What do history's most notorious despots have in common with many of the flag-waving, patriotic politicians of our day? Both groups rise to power through the exploitation of fear, which has become a societal plague. There have been widespread casualties. We need an antidote. Feardom offers its readers a much-needed immunization.
photo credit: LilB
With pundits pondering whether we’re headed for a recession or if we’re in one already, the cautious investor finds himself sitting on the edge of his seat, monitoring his charts and wondering how best to invest his hard-earned money. Does he wait for a dip and then buy, or does he take the plunge and invest in some low-risk funds hoping to see his wealth grow?
It is to such an investor that I would like to address myself.
We live in a day of widespread uncertainty. Global markets have essentially become fused together, with each market reacting to the ups and downs of another. The dollar, considered to be the main world reserve currency, is rapidly decreasing in value. Many foreign currencies are either pegged to the dollar or closely dependent thereto, as this article explains:
The U.S. dollar serves as international money in the world economy in general, and as the dominant currency in East Asia in particular. Because of this dominance, financial regulation to prevent banking and currency crises can be much more difficult in countries on the periphery of the dollar standard than in the center country itself. Although the United States has never imposed the dollar standard on other countries, markets naturally choose one national currency as a facilitator of international exchange and safe haven store of value. Thus international debt contracts are typically denominated in dollars even if the loan proceeds are switched into the domestic currency of the borrowing country. This natural asymmetry among national monies, between a “center” and a “periphery,” is key to understanding how financial crises occur and may be dealt with when economies are ever more globalized.
While historically seen as solid and desirable, the dollar today is worth 4% of its original value, and continues to decrease. Foreign markets are now abandoning the dollar in favor of stronger currencies such as the Euro.
How can it be that a currency once considered “as good as gold” has become worth less than the paper it is printed upon? The answer to this question lies in the understanding of fiat currency. The dollar (or Federal Reserve Note, more precisely) is nothing more than a piece of paper deemed “legal tender” by the government. Uncle Sam demands that merchants accept this paper as money, thus sanctioning its use as if it were actually a store of value. In fact, the paper has no inherent store of value, but only is propped up by the faith of the average consumer.
When that faith begins to wane (whether due to overall market conditions, foreign policy implications, price inflation, etc.), the person’s confidence in the dollar diminishes. On a grand scale, paper currencies hyperinflate (sometimes rapidly, sometimes over many years) as the central bank continues to print more money out of thin air. When this occurs, every dollar in the economy decreases in price due to an inflated money supply. People who own dollars (or dollar-based investments) have now lost a portion of their wealth.
This is of crucial importance in the investment world, since any dollar-based investment is affected by the value of the dollar itself. While a 401(k) or savings fund may yield a return of 5% per year, this is largely worthless if the currency itself is devalued by 10% during that same year. In essence, dollar-based investments slow down the rate at which your savings is being eroded, for the dollars you have earned in interest are worth less than those you initially invested.
The author of this excellent article agrees:
So why have investors been abandoning conventional assets, such as government bonds and stakes in blue-chip businesses, in favour of a metal that appears to offer no reward for holding it? The answer, I’m afraid, is crumbling faith in the world’s central banks, and in particular the US Federal Reserve, where the presses have been working overtime.
Some argue that the soaring gold price has been driven by temporary anxiety over global instability. The metal is a safe haven in troubled times. But answer me this: when was the last time the world felt like a cosy hideaway? Ever since mankind turned up, Planet Earth has never been a safe place.
In times of economic instability, the eager investor looks for a safe storehouse for his wealth. Where is one to find such a reliable investment? As this author notes, gold has proven millennium after millennium to be a safe haven in troubled times.
Note that gold is not an investment in the Wall Street sense—you will most certainly see a return in terms of more dollars, but the value of those dollars will be decreased. Instead, gold is a wealth preservation tool, enabling a person to maintain the value of his earned money. The success of any investment in a paper currency is largely contingent upon the actions of whoever controls the printing presses. In contrast, gold answers to no man but its owner, retaining its value despite the actions of any other person.
Gold, unlike paper (or digital currency), keeps men honest. One of the principal reasons that politicians wanted to move off of the gold standard was so that they would be able to finance their desired deficit spending merely by issuing treasury bills—in other words, signing a ledger book and creating money out of thin air for whatever they desired. This was not possible with a gold-backed dollar, for there was a limit on how many dollars could circulate based on the size of the nation’s gold supply. When the inflation tax (as a resulting of printing new fiat currency) was not available to them, the politician’s only option was to directly tax the citizens for any programs they desired to create. Instead, we now have a 9 trillion dollar debt where the inflation tax payments are deferred to the raising generation—forcing our children to pay for our fiscal follies.
Make no mistake, the problems faced by the American people are not caused by unscrupulous mortgage brokers or the rising price of oil. These are symptoms of an economic disease caused by a spendthrift Congress enabled by loose monetary policy. Too many pundits praise the weak dollar as benefiting exporters, but they fail to see the harm done to thrifty, hard-working Americans. Rather than continuing to pursue a policy of easy credit and increasing debt, we need to return to a sound monetary system.”
This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.
This tirade Greenspan mentions has been, at various times, an all out war against gold, whether regarding the status of its association with the Federal Reserve Note, or its private ownership in the hands of the public at large. As this article explains, there is one effective weapon that we can wield in this battle for economic self-preservation:
There are few things that federal big spenders hate more than gold. Why? Because they know that, historically, gold has provided the best means by which people could protect themselves against the ravages of a rapidly depreciating currency.
Ayn Rand likewise noted the way this war is waged:
Whenever destroyers appear among men, they start by destroying money, for money is men’s protection and the base of a moral existence. Destroyers seize gold and leave to its owners a counterfeit pile of paper. This kills all objective standards and delivers men into the arbitrary power of an arbitrary setter of values. Gold was an objective value, an equivalent of wealth produced. Paper is a mortgage on wealth that does not exist, backed by a gun aimed at those who are expected to produce it. Paper is a check drawn by legal looters upon an account which is not theirs: upon the virtue of the victims. (Ayn Rand, via Quoty)
Despite its evident necessity in light of recent economic turmoil, the return to a gold standard would not be without its complications. The crucial importance, however, is the elimination of the Federal Reserve’s monopoly on money. Allowing a privately held corporation to print up whatever money it desires is nothing more than legal counterfeiting. Were I to do the same, I would be jailed. The government is not entitled to any power that its citizens would not inherently possess themselves, and thus the creation of new money to satisfy debt is immoral, illegal, and downright dishonest.
The legalization of competing currencies (in effect, allowing gold and silver—the Constitutionally mandated currencies—to be considered legal tender) would reign in rampant deficit spending, as politicians eager to keep the dollar afloat would have to act in such a way that would bolster its value when compared to stores of inherent value such as precious medals.
Regardless of what occurs on a national level, the average investor would be unwise to dismiss the benefits offered by gold. The investment of any fiat paper currency is little more than gambling—betting that the money you will receive in interest will be of enough value to compensate the loss in overall value due to the inflation that has likely occurred within the given time frame.
The 10 year history of gold might seem, to the amateur investor, like a great investment. It should be noted however, that the value of gold is often reflective of the inverse value of the dollar. While there are many other factors involved, the value of gold almost always increases as the dollar’s value decreases. Thus, the new dollars one receives after years of gold ownership all have a diminished purchasing power.
The case for a return to sound money is not hard to make when the average consumer goes to the local market and sees evidence of skyrocketing price inflation. It becomes easier after studying the history of banking, understanding how much each person’s share of the national debt is, and observing the ongoing loss of faith in the dollar worldwide.
Today, more than ever before, our economy needs a return to sound money. Gold, a historically-proven store of value, is the right choice for any investor desiring to maintain his wealth and free himself from the inflationary decisions of central bankers and politicians.