past. What kinds of hoardable wealth items did they pass on through generations?

Quality can mean durability, as in the case of a hardwood antique chair versus a cheap modern equivalent, but it can also be subjective, as in the best of the best. When considering hoardable wealth items, this kind of subjective quality is of the utmost importance. Think about fine art, or even real estate. It's only the very best of the best that always increase or at least retain their value, and can always find a buyer easily.

If you could afford art like that, buying the very best of the best would mean you would get fewer pieces of art, but remember that you are buying them to hoard them as wealth. That's the purpose that drove your purchase. So it's more important to you that it retains its value and can always find a buyer easily than the amount of space it takes up. In fact, the smaller the better if you're just going to store it in a secure vault somewhere (like the uber-rich do with much of their art). The smaller it is, the cheaper and easier it is to store securely, or hide. So for this purpose, the greatest value in the smallest package is the ultimate ideal.

Of course, we can't afford art like that, at least most of us here at the Speakeasy can't. But in this realm of hoardable wealth items that are not needed by others for any purpose other than the purpose that is driving us, is a whole plethora of collectibles, from baseball cards to classic cars; from antique furniture to fine Persian rugs. You may buy some of these things for other purposes, like to drive, or walk on, or sit on or look at, but if you are buying for the purpose of storing value through time, it's best to go for the highest of quality, both subjective and objective quality, and also not to drive, walk, sit on or look at them too much. ;D

So there's nothing morally wrong with hoarding collectibles. It's not bad for the economy, or against the greater good, but there are so many potential pitfalls that it's bad for the saver's own interest. Just like with stocks and bonds, unless you’re a professional or expert in one of these types of collectibles, you have no business buying them, and you will likely not succeed at your purpose of efficiently storing value through time. Therefore, it is immoral to recommend such items to savers, and yes, that includes numismatic gold coins. When I say gold, and only gold, I mean bullion, with no numismatic premium in the price!

Gold is a little different from collectibles like baseball cards and classic cars in that it's a naturally occurring element and a commodity. We tend to lump gold in with other similar things, like fine gemstones, diamonds, even jewelry, and of course other commodities, like silver, platinum and palladium. And in this group, there are good reasons why gold is the only moral choice for storing value through time.

With jewelry, diamonds and gemstones, we have the same problem as with collectibles. You've got to be an expert in them to even consider buying them as a store of value. And anyone who recommends them to you for this purpose is a conman, a thief or a moron. As for commodities like silver, platinum and palladium, these are metals that are used to make essential economic goods, and the reasoning behind hoarding them as a store of value is to drive up the price in order to stick it to the people that use them productively. This is immoral. It is bad for the economy, and against the greater good. And what Charlie Munger said about gold actually does apply to these other metals: "Even if it works, you're a jerk."

It is true that gold is used in the production of some essential economic goods, like the high-end medical machines they use at hospitals. But the amount of gold used in those machines is such a small amount that a $10,000 piece of medical equipment contains only about 10 cents worth of gold. So even a 50X Freegold revaluation would only raise the cost of that piece of equipment by $4.90, or 0.05%.

There's a good argument for that 50X Freegold revaluation. That's what my 8+ years of blogging, more than 500 posts and more than 100,000 comments have been about, and it doesn't include silver. The argument for silver is completely different. Look it up. It's all about silver's industrial uses, its scarcity, and hoarding what's left in order to drive up the price for industrial and end users. That's the argument for silver, and as you can now hopefully see, there's a moral difference between the two.

I'm not going to go into why gold will revalue by maybe 50 times, or 5,000%, while the silver price will likely plunge at the same time. That's not what this post is about. But please at least understand that the arguments for Freegold and for a "gold and silver" bull market are different. They are different things, and they are mutually exclusive, which means you aren't going to get both. And that's all I'll say about that.

What this post is about is the moral case for gold versus the financial system. And I think I've made that case, so let's recap.

First of all, we're talking about savers as a group, as opposed to professional investors. There is nothing immoral about being a professional investor, or supporting entrepreneurial ventures with your surplus capital, as long as you know what you're doing. Where it starts to get detrimental to the greater good is when you expect to have the same effect and get the same results as the professional investor, but do so passively. The more passive, the worse it gets. And the global financial system is chock full of passive money being managed by someone other than its owner. That's where it gets really bad for the system as a whole.

Second, banks lend money out of thin air, or more specifically, they turn people's credibility into spendable, circulating money. They do need some money to make this work, but they don't need your savings. The money that circulates for transactions is plenty. Probably 90% of your income stays in the banking system when you pay your bills, and that's all the banks (and the global financial system) need. They don't need your savings in order to have some spare money to lend. I know I'm repeating myself, but this is an important concept to internalize.

Third, when you buy yourself some gold, you are not depriving the world of your money. You bought the gold, and you gave your money to whoever sold you the gold. He then either spent it himself, or put it in the bank. So, round and round it goes. The same money continues to circulate whether you bought gold, or gave it to some bank or financial system money manager to do whatever they do with it. The difference is, if you don't give it to the bank or a financial system money manager, you are not contributing to the smothering of the global economy, the maniacal overvaluations, uneconomic overcapacity, and unprofitability of global businesses, the zero and negative yields which force imprudent activities that ultimately collapse the entire financial system, wiping out your savings which you gave to the bank or a financial system money manager in the first place.

So buying gold makes the world a better place, but it is also better for you individually. Gold is the one and only physical wealth item that normal people like you and I can buy that is of the exact same objective and subjective quality as the Giants. In fact, being the focal point of hoardable physical wealth items, like card tables, Warhols and balloon dogs, gold is the best-in-class even for the Giants. And, again, that's what I mean by equal footing!

There is nothing good about bubbles, and virtually the entire global financial system is one big bubble today. There are very few inadvertently-lucky winners in bubbles, and almost everyone involved is either a bad actor or a loser. There's nothing moral about either of those things, but there's also no need to be involved! If you're not a professional investor, trader or speculator, then there's a good chance you're a saver, and in that case, you have no business being in the bubble.

Webster's defines moral as relating to the principles of right and wrong, or ethical and unethical behavior. Immoral is defined as conflicting with moral or ethical principles. I actually agree with most of what Charles Munger said. I, too, like understanding what works and what doesn't in human systems. To me, that's not optional. That's a moral obligation. If you're capable of understanding the world, you have a moral obligation to become rational. And you become a moral and rational saver by hoarding gold.

I also agree with most of what Steve Bannon said. I, too, think it behooves all of us to really take a hard look and make sure that we are saving in positive things. And by that, I mean positive for both our own interests and for the world around us. For savers, that means buying gold, and only gold. As savers, it is immoral for us to stifle the economy and smother the financial system with our passive money, expecting to have the same effect and get the same results as professional investors, but to do so passively. It is also immoral for us to hoard as a store of value anything that is used productively by someone else, in order to drive up the price and stick it to them. And that, my friends, is the moral case for gold!

If you're interested, you can hear Steve Bannon's entire talk below. "The remarks — beamed into a small conference room in a 15th-century marble palace in a secluded corner of the Vatican — were part of a 50-minute Q&A during a conference focused on poverty hosted by the Human Dignity Institute, which BuzzFeed News attended as part of its coverage of the rise of Europe’s religious right."

Or the transcript is here.

"It is the “practical understanding” that our modern world must use a “digital paper money” for commerce. All accept this. However, without a “gold currency” priced daily in the “free market”, and used as real reserves for backing, any “world currency reserve” would expand using “debt only” as the tool. This result brings the eventual reckoning for all users.

The “host country” finds all other nations supporting its “lifestyle”, even as those country’s private financial infrastructure is destroyed. It is the rising US equity markets and falling inflation that so indicates the last days of the dollar!

Many say this is a sign of strength for America, yet they know not what time of life the dollar has attained. The “old man” has he become even as persons place their financial horse upon his shoulders. The world debt structure of this “old man” is such that the true pricing of gold in a new currency, will bring such a weight as it will end his life! […]

It has always been the desire for the "hard currency" to settle old dollar debts. Dollar debts made "unreasonable" by the loss of "honest commerce" by "dishonest exchange rates". As has been from the past, and will be in the future, Gold does always settle the score! Thank You"

ANOTHER (THOUGHTS!) (11/19/98)