Plenty of Time to Invest in Gold

Ned W. Schmidt features the above graph on his Kitco commentary and on his newsletter's website (the newsletter costs $149, a reasonable price for an investment letter).

The price of gold for the past few years seems to have tracked the rate of monetary growth, but recently diverged sharply. The reason, as Schmidt shows, is contraction of industrial loans leading to less monetary growth. However, the monetary base expanded exponentially, far more rapidly than money itself, which would explain the divergence along with the contraction in loans.

The point that Schmidt is making is very good. First, note on the graph that at least until '08 the gold price has tended to anticipate monetary expansion but trail monetary contraction. Gold investors underestimate the possibility that the Fed will raise rates and contract the money supply. They are right in the long term but can be wrong in the short term. Second, the gold investors have diverged from monetary growth since '08. This may be a larger than usual short term error. Third, it is true that in the short run the contraction in loan activity in a fractional reserve banking system leads to reduced inflation or deflation. But longer term, over the next couple of years, there will be heavy pressure to inflate further, as Schmidt points out. Moreover, government borrowing will create pressure on the Fed to expand the money supply to purchase additional bonds. Until recently, foreign governments have been buying US debt to keep the dollar strong. There are signs that this policy will abate as China has been talking about tightening its money supply. On the other hand, there may be pressure to inflate in Europe as southern European countries suffer from socialist fiscal mismanagement.

Schmidt asks:

"Will that red line turn positive? Yes. Already the lack of economic growth inspired by weak U.S. money supply growth is evident in the economic statistics. Preliminary report on the U.S. economy for the fourth quarter of 2009 was dismal, despite the praise of journalists unschooled in economics. That weak economic growth will increase the pain felt by the Obama Regime and the U.S. Congress. With U.S. national election only nine months in the future, great pressure will be applied to the Federal Reserve. Bernanke may finally get to use that helicopter, either from which to hurl money or to seek asylum in some other land."

In fact, the helicopter left the heliport years ago. The tripling of the monetary base in '08 provides the banks with plenty of liquidity. Government will take advantage of it if consumers cannot. Government spending is inevitably inflationary. Inflation is the difference between the value that the investments facilitated by the new money create and the amount of new money. Government does not create value, it merely allocates consumption. So when most of the new money is borrowed by government, hyper-inflation is likely.

This provides a simple explanation for the recent weakness in gold. But longer term the liquidity-addicted financial-bureaucratic complex will take advantage of the liquidity to expand relentlessly.

William Graham Sumner on 19th Century Corporate Fraud and Government Subsidies to Business

The Progressive movement that developed in the 1890s into one of the most important political movements of the twentieth century was in large part a reaction to the development of big business and the trusts of the late nineteenth century. Theodore Roosevelt, a Republican as were the vast majority of Progressives, ultimately believed that nationalization or at least federal licensure of big business firms was necessary to ensure that trusts remained good and reasonable.

But did the very existence of trusts depend at least in part on government subsidies in the first place? This is what William Graham Sumner wrote in 1883 about corporate fraud and government subsidies to business:

"I have said something disparagingly in a previous chapter about the popular rage against combined capital, corporations, corners, selling futures, etc., etc. The popular rage is not without reason, but it is sadly misdirected and the real things which deserve attack are thriving all the time. The greatest social evil with which we have to contend is jobbery. Whatever there is in legislative charters, watering stocks, etc., etc., which is objectionable, comes under the head of jobbery. Jobbery is any scheme which aims to gain, not by the legitimate fruits of industry and enterprise, but by extorting from somebody a part of his product under guise of some pretended industrial undertaking. Of course, it is only a modification when the undertaking in question has some legitimate character, but the occasion is used to graft upon it devices for obtaining what has not been earned. Jobbery is the vice of plutocracy, and it is the especial form under which plutocracy corrupts a democratic and republican form of government. The United States is deeply afflicted with it, and the problem of civil liberty here is to conquer it. It affects everything which we really need to have done to such an extent that we have to do without public objects which we need through fear of jobbery. Our public buildings are jobs--not always, but often. They are not needed, or are costly beyond all necessity or even decent luxury. Internal improvements are jobs. They are not made because they are needed to meet needs which have been experienced. They are made to serve private ends, often incidentally the political interests of the persons who vote the appropriations. Pensions have become jobs...The California gold-miners have washed out gold, and have washed the dirt down into the rivers and on the farms below. They want the Federal Government to now clean out the rivers and restore the farms. The silver-miners found their product declining in value, and they got the Federal Government to go into the market and buy what the public did not want in order to sustain (as they hoped) the price of silver. The Federal Government is called upon to buy or hire unsalable ships, to build canals which will not pay, to furnish capital for all sorts of experiments, and to provide capital for enterprises of which private individuals will win profits. All this is called 'developing our resources' but it is, in truth, the great plan of all living on each other.

"The greatest job of all is a protective tariff. It includes the biggest log-rolling and the widest corruption of economic and political ideas...The farmers have long paid tribute to the manufacturers; now the manufacturing and other laborers are to pay tribute to the farmers. The system is made more comprehensive and complete, and we all are living on each other more and more...

"...Attention is all absorbed by the clamorous interests, the importunate petitioners, the plausible schemers, the pitiless bores. Now who is the victim? He is the Forgotten Man...."