More Price Ramps Ahead: How to Retire with Commodity Indexing

Jim Crum, with whom I have corresponded since the beginnings of the search for information about BO's birth certificate, has published an excellent piece with American Thinker. Jim comments on the inflation effects of the Fed's QE2 program:

The recently released BLS import and export report simply confirms what many of already knew was happening or was going to happen. Prices everywhere on nearly everything of substance are going up dramatically.

Jim adds that fuel and agricultural prices are both on the rise. American Thinker's Thomas Lifson adds to Jim's post:

Inflation, using the reporting methodologies in place before 1980, hit an annual rate of 9.6 percent in February, according to the Shadow Government Statistics newsletter.

If you are thinking of retiring, you will have to think strategically. Unlike Jim, who told me separately that he's bearish on the stock market, I am convinced that there will be a short term run up. The reason is the liquidity and ultra-negative interest rates that Helicopter Ben and the Fed are generating. One commentator on Kitco suggests that there will be a few week consolidation period followed by an additional run up in the stock market.

No increase is consistent. The silver market has been doing beautifully, and those of us who have partaken of the white metal have enjoyed the run. My portfolio is near its all-time high in February of 2008, when I had benefited from a short term run up in construction stocks that the late Howard S. Katz had recommended. However, I am not sure about silver's short term performance. Over the long term it will continue to rise, along with other commodities.

My recommendation to deal with Obama's declining America is to plan for retirement by purchasing blocks of commodities that reflect your anticipated consumption. For instance, if you are retiring at age 67 and you figure that you'll live until about age 82, you need 15 years' worth of commodities. If you spend $6,000 a year on fuel and gasoline, $7,000 a year on food, $2,000 a year on house repairs, $5,000 a year on property taxes and $5,000 a year on other consumables then you have a commodity budget of about $25,000 a year. The property taxes can be accounted for with gold or silver. The consumables and house repairs can be accounted for the with Deutsche Bank Commodity Index, DBC and/or the Deutsche Bank Agricultural Index, DBA. So you need to fund $25,000 x 15 = $375,000 in commodities investment before you retire. If you have ten years to go, you should fund $37,500 per year, $75,000 over five years, or put it all in now, depending on your theory of where the market is going to be going.

The commodities should not be used as speculation but rather as savings that you will liquidate over your anticipated retirement period. Whether commodities go up or down, your inflation risk for the funded period will be nil.

Help! America Needs Financial Advice!

Question from Reader:

>"Do not trust the socialists in power. Get out of the dollar. Buy commodities (GLD, HUI, DBA, the Euro via Everbank or UDN)."

>Dear Mitchell,

I have been hearing about collapse for over a year now. I am VERY worried. Next year when the commercial "adjustable" mortgages start re-adjusting, many claim we will spiral out of control, and at that point, nothing may be able to stop it......

>I have a bit of money from my Mom.....Lord KNOWS how hard she and Dad worked for all ten of us to have the best they could provide. I have the money in two savings accounts. Should I convert all of it to gold or euros do you think? I do not want to lose what little is left. Our retirement funds were decimated.......and I am STILL out of work with no prospects in sight. I am hoping to start a small community based business with a neighbor....but this has not been the greatest year for me....and things health wise are NOT looking any better.

>I have debated "buying down" our mortgage so that payments on the house would be much lower. We were VERY lucky to get a fixed rate mortgage some years ago at 5.5%. But the payments with taxes are high, and I don't know when I will have an income again......

>I am really worried about the dollar's collapse. I appreciate any advice you may have......GOD Bless you,

Dear Reader: Do not panic. I would advise you not to pay off your house but rather, if necessary, get on the sub-prime bandwagon and borrow up to your eyeballs. In inflation debtors win. People with cash lose, so get rid of it. Get rid of your bank accounts.

I'm sorry that you lost in the market. All investments are risky. I would advise you to purchase a range of the things in the list you clipped: GLD, HUI, DBA, UDN. I would not put all my eggs in one basket.

Some commentators are afraid of bankruptcy of commercial banks. Hence, buying Euros through a CD has that risk. But otherwise, diversifying out of the dollar and possibly shorting the stock market is a good idea.

GLD is a gold ETF and it is taxed as a collectible, at 28% rather than at the lower capital gains rate. Gold stocks, are volatile and risky. They can go up alot more than gold, but they can also be affected by a stock market collapse. I lost money in 08 because of that very problem. The gold stocks can easily go down 70%. Gold is volatile but less so than the stocks.

If you put your money in gold, you need to be able to live with a 40% decline without panicking. IF you put your money into gold stocks, the variability is larger.

There is a stock, SH, which is the short-sale equivalent of the S&P 500. It goes in direct opposite to the S&P 500. You and I wish we had bought that in summer 08. You might consider this:

30% GLD
10% UDN
10% HUI
10% DBA
10% SH
20% SPY
10% SLV

These are:

GLD= gold exchange traded fund;
UDN = dollar short exchange traded fund;
HUI=gold stock index exchange traded fund;
DBA = agricultural commodities excahnge traded fund;
SH = S&P 500 short fund;
SPY = S&P 500 exchange traded fund;
SLV = silver exchange traded fund.

Alternatively, you could try this:

Cash: 50%
GLD: 50%

or

Cash 30%
UDN 20%
Gld 50%

or

GLD 100%

or

SH 90%
GLD 10%

Shorting the market now is of course risky. It could continue to go up because of the monetary infusion last year. But it has had a good run; Americans are heavily in debt; the Chinese are ticked; and the national socialists are in power. I would not be optimistic.

You might also look at international stocks but I would wait. If there is a stock market decline in the near future it will infect the international stocks too.

I am not a prophet and cannot foretell with any certainty what the markets will do. I do think gold is going up and if you put 100% in GLD you would not be crazy in my opinion. If you are bullish and put your money in the S&P 500 you could do well from hereon in, but there is a risk of stock market collapse. I would not be an unrepentant bull at this point.

The reason for a possible market collapse is this. The stock market is going up because of a large infusion of money last year. That can continue for a while. However, it is also inflationary. As inflation starts (dollar declines) the Federal Reserve Bank is subjected to pressure to withdraw some of the dollars. This will cause interest rates to rise. When interest rates rise, the stock market falls.

But let's say the Fed doesn't withdraw the dollars. Then, inflation escalates. Interest rates then will rise because bond investors want higher returns. It seems like there's a good chance for a market decline at some point either way.

It is easy to know what will happen, difficult to know when. The rising SPY could continue for another year. The stock market could double before the collapse. No one could know this. Unless you had inside information about the banking world last year, it would have been difficult to predict that the collapse of their balance sheets would have occurred.

So I don't know what to tell you. In an inflation, borrowers benefit. The St. Louis Fed tracks money statistics, and they are scary. I cannot say for certainty that the gold market will go up.

If you want to take a risk, buy gold stocks. Check out the Kitco site each week. No one knows for sure what will happen, least of all me.

Where I am heading right now, but I'm taking my time, changing a little each week:

SPY 10%
GLD 50%
HUI 10%
SH 5%
SLV 5%
Euros CD 20%

Getting Rich from an Obama Presidency

The Democrats have inherited an inflationary mess from their sister party, the Republicans. A testimony to the Democrats' incompetence is that their leading economists are talking about the likelihood of "deflation" when the Republicans just doubled the monetary base on top of 2 1/2 decades of Republican monetary depreciation. Rather than make inflation into an issue, the Democrats complain that there isn't enough inflation. The reason is, of course, that their programmatic suggestions, to include Post Office- and New York City-Subway-style government health insurance and "spreading it around", require that our impecunious government spend ever more. As well, George Soros, Goldman Sachs, Morgan Stanley and Warren Buffett must be paid.

Here are a few pointers about inflation:

1. Buy without holding prisoners. It is time to buy the Lexus, Lincoln or Mercedes you have been thinking about. If you've been saving for a Lexus consider borrowing to buy one instead. Use the cash as a down payment on a leveraged investment.

2. If you are planning to retire, have some gold. My friend wants to keep gold under the mattress. He's holed up with a rifle, bars of gold and dry food. If you're not quite so paranoid, take a look at SPDR Gold TR (GLD) or Ishares Comex Gold Trust (IAU).

3. Consider a commmodity investment such as Powershares DBC Commodity Index Tracking Fund (DBC). This exchange traded fund tracks the Deutsche Bank Commodity Index, which is composed of light sweet crude oil, heating oil, aluminimum, gold, corn and wheat. Commodities have taken a beating this year with oil falling by more than 50% and gold falling about 34% (it is currently about 25% below its high).

4. Consider gold stocks. These have underperformed gold this year and so can catch up to the gold price as well as travel up along with the gold price during the Democrats' inflation. Some examples are Agnico (AEM), Eldorado (EG0), Kinross (KGC) and Randgold (GOLD).

5. Take a slice of Jim Rogers's thinking and buy his commodity index ETF, Market Vectors Hard Assets Producers ETF (HAP). Jim Rogers designed the index to take advantage of the global commodities boom. HAP began this past September (2008) and sold as high as 38 or so before falling to its current $23.93.

With an Obama presidency, it's going to be rock 'n roll time for commodities. Let's make some money!

Deflation? Unemployment?

Seasonally adjusted CPI



Someone just e-mailed that there is deflation in the making. The above table (in case of viewing trouble, the chart is located here) shows the Consumer Price Index over the past year. The numbers at the end, 2.6 and 4.9, indicate the inflation rate over the three months and twelve months ended September 2008. A 4.9% annual inflation rate is historically high. Note that there was recently a more than 50% fall in oil prices due to a speculative crash. Despite this, inflation in September was zero. Between 1913 and 2008 the CPI increased more than 4.9% only 19 times. That means that this year has had the 20th highest inflation in the past 95 years and represents the 21st percentile. I would call it above-average inflation. I am puzzling over how there can be deflation and inflation at the same time, but apparently today's economists and media pundits have figured out a way. It is true that the CPI deliberately excludes an element that ought to be counted toward inflation--house prices. The problem with including house prices now is that they were excluded since the 1980s and so inflation has been understated every year since 1983. If they add it in then inflation will have been 1/4 higher. It would seem that the Federal Reserve's regime has been one of price instability.

It is true that unemployment has been increasing. In February of this year unemployment was 4.8%. Unemployment is up 24%, from 4.9% in January to 6.1% in September. This would seem to reflect the decline in construction due to falling house prices.

In days gone by some economists claimed that unemployment implied deflation or reduced inflation and vice-versa. However, in the 1970s there was both high unemployment and high inflation, earning the appellation "stagflation".

Nouriel Roubini describes his fear of deflation in a Forbes article. Roubini argues that slack consumer markets, falling commodity prices, a global recession and unemployment will cause deflation. He notes that commodity prices are down 30% from their July peak. Also, inflation-adjusted treasury bonds are selling for more than non-inflation-adjusted treasury bonds. He argues that the federal government will not monetize (print money to cover) the trillion dollar bailout and that "central banks will mop up" the massive increase in the money supply in the past few months. These last points are speculative. Why would he think that a fifty percent increase in monetary reserves will be "mopped up" by the banking system? Banks are sitting on surplus reserves and they will eventually use them to make ever worse investments.

The 30% contraction in commodity prices to which Roubini refers follows a large increase in oil prices. The average oil price in 2007 was approximately equal to the current price. Thus, there was likely a speculative run up in oil prices over the past 18 months. The current oil price of $64.42 is almost triple the average price in 2002, $22.81. Comparing gold, which has fallen 26% from its 2008 high (which is the nominal all-time). In January 2001 the gold price was approximately $280 per ounce. It peaked at approximately $1,000 in March and is now about $736, 2.6 times higher than or almost triple its low in 2001. Might there have been excessive speculation in commodity markets that exceeded inflation and so caused a pull-back? These fluctuations would be greater than normal, but occur all the time in commodities markets.

The current banking problems have reduced new construction and are causing house prices to fall. However, this does not mean that there will be no inflation. The Fed's increase in monetary reserves of 60% is on top of several decades of healthy monetary expansion. Much of the monetary expansion was invested in worthless sub-prime and other real estate development. The Fed has already expanded the money supply to create unmarketable, worthless, investments to the tune of hundreds of billions if not trillions of dollars. It is difficult to picture how food, energy and commodities will not increase in price given the destruction of resources in which borrowers from banks funded through Federal Reserve Bank Credit have engaged since 1981.

Gold, Stocks and The Dollar, Oh My!

The past month has been rather confusing on the investment front. I had been in gold stocks and they plummeted like the dickens into Hades. Presumably gold went down because the dollar went up and oil went down. Now mostly in cash, I watch gold shoot up as the S&P 500, the Nasdaq and the Dow take their own ride into perdition. What new torments await investors in the first rung of hell? Does the Dow decline further and gold continue upward? Has the dollar ended its six-week ascent? Are foreign central banks and the Fed playing games with the dollar? Why would the dollar ascend and gold and oil decline weeks before the bankruptcy of Lehman Brothers and the subsidy of AIG and Freddie Mac? Do we have a free market, or a pretense of one, with the Wicked Wizard of the East making sport of it? With the Dow down better than 700 points this week, is it good idea for the Wizard to remain behind the curtain, pulling strings?

WHAT's IN A NAME?

Howard S. Katz wrote this blog here.
8-18-08

In commenting upon the recent (July-August) decline in commodity prices, Bloomberg news service recently reported:

"Commodities, measured by the CRB, are down 20 percent….”

Bloomberg, 8-15-08

This would seem to be an unobjectionable statement, mathematical in its precision. There is, alas, one problem. What is the CRB?

The Commodity Research Bureau was an organization founded in the 1930s by a group of economic types to study the commodity markets. In the mid-1950s, they started to compile an index of the most prominent commodities to do for commodity traders what the Dow Jones Index had done for stock traders. This index was called the Commodity Research Bureau (CRB) Index, and for half a century it served its function well. It told commodity traders what commodities as a whole were doing.

But in 2004, with the founding generation gone, the CRB, now a successful and established organization, had passed into the hands of a new generation. A generation educated in the new way of gathering knowledge. The new generation sought knowledge by hiring a group of authority figures with long and impressive titles to rework the CRB.

I will save you a lot of complicated mathematics and say that the new index they came up with was half crude oil. Each commodity was given a special weighting, and when all the calculations were in, crude oil and its associated commodities (heating oil, unleaded gasoline and natural gas) had a weighting of close to 50%. Since there was a high probability that the other commodities in the index would cancel each other out, the new index pretty much moved up and down with crude oil. The authority figures with their impressive titles had taken away the CRB index and in its place put in its place one commodity. It would have been like taking away the Dow Jones Index and substituting a new index based on GM. GM may be an important stock, but it isn’t a proxy for the market.

Fortunately, the new Commodity Research Bureau knew that they could not just throw out the old CRB Index. That would risk another group picking it up and taking their business away from them. So they kept the CRB Index and changed its name to the Continuous Commodity Index. The new index they called the Reuters/Jeffries CRB Index (hoping that it would be abbreviated to CRB Index and thus confused with the old index).

Of course, if one wants an objective record of what commodities have been doing for the past half century, then one needs to track the same index over that period. It would not be valid to track the DJI from 1956 to 2004 and then switch to GM all the while calling the whole thing the DJI.

In short, the new Reuters/Jeffries CRB is a worthless piece of garbage, and any commodities trader with half a brain will give it no further thought. It was to head off this kind of thinking that the modern CRB gave the new index the name of the old one and changed the old one’s name.

Now perhaps you might say, “Well, these people originated the index. They named it in the first place. They have the right to change the name to anything they want.” The problem, however, is that a name stands for an object. If a young couple has a child, they have the right to call him “Bill.” But if they have a second child 20 years later, they do not have the right to call this second child Bill and rename the first. The character of the first child has become associated with the name “Bill.” People who know him will become confused, and his reputation may (undeservedly) suffer. This is the kind of confusion inherent in the idea that definitions are arbitrary.

Let me take another example. Ever since there has been a science of economics, economists have known what money is. Money was the economic good with which you could buy things. For example, if you want to buy a car and go to the dealer, the dealer will only accept one thing in exchange. If you bring a famous painting to exchange for the car, you will be refused. They will tell you, “Sell the painting for money, and come back and give us money for the car.”

But in the 1980s, Milton Friedman announced a new “money” (which he called M-2), which included short term loans (bank certificates of deposit). This has the same problem as the painting above. It cannot be used to buy things. If you take a bank CD to the car dealer, he will tell you politely to turn it in for money and come back. Soon M-2 had spawned a dozen brothers, up to M-13.

To come up with something like this takes a Nobel Prize winner. Oh, excuse me. I forgot that there is no such thing as the Nobel Prize in economics. It was not one of the 6 prizes described in Alfred Nobel’s will. Indeed, it came along more than 70 years later. Somebody just announced that they were giving a prize in honor of Alfred Nobel. By calling their prize by this name, they were trying to give it the distinction and honor which the prize had acquired over the years. The world press fell for it hook, line and sinker.

The creation of M-2 is a serious problem because in trying to predict a rise in prices, one must take account of any rise in the money supply. If two people cannot agree on what money is, then they cannot predict when prices will rise. Prices only rise as a result of an increase in the economic good which is used to buy things.

Another of my favorite examples is the concept of capitalism. This concept was first used by Karl Marx, and he never defined what capitalism was. For the next century, Marx’s followers would call anything they did not like “capitalism.” For example, Hitler called himself a socialist (as in National Socialist – NAZI), but his leftist enemies called him a capitalist. Adam Smith never used the word. Neither did the classical economists (including Herbert Spencer). I have learned from bitter experience that whenever I hear the word, I am sure to be served up a pastry of confused gobbledegook.

The advantage of simply making up one’s own definition is that you can prove pretty much anything you want. But this is a big disadvantage in the honest search for truth. If you want your ideas to correspond to reality, then you must have accurate definitions of the concepts you use. And since any society has intuitive definitions for all its concepts, intuitive definitions which capture our minds and in terms of which we think, your explicit definitions have to correspond to these intuitive definitions. Otherwise you will confuse the two. Pretty soon you have won the argument and lost the search for truth. (The intellectual world is full of people who “cleverly” start out with formal definitions they know will lead to the conclusion they wish to reach. But these definitions do not correspond to the concept. For example, some sound money types, with whom I am in basic sympathy, defined inflation as an increase in the money supply. They did this so that they could “prove” that inflation is caused by an increase in the money supply. They have been hammering away at this point for over half a century and have still not convinced any of their opponents. If they define inflation as a general rise in prices, they will have a bit more success.)

For example, I define a witch as a woman who has magical powers used for evil. I don’t believe that witches exist. But when I define the concept, I have to put into words the (intuitive) idea of the people in my culture even if they do believe in witches. If I don’t do that much, then I will never be able to convince them that witches don’t exist.

The problem is that modern intellectuals support the arbitrary nature of definitions. It creeps into our culture, and it makes (most) people stupid. For example, do you remember being told early in the year 2000 that the DJI was going to 35,000? It was in all the papers. The New York Times and the Wall Street Journal cooperated in shoving that idea down our throat. Did you buy stocks just before the horrific bear market of 2000-2002? Well, you are allowed a few mistakes, but you are expected to learn from them.

When I first took philosophy courses at Harvard, I was told that all they could teach me was that they didn’t know anything. Hey, wait a minute. The reason I went there in the first place was that they told me they knew more than anyone else. If they couldn’t teach me anything, then what was I paying them money for? How about a class action suit to get my tuition money back?

One of the things I learned about Harvard was that of all the things I learned there, nothing worked. I couldn’t do anything with my “knowledge.” Fortunately, I studied on my own before going to college, and this gave me some ability to question my professors. After college, I continued to study on my own, and now I realize that they are nothing but a collection of frauds.

Unfortunately, this collection of frauds continues to corrupt our youth and dominate our society. They make everybody dumb. We are so dumb that we even buy Books for Dummies. In a previous generation, any book reader would have been offended by such a title, and a book with such a title would not have sold. Today’s book buyer meekly accepts it because he feels himself to be a dummy.

Unlike my college professors, readers of this blog are expected to admit and learn from their mistakes. If it doesn’t work, then it isn’t true.

If you do nothing more than read The Federalist Papers or some of the other works of the Founding Fathers, you realize that the intellectual level has collapsed over the past 2 centuries. We are now seeing the cultural and economic collapses which are the result of this. And if nothing is done to stop it, we will eventually follow the path of ancient Rome.

# # #

Howard S. Katz can be visited at http://www.thegoldbug.net.

Fed and Financial Community Cause Global Food Shortage

Gaius of Blue Crab Boulevard has posted a blog about a New York Sun article concerning food riots. The current global food shortages are a symptom of Alan Greenspan's and Ben Bernanke's excessive liquidity policies. As Howard S. Katz has pointed out in his blog, the banking system in the United States and globally has lent counterfeit Fed money (or excess liquidity) about which the financial community has been ecstatic for the past three decades (calling it stabilization of the credit markets, priming the pump, reducing unemployment, ending recession, stopping depression) to build homes that no one could pay for. At the same time, too little investment was made in commodities. Thus, the sub-prime crisis and the current global shortage of food are direct products of the banking system's lending practices and the Fed's expansion of the money supply since 1981. Ludwig von Mises, the Austrian economist, called this process malinvestment. For the past 25 years the Fed printed money and stimulated home building. Too many homes were built and sold to people who could not pay for them. Too little investment went into expansion of food and commodity production. The sub-prime crisis of today results from the mistakes that the banking community made in response to the hot Fed money that Greenspan and Bernanke have been creating under four presidents, Reagan, Bush, Clinton and Bush II.

The Bush administration's solution to the malinvestment of the past three decades has been...more malinvestment. The Bear Stearns bailout, the current loose monetary policies of the Bernanake Fed and further government transfers to banks to prevent defaults from incompetently made loans keep real estate prices high and continue the massive malinvestment that has occurred in the housing sector.

From an investment standpoint, it is clear that commodities will be hot for the next few years as rising interest rates freeze out new investment in commodities (see Howard S. Katz's blog for more on what he calls the "commodity pendulum"). From a moral standpoint, the American public should be ashamed of itself for allowing this orgy of self indulgence among the various players in the financial community; for allowing transfer of wealth from people who need to eat to wealthy stock investors and hedge fund managers; and for allowing the incompetence and mismanagement that the economics establishment and the Fed have demonstrated.

To quote Gaius:

"The New York Sun reports on a trend that is not at all pretty. In some areas of the country, rice, flour and cooking oil are in such short supply that retailers are limiting the amount people can purchase. This is happening right here in the United States.
The curbs and shortages are being tracked with concern by survivalists who view the phenomenon as a harbinger of more serious trouble to come. "

Savings Accounts in Foreign Currency

Jim Rogers was on Bloomberg radio on Sunday morning at 6:25 am and he was talking about the dollar declines, Helicopter Ben's humming propellers and the Chinese stock market. Two of Rogers's ideas that caught my attention were investments in agricultural commodities and in the renminbi, the Chinese currency. Unfortunately, it is inconvenient for small investors to purchase Chinese currency because of the Chinese government's low-valuation strategy. However, where you can invest easily is in various currencies through Everbank. The minimum deposits range from $10,000 to $20,000 (for the indexes). Unfortunately, Everbank does not offer renminbi cds, but they do have 15 other cds including Hong Kong.

Powershares has commodity index products including a DB agriculture fund.

It is unfortunate that I cannot trust the dollar now, but given the irresponsible history of the Fed, I would rather keep my savings in another currency and/or secure it through commodities tracking investments.

Howard S. Katz's "Bad News"

Howard S. Katz has posted a fascinating blog entitled "Bad News" which I reproduce below:

>"I have bad news for all young Americans.

"You were born into what used to be the greatest country in the world. The Founding Fathers of this country fought for our liberty in the 18th century. They won, and they set up a government whose purpose was the protection of everyone’s rights. The first President of this country was known for being unable to tell a lie.

"In 1933, however, the country fell into the hands of a collection of scoundrels. They said, “Rob from the rich and give to the poor.” Then they set up a system which robs from the poor and gives to the rich. In order to win support for this system, they told a bunch of lies.

"Then when these lies had become accepted as commonplace, they made up more lies. Then more lies still. The whole structure resembles an onion. If you are smart enough to discover an important truth and peel off one layer of the onion, you think that you are seeing reality. But then there is another lie to be peeled off and yet another lie beneath that. Let us take the current issue facing America, the “interest rate cut” of Sept. 18, 2007. The phrase is in quotes because, while not literally a lie, it was a half truth, and a half truth with the intent to deceive. (See blog 9-24-07.)

"The argument in favor of the “rate cut” was that the country was on the verge of a recession. Please to define recession? Well, John Maynard Keynes argued that it was not having a lot of goods that made a country rich. Just the opposite, what made a country rich was having a lot of demand. It was necessary to have an intense desire for economic goods, and having this desire would in some way create the goods.

"Let us test this theory against the empirical facts. In North Korea, for example, they have unbelievable poverty. Ditto, ditto, Tibet, Albania and most of black Africa. Is the United States rich and North Korea poor for the simple reason that we have more demand? And anyway, how would you measure demand to prove whether this was true or false?

"In reality, a human being starts to demand economic goods almost from his first breath. He cries for food. Then he cries for a rattle, then a bicycle. Then he asks for a car. Then he gets a job so that he can get a better car. All of his life is spent demanding. The problem in an economy is not to create the demand. There is plenty of demand. What America (and Britain) did starting about 1790 was to figure out a way to increase the quantity of goods to satisfy that demand. That took a number of brilliant men. At that time, all of the world was demanding (and had been demanding since the creation of the human species), but only the Anglo-Saxon countries (and later a number of other countries which imitated them to a degree) figured out how to satisfy much of that demand.

"Now, what about recessions? According to the Keynesian theory it is bad to not have enough demand. But it is equally bad to have too much demand. And since there is no way to measure demand, we must depend on the economic authority figures to tell us whether demand is too high or too low. An economy with demand too low is said to be in recession or depression. An economy with demand too high is said to be overheating and suffering from inflation. And what the Keynesian economists are always searching for is a Goldilocks economy – one where the demand is just right.

"One thing is impossible under this theory,: to have demand too low and too high at the same time. Or to put it in their lingo, it is impossible to have a recession and an overheating (inflationary) economy at the same time.

"But two months ago, Ben Bernanke, the chairman of the Federal Reserve, said that the economy was in danger of inflation. Indeed, for the first 8 months of 2007 the official consumer price index has risen by 3%. If this continues for the remainder of the year, then 2007 will come in at a 4.5% rate. And this would be the highest rate since 1990. But just last week, in the twinkling of an economic eye, Bernanke said that the economy was in danger of a recession. (I should mention that most pieces of economic data are very erratic, and it is necessary to watch a given index for at least 6 or 12 months to even know whether it is going up or down. Indeed, all of the data issued over the most recent two months are labeled preliminary. They are often revised, and sometimes revised sharply. A piece of data which was reported two months ago might be revised away next month and discovered never to have happened.)

"If you want to understand what is really going on, then the U.S. economy did not suddenly go from too much to too little demand. There has been too much demand for every one of the past 52 years because prices have risen every year since 1955. And during this period there have been nine officially declared recessions. In every one of these, there has been too much demand and too little demand. Nobody cares that this is impossible. To be a Keynesian economist, one must, like the Queen of Hearts, “believe 6 impossible things before breakfast.” (To believe the impossible, it is helpful to give different meanings to the same concept. For example, sometimes demand means a willful desire, as when a baby cries; sometimes it means effective demand, i.e., demand backed up by the money to buy.)

"But the sad thing, dear young American, can be seen if we consider a line from Hamlet. “Though this be madness, yet there be method in’t.” Indeed, modern establishment economics is madness. Yet there is a method in it. The method is to rob from the poor and give to the rich. From 1972, real wages in America have been going down. From 1974, the stock market has been going up. (During the age known as the period of the robber barons the real wages of the working man went up, and the stock market went sideways.)

"The Federal Reserve does not have the ability to manage the economy. From 1836 to 1914 there was no central bank in America, and our economy was the greatest in the world. During this time prices remained stable. Today the bankers (government and private) have the privilege to create money, and the classrooms are filled with “economists” teaching that the creation of money out of nothing is the “road to plenty.”

"One of the rich people who made big bucks from the Greenspan issues of money in the 1990s was hurting this year because the creation of money slowed down. This gentleman, Jim Cramer, went on YouTube on August 6 and threw a public tantrum. (You can find it via a Google search on his name and then click YouTube – Market Meltdown.) The reason that the Federal Reserve “lowered interest rates” (meaning agreed to print money) on Sept. 18 was that it was trying to balance the rich people like Jim Cramer with the poor people who do not make any noise. The squeaky wheel got the grease. And all the pseudo-economics is a rationalization.

"This is the world into which you were born. The Government steals from the poor and gives to the rich. How much is to be stolen is decided by the method of the 3-year old who throws a tantrum in the supermarket. Paper money is the money of the bankers. Gold money is honest money. Gold is the money of the people."

How to Re-Monetize Gold

Lenny Rann responds to my earlier blog as follows:

Rann writes:
>"We have exceeded the ability to regulate our currency along the gold standard, we have produced too much to cover with such a scarce resource. Much that we produce are not commodities that exist in the natural world, i.e. the richest man in the world made it on intellectual property. Today, copper and steel seem to define the relationship between liquidity and commodity prices (inflation?) Please see the five year chart for the following copper producer (PCU) and steel manufacturer (SID) http://finance.yahoo.com/q/bc?t=5y&s=PCU&l=on&z=m&q=l&c=sid. Whether we are in a metal commodity bubble, I don't know. Almost all of my holdings are in metals and mining, but I am reducing my positions and moving back to petroleum."

It doesn't matter what resource is used as a standard. But the problem isn't that gold fluctuates too much; that there is too much productivity; or that the economy is too complicated for the dollar to be backed by gold. The problem is that we have increased productivity too little to merit the increases in the number of dollars.

You could use platinum, iron or silver, as a monetary standard, but historically gold has been used and people feel comfortable with it. You could use other things as well, say oil, it's arbitrary in the sense that people expect coins to be shiny. The government still makes them shiny because people feel comfortable with shiny coins. Coins could be orange, but people would be uncomfortable.

Gold is a good choice because people feel comfortable with it.The issue is whether to have a standard or not. It doesn't matter if commodities fluctuate in price. They don't fluctuate in only one direction, so over the long run there is more stability with a commodity standard than without one. The arguments against a standard are just an excuse because some people want inflation. The people who favor inflation are: commercial bankers, investment bankers, hedge fund managers, corporate executives, left wing academics, Keynesian economists, the American Enterprise Institute and debtors. The people who shouldn't want inflation are wage earners and savers.

There are many people who both benefit and lose from inflation. People who are bad stock market investors lose, because inflation causes unpredictable shifts in the stock market which make many people do irrational things like withdrawing their money when the market bottoms. Also, people are often both real estate owners who hold a fixed-rate mortgage and also are wage earners. Inflation will help them via the fixed rate mortgage but it will hurt them because it reduces the real value of their wages.

The last three decades have seen flat wages (which began in the 1970s, right after the gold standard was abolished) coupled with widespread home ownership. So the effects of inflation are complicated. The poor who can't borrow are hurt the most. The very wealthy are helped the most. Risk-averse savers are hurt. Risk-taking investors with good market timing and people who take large mortgages at fixed rates relative to their incomes are helped. Wage earners are hurt. Stock holders are helped.

The chief thing that changes when you don't have a gold or other standard is that the central bank has the flexibility to increase the money supply faster than the rate of increase in productivity. M3, the now-discontinued measure of global supply of US dollars, has been increasing at 8% per year, three times the rate of US productivity increases. If the Fed could match increases in the money supply to productivity increases in the US economy it would be ideal. But they cannot because of political pressure from the financial community, the business community and Keynesian and left-wing academics. Also, the Fed makes many mistakes.

The effects of money supply increases are felt in the long run and can potentially become catastrophic for the United States and its citizens.The shift from the gold standard to pure paper money was completed in 1972, under President Nixon, and workers' real wages started stagnating almost immediately thereafter.

According to David Wozney, a poster on Howard Katz's Gold Bug blog , "A 'Federal Reserve Note' is not a U.S.A. dollar. In 1973, Public Law 93-110 defined the U.S.A. dollar as consisting of 1/42.2222 fine troy ounces of gold."

I read on the web that there are 368,250 bars of gold in Ft. Knox, with each bar weighing 400 oz. 400 x 368,250 x $750 (approximate price) = $110.5 billion. The government stopped publishing M3, which included foreign deposits, but it is likely in the area of $11.3 trillion. That means that while the government has defined a dollar to be 1/42.2 oz. of gold, according to one observer it has gone ahead and printed 185,000 dollars for every ounce of gold that exists anywhere in the world.

Eventually, dollar holders may realize that the dollar has no validity. It has not been backed up "by the US economy"; it has not been backed up by the good faith of the US government (which has been increasing global money supply at 8 percent per year while US productivity has been increasing at 2.5 percent per year); and it has not been backed up by gold.

I would assume that to re monetize gold you need to redefine the dollar as 1/750th oz. of gold, or the current market value, and use the amount in Ft. Knox as fractional reserves.