Repaying the Debt with Alchemy/Science

John Hodgman has quite a gig going with his “You’re Welcome” series on The Daily Show. This one’s terrific — our debt ceiling is now a “debt convertible.”

“Also like a convertible our economy is expensive, impractical and only seats a couple of wealthy jerks.”

Stewart asks Hodgman what we should do about the $800b we owe China and, following on my commentary on gold, Hodgman suggests turning the lead from the children’s toys and pet food China sends us into gold (as the two are just a couple of electrons apart).

Alchemy? Heck no, science!

One minor problem: the US isn’t churning out the math and science minds it used to.

Because You Can’t Spell Gold without G-O-D

The goddess Juno Moneto from whose name "mint" and "money" are derived

In our current frenzy for certainty in an uncertain world, gold is back in the news. Time for a little context on the current gold rush, starting with a tale from antiquity:

A man who wanted riches dutifully installed a money god in his home altar. He prayed to it for hours every day. His knees ached and his forehead bore a bruise from his repeated prostrations.  He persisted in the fanatical belief that he was on the true path to prosperity despite the daily worsening of his situation.  One day he flew into a rage with the god for all the time he’d wasted, picked up the little clay god and smashed it on the altar board, revealing a cache of gold coins.

The moral? I’ve heard a few including:

• We must slay our conceptions to achieve a breakthrough
• Praying for money brings us to rage and despair
• Money can be hidden in plain sight
• Go deep inside religion/a spiritual path to find true prosperity

The Wizard of Oz: an American tale of gold?

The last time I gave gold any thought was business school ten years ago when my micro-economics prof told us that some people considered The Wizard of Oz to be an allegorical story about America and the gold standard.  BBC News summed up this story, reminding us that Judy Garland’s ruby slippers were a departure from the silver slippers of Baum’s original tale, which some believe represented the promise of a dual gold-silver standard.

Baum published the book in 1900, just after the US emerged from a period of deflation and depression. Prices had fallen by about 22% over the previous 16 years, causing huge debt.

Farmers were among those badly affected, and the Populist political party was set up to represent their interests and those of industrial labourers.

The US was then operating on the gold standard – a monetary system which valued the dollar according to the quantity of gold. The Populists wanted silver, along with gold, to be used for money. This would have increased the US money supply, raised price levels and reduced farmers’ debt burdens.

CHARACTER SYMBOLISM

Dorothy: Everyman American

Scarecrow: Farmer

Tin Woodman: Industrial worker

Lion: William Jennings Bryan, politician who backed silver cause

Wizard of Oz: US presidents of late 19th Century

Wicked Witch: A malign Nature, destroyed by the farmers’ most precious commodity, water. Or simply the American West

Winged Monkeys: Native Americans or Chinese railroad workers, exploited by West

Oz: An abbreviation of ‘ounce’ or, as Baum claimed, taken from the O-Z of a filing cabinet?

Emerald City: Greenback paper money, exposed as fraud

Munchkins: Ordinary citizens

A post-Depression history of gold prices

With a new gold rush in the news I wanted some historical context, which I plucked selectively from USAGold.

April 5, 1933: President Roosevelt, acting under the sweeping authority passed to him by Congress on March 9, invoked his authority to make it unlawful to own or hold gold coins, gold bullion, or gold certificates. The export of Gold for purposes of payment was also outlawed, except under license from the Treasury.

January 31, 1934: President Roosevelt fixed the weight of the Dollar at 15.715 grains of Gold “nine-tenths fine”. The Dollar was thereby devalued from $20.67 to one troy ounce of Gold to $35.00 to one troy ounce of Gold – or 40.94%. The Treasury, which had become the possessors of all the nation’s Gold on the previous day, saw the value of their Gold holdings increase by $US 2.81 Billion. The Treasury now “owned” the Gold, and no one else inside the U.S. was allowed to own any Gold except by the express permission of the Treasury.

Bretton Woods in July 1944: The new ratio of $US 35 was adopted and the U.S. Dollar was made the world’s Reserve Currency.  The now international ratio of 35 U.S. Dollars to one troy ounce of Gold lasted until August 15, 1971.

January 1961: Shortly after President Kennedy was Inaugurated and  newly-appointed Undersecretary of the Treasury Robert Roosa suggested that the U.S. and Europe should pool their Gold resources to prevent the private market price of Gold from exceeding the mandated rate of $US 35 per ounce. Acting on this suggestion, the Central Banks of the U.S., Britain, West Germany, France, Switzerland, Italy, Belgium, the Netherlands, and Luxembourg set up the “London Gold Pool” in early 1961.

The Pool came unstuck when the French, under Charles de Gaulle, reneged and began to send the Dollars earned by exporting to the U.S. back and demanding Gold rather than Treasury debt paper in return. Under the terms of the Bretton Woods Agreement signed in 1944, France was legally entitled to do this. The drain on U.S. Gold became acute, and the London Gold Pool folded in spring of 1968.

January 1975: After 42 years, it again became “legal” for individual Americans to own Gold. Anticipating the demand, the U.S. Treasury in particular and many other Central Banks sold large quantities of Gold, taking large paper profits in the process.

July 1979: Paul Volcker was appointed as Fed Chairman while  gold continued to surge, hitting $400 in October. While this was happening, Mr Volcker was attending a conference in Belgrade. There the assessment was made that the global financial system was on the verge of collapse. When Mr Volcker returned to the U.S. from Belgrade, he took a momentous step. He announced that the Fed was swiching its policy from controlling interest rates to controlling the money supply.

I worked at a jewelry store in 1980 and learned how to spot-price our gold merchandise because it was a waste of time to affix labels to the inventory.  U.S. interest rates skyrocketed. As they rose, the dollar first slowed it’s descent, then stopped falling, and then began to rise. Both the public and the investment community which had stampeded into Gold was lured back into paper by this huge rise in interest rates – and by the prospect of a higher U.S. Dollar. The threat of financial meltdown was averted, but at a cost. The U.S. Prime rate hit 20% in April 1980 and stayed there (with a brief dive in mid-1980) until the end of 1981. There was a rush out of Gold and back to Dollars.

Once interest rates began to come down, in early/mid 1982, the choice of where to put the Dollars faced investors once more. The initial solution was just as it had been in the 1970s. The Dow took off – rising from 776 to almost 1100 between mid August 1982 and late January 1983. Gold fell $105 in the last four trading days of February 1983. As it fell, the Dow broke above the 1100 point level for the first time. The long bull market in stocks, and the long stagnation of Gold, had begun.

Post-meltdown gold rush

Fast forward to 2010 with stories about home parties where a jeweler brings in scales to buy party goers’ jewelery.  What gives? As investor Jim Gobetz said to me, “Gold is traditionally (at least in the age of fiat currencies) a hedge against inflation.” Problem is, in certain circles, the fear mongering is unavoidable, deafening and self-serving.  Take Glenn Beck’s hucksterism, as exposed on The Daily Show:

If you prefer something more buttoned down, PBS’s NewsHour did a thorough job examining the current gold rush.

Gold as a sure thing

Gold investor Bob Chapman recently said “Gold and silver are the only real way to protect against financial calamity and offer possibilities for profit simultaneously.”

Really? If so, why are gold promoters letting the rest of us in on the security? Because they want to sell us something and make money on our insecurities. If gold really offered true protection, guys like Beck and Chapman would be hoarding — not promoting.

In The Secret Life of Money, I learned a lot about the history of money, including its many forms, from seashells and porpoise teeth to tobacco and beaver skins, to, of course, gold.  Author Tad Crawford tells stories of how belief in the value of something transcends rationality, and sometimes, practicality.

For example, the Yap people of Micronesia used giant limestone discs for currency.  These discs were so difficult to transport that eventually people left them in place with the communal understanding of who truly possessed the “wealth.”  So isn’t gold similarly “accepted” as valuable despite its impracticalities as a currency?  Do we really expect to carry bullion around? And do we want to carry a beaker of acid with us every day to test the purity of coins and bullion exchanged for goods and services? If we all believe gold is the only ultimate thing with intrinsic and everlasting value, then it is. It’s our belief that matters.

Crawford’s book discusses at great length the connection between money and the divine, from the ancients who minted coins with faces of divinities (see Juno Moneta at the top of the post) to the practice of stamping “In God We Trust” on American currencies since 1864.  ”If the phrase means nothing, perhaps we should put ‘In the Federal Reserve We Trust’…In times of recession and depression, this slogan offers a way to understand why money fails us. Money, although a secular tool, requires our belief in the richness of a divine power.”

I think times like these serve the purpose of reminding us of how uncertain life really is. We middle-class Americans thought we’d somehow transcended subsistence issues like food and shelter, but the meltdown has driven record numbers of Americans onto food stamps and out of their homes. We thrash about for something certain and land on gold — the modern analog of a Micronesian Yap’s limestone.

Security is a head game — as JM Keynes reminded us, “In the long run, we’re all dead.”

Weighing in on the gold rush with some spiritual advice is Baha’u'llah, the Prophet-Founder of the Baha’i Faith:

Busy not thyself with this world, for with fire We test the gold, and with gold We test Our servants.