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.

Ethanol and Inflation

Don Surber of the Charleston Daily Mail blogs that Heather Stewart of the London Observer has covered the story that Al Gore's fight against global warming is now starving the third world. Heather Stewart notes that America's thirst for environmentally friendly biofuels is driving up food prices around the world as farmers use corn for ethanol rather than food.

In February, Gold Bug Howard S. Katz blogged that

"In 2005, Archer, Daniels, Midland (the world’s largest processors of soybeans, corn, wheat and cocoa) persuaded the U.S. Congress to vote a subsidy of 51¢ per gallon to convert corn to ethanol. This means that, when you put 10 gallons of gas in your car these days at a pump price of $2.25/gallon, you are actually paying $2.76 for the ethanol gallon. You pay $2.25 at the pump, and another $0.51 is taken from you by the Government...the manufacture of ethanol from corn is not a very efficient process. It takes a lot of corn to make a small amount of ethanol. David Pimentel (professor of agriculture at Cornell) estimates that it would take 100 percent of the country’s corn crop to increase the fuel supply by 7%...With this extra demand for corn, the price of corn started to rise, and between August 2006 and January 2007 the price of corn almost doubled (from $2.20/bu to $4.20/bu)."

Katz also pointed out that the increasing corn prices would filter into meat prices since corn is a key foodstuff for cattle. As well, he noted it is pressuring the cost of food Mexico.

Serber reminds us to:

"not blame the United States because Zimbabwe, which once exported food, must import it thanks to Robert Mugabe's racist seizure of farmlands."

Of course, third world governments are corrupt, and naive, left wing idealists play into government interventionists' and inflationists' hands.

Surber adds:

"Last month, food prices rose 4% nationally....Corn product chips, tortillas, enchiladas, will go up 25 to 30% at the restaurant level if things continue as they are now...Analysts blame a combination of drought, freezing weather, and the rising demand for corn due to the popularity of ethanol. With ethanol production expected to double in the next four years, some analysts say today's prices may look like a bargain in comparison."

But the chief cause of rising prices, Fed monetary policy, is excluded from this list. Back in February Katz also predicted that beef prices would rise thanks to Congress's ethanol subsidy. But the policy underlying inflation is the Fed's.

Surber now notes that:

"Another favorite Memorial Day snack that may take a bite out of your wallet is beef.My Pittsburgh bureau chief supplied the reality check by actually buying groceries: I noticed that the chicken on special this week, fryers and split fryers etc, generally priced at $.99 Lb are on special at $1.19. Filet Mignon special last year at $6.99 lb for whole filet is $8.99. Guess you could say ethanol production hurts the poor and the rich!"

Of course that is true. But blaming particular causes for price increases plays into the inflationist establishment's hands. There are two US causes to the problem that Don Surber notes: (1) Government intervention resulting in poorly thought-through policies like ethanol and (2) price inflation due to the Fed's monetary expansion. A third problem is third-world corruption. A fourth problem is European jealousy of and hostility toward America. It difficult for me to talk about the London Observer or Heather Stewart or Europeans' opinions of America with a straight face. I'd prefer to leave them running in place on hamsters' treadmills, swinging from trees and eating bananas, as long as they don't run wild and return to their millenial habit of murdering Jews.

Both of the policies, government intervention and inflation, make corn and beef prices higher, hurting almost everyone except for those who benefit from them, i.e., Archer Daniels Midland, inflationist bankers, big business, hedge fund operators and real estate developers.

Hasselbeck versus O'Donnell; Buckley versus Vidal

Jonah Goldberg of NRO finds ABC News's claim that Rosie O'Donnell's and Elizabeth Hasselbeck's debate on Barbara Walters' "The View" "harkens back to a Vietnam-era exchange between liberal Gore Vidal and conservative William Buckley."

Larwyn has provided the following link to the New Editor which has clips of both the Vidal/Buckley debate (which I recall took place in the summer of 1967 when I was a camper at Camp Woodcliff in Sawkill, NY) and the O'Donnell/Hasselback debate.

There are two similarities. Both debates are based on mistaken assessments and characterizations about, respectively, the Vietnam and Iraqi Wars. For example, Vidal claims that North and South Vietnam were one country, a mistaken claim that Mark Moyar debunks in Triumph Forsaken. Second, you had some people like Buckley and Hasselbeck both favoring the respective wars and Vidal and O'Donnell both opposing them.

However, there are two big differences. First, neither Buckley nor Vidal are as good looking as Hasselbeck but both are better looking than O'Donnell. Second, Buckley and Vidal are extremely articulate and are the products of education and refinement. In contrast, Hasselbeck and O'Donnell lack these characteristics.

Part of the problem with today's public discourse is that the educational system has failed to prepare Americans to express themselves coherently. The mass media, especially television, have contributed to this inability. College courses no longer require good writing. Opinions count more than learning. Self-esteem and self-indulgence take priority over self-discipline and education.

The difference between the Hasselbeck/O'Donnell and Buckley/Vidal debates is that in the 1960s the public required its television commentators to be well educated. Today, the public commentators are circus clowns.

Will TIAA-CREF Participants Put Their Money Where Their Rhetoric Is?

Charles Fishman quotes quite a few academics in his book The Wal-Mart Effect. Fishman argues that Wal-Mart should take various actions that would reduce its profit margins but improve its corporate social responsibility. Such actions might even potentially increase stock prices if the public responds positively to Wal-Mart's better public image. The academics whom Fishman quotes universally believe that Wal-Mart stockholders should live with lower returns in exchange for Wal-Mart's enhanced social responsiblity.

I have previously suggested that academics put their money where there mouths are:

"Why doesn't TIAA-CREF, the college retirement fund, take over Wal-Mart? It probably has the capitalization. Then Wal-Mart can be improved socially,and if the professors' stocks drop 30 percent, they will be glad because they saved the third world, right? I haven't heard any screams from MIT, the University of Missouri or other universities for such a strategy."

In order to pursue this proposal, I have just sent the following e-mail to the governing board of TIAA-CREF:

Dear CREF/TIAA Board:

As a TIAA/CREF participant I would like to put a resolution before the board that CREF should devote a 25 percent portion of its diversified stock portfolio to acquire shares in Wal-Mart in order that university and related professions may influence corporate policy and social responsiblity at Wal-Mart. Asking CREF participants to invest in Wal-Mart to improve the lot of 1.8 million Wal-Mart employees is a small sacrifice.

Would you please let me know how to make this proposal before your plenary meeting? Thank you,

Mitchell Langbert, Ph.D.