can I rant about Paul Krugman and gold?
secondrepublic
Posts: 2,619 ✭✭✭
I made the mistake of reading Paul Krugman's article on gold in the NY Times. The article was predictably bad, but the reader comments were even more depressing.
I first encountered Krugman's work in the 1990s as a grad student. He made his name as an academic economist - and eventually won a Nobel prize - in international trade theory. International trade is specialty area of economics, just like orthopedic surgery is a speciality in medicine, and like tax law is a specialty among attorneys. You can be an expert in a speciality, but that doesn't carry over to all the other fields in your profession. An ortho. doc isn't going to have any great insights in radiology, and you don't want a tax lawyer doing your slip-and-fall case. The same is true for Krugman. He writes mostly way outside of his specialty; but because he has a Nobel prize, anything he says has this patina of infallibility for people who don't know any better. (These are the same people who totally disregard what many other Nobel prize winning economists - like Hayek and Friedman - have said which goes directly against what Krugman argues).
In a nutshell, Krugman's argument is that gold is pretty much useless, should play no role in supporting a currency, and the only people who want it are crazed right wingers (and ha ha, it's recently fallen in price, so Krugman's brilliant and those bought gold are idiots). Many of the commentators parroted these arguments -- one guy argued that printing tons of money out of thin air like the Fed has done isn't inflationary. My response is, maybe not, but it's coming. This kind of denial of reality reminds me of a 500-pound guy eating a plate of cheeseburgers -- yep, the heart attack hasn't hit yet. But eventually it will. You can't just print money ad infinitum without huge consequences.
But I digress. If gold is so useless, why does our government keep 70% of its financial reserves in gold? In fact, it's even higher than 70% because the gov't "values" its gold arbitrarily at $42/oz, way below market price. So in reality the US government keeps almost all of its reserves in gold. They don't stuff the bank vaults at Fort Knox with Euros, or Japanese Yen, or stock certificates for Apple or Google. Yet when Ben Bernanke was asked by Ron Paul why so much gold is kept in reserve by the government, he said "tradition." Seriously? The government's decision of what reserves to keep is based almost entirely on... tradition? That's what all the smart PhDs in the Fed and Treasury concluded? It's almost laughable.
If you met someone who kept 70% of his assets in gold, you'd conclude he was a huge gold bug. Do we conclude from this that Obama, Bernanke and the others are the biggest gold bugs out there? What about China and Russia? The small-time retail buyer in the US is only a tiny factor in overall world gold demand. The big central banks and buyers in the Middle East and Asia are the ones that have been driving demand. In fact on a net basis, per trade statistics, the US has seen outflows of gold over the past decade. So demand is clearly not being driven from the US anymore. What do all these smart people in other countries know that we don't know? Why are the loading up on gold while Americans, on a net basis, have been selling?
The idea that returning to a gold standard is "crazy" is another thing that bugs me. One commentator argued that the post-war period (1946-1973) proves we don't need a gold standard. Hello? We had a gold standard - called the Bretton Woods system, in place until 1971. There have been various types of gold standards over time; the one from the 1870s to WWI was different than the 1919-1933 system, which also differed from Bretton Woods. But the point is that all of these systems worked. They sometimes allowed painful economic deflations to occur, but they kept prices stable (mandate of the Fed, anyone?) and helped make the US the highest-wage, highest-income country in the world as early as the 1880s... precisely why so many people emigrated to the US through Ellis Island during that time.
OK... rant over
I first encountered Krugman's work in the 1990s as a grad student. He made his name as an academic economist - and eventually won a Nobel prize - in international trade theory. International trade is specialty area of economics, just like orthopedic surgery is a speciality in medicine, and like tax law is a specialty among attorneys. You can be an expert in a speciality, but that doesn't carry over to all the other fields in your profession. An ortho. doc isn't going to have any great insights in radiology, and you don't want a tax lawyer doing your slip-and-fall case. The same is true for Krugman. He writes mostly way outside of his specialty; but because he has a Nobel prize, anything he says has this patina of infallibility for people who don't know any better. (These are the same people who totally disregard what many other Nobel prize winning economists - like Hayek and Friedman - have said which goes directly against what Krugman argues).
In a nutshell, Krugman's argument is that gold is pretty much useless, should play no role in supporting a currency, and the only people who want it are crazed right wingers (and ha ha, it's recently fallen in price, so Krugman's brilliant and those bought gold are idiots). Many of the commentators parroted these arguments -- one guy argued that printing tons of money out of thin air like the Fed has done isn't inflationary. My response is, maybe not, but it's coming. This kind of denial of reality reminds me of a 500-pound guy eating a plate of cheeseburgers -- yep, the heart attack hasn't hit yet. But eventually it will. You can't just print money ad infinitum without huge consequences.
But I digress. If gold is so useless, why does our government keep 70% of its financial reserves in gold? In fact, it's even higher than 70% because the gov't "values" its gold arbitrarily at $42/oz, way below market price. So in reality the US government keeps almost all of its reserves in gold. They don't stuff the bank vaults at Fort Knox with Euros, or Japanese Yen, or stock certificates for Apple or Google. Yet when Ben Bernanke was asked by Ron Paul why so much gold is kept in reserve by the government, he said "tradition." Seriously? The government's decision of what reserves to keep is based almost entirely on... tradition? That's what all the smart PhDs in the Fed and Treasury concluded? It's almost laughable.
If you met someone who kept 70% of his assets in gold, you'd conclude he was a huge gold bug. Do we conclude from this that Obama, Bernanke and the others are the biggest gold bugs out there? What about China and Russia? The small-time retail buyer in the US is only a tiny factor in overall world gold demand. The big central banks and buyers in the Middle East and Asia are the ones that have been driving demand. In fact on a net basis, per trade statistics, the US has seen outflows of gold over the past decade. So demand is clearly not being driven from the US anymore. What do all these smart people in other countries know that we don't know? Why are the loading up on gold while Americans, on a net basis, have been selling?
The idea that returning to a gold standard is "crazy" is another thing that bugs me. One commentator argued that the post-war period (1946-1973) proves we don't need a gold standard. Hello? We had a gold standard - called the Bretton Woods system, in place until 1971. There have been various types of gold standards over time; the one from the 1870s to WWI was different than the 1919-1933 system, which also differed from Bretton Woods. But the point is that all of these systems worked. They sometimes allowed painful economic deflations to occur, but they kept prices stable (mandate of the Fed, anyone?) and helped make the US the highest-wage, highest-income country in the world as early as the 1880s... precisely why so many people emigrated to the US through Ellis Island during that time.
OK... rant over
"Men who had never shown any ability to make or increase fortunes for themselves abounded in brilliant plans for creating and increasing wealth for the country at large." Fiat Money Inflation in France, Andrew Dickson White (1912)
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Comments
Tenure is the heart of all evil as it allows these toads the time to create mischief on someone else's dime.
I know of a guy who is as least as bad..Joe Stiglitz..he will drive you just as nuts.
The US owns the world's reserve currency. And because of that our primary mission is to milk it for all it's worth before it's taken away from us. You don't milk
your reserve currency by promoting gold as a sidekick. You leave gold for all the other nations to fight over since they don't own the world's reserve currency. So they
go after the next best thing. Central Banks don't keep 31,000 tonnes of gold vaulted for kicks. When CB's want debts permanently extinguished, they request gold, not fiat.
Krugman labels gold as an unsafe investment because it lost 65% of its value from 1980 to 1982 and then another 30% from Sept 2011 to today. All of that's true. But how
much did the stock market lose from 1878 to 1894, or from 1929-1936, or from 1966-1982, or from 2000-2003? The answer is from 40% to 90%. Does that make the DOW
an unsafe investment. One would assume so for the same reasons that gold is unsafe. His gold buggerism is in direct conflict with what secondrepublic already stated. That is,
that the biggest industrial nation was built on the 19th century gold standard. It wouldn't have happened on a fiat money standard. England had the same experience when their
nation flourished. Same comment for France, Spain, Netherlands, and Portugal over the past 600 yrs. A precious metals monetary standard built each of those nations into the
world's next superpower. The next world superpower is coming around and it's going to be built utilizing a precious metal monetary standard of some sort. Immigrants flocked
to the US in the 1800's and early 1900's because of what the gold standard did for us. Hard to say if we could even revisit that tremendous growth from the 1800's again if we
returned to a gold standard. For starters, you'd have to totally revamp the current financial system and take apart all the too big to fail banks.
I mentioned in another post that gold in central bank vaults had huge symbolic value worth many times more than the gold itself. The fiat bugs didn't understand that. I see 31,000
reasons to understand it.
by Paul K.
I always advise doubters to
go back to 1913, when most countries minted gold coins, and compare
the gold content in those coins to the value of those currencies now.
Start with the US dollar. The dollar was worth .048375 oz of gold.
That is worth $71.59 now in current dollars.
UK Pound? Did twice as bad as the US $.
Russian Ruble? Those rubles are long gone.
German Mark? Revalued, those marks are long gone.
Italian Lire? 20 Lire gold coin contained .1867 oz of gold. Devalued many times.
The (well deserved) lauded Swiss Franc? Same .1867 per 20 francs. .09335 oz per franc.
That is worth $13.81 in US $ now, one franc is worth $1.08 now. That is the best.
Monetary policy does not even recognize gold as a factor anymore. While it has a most interesting set of fans and detractors in the marketplace, the total value of above ground gold is a drop in the bucket of worldwide assets. All the paper gold is just speculation and IMHO often manipulated as is the silver paper market. A very slippery slope for the average guy.
I enjoy watching and occasionally buying and selling numismatic gold, but my diversified portfolio has less than one percent in metals. To each his own.
The gold has sat in vaults for decades (assuming it's all still there), but to say the government doesn't "consciously" keep gold as a reserve is off base. It's not remotely realistic to believe the US, Germany, France, etc. all keep so many thousands of tons of gold in reserve without having thought about it very carefully. If it didn't matter, why did Nixon slam shut the gold window in 1971 (and thereby breach the agreements made at Bretton Woods) when France and others tried redeeming their paper dollars for gold? Of course they care about how much gold they have. They recognize that it's the ultimate financial reserve. That's why nobody, outside of a few kooks, has ever suggested that the Treasury sell off the US gold holdings. Isn't it curious that even Krugman et al. never suggest such a thing? Even they recognize that having "nothing in the vaults" will destroy confidence in the US currency.
The point is that if gold is a wise thing for governments to hold for something as fundamental as instilling confidence in its currency and its government, it's certainly not dumb for individual citizens to hold it. Yes, the price denominated in dollars has fluctuated. But the general trend is all in one direction. In 1932 you could walk into a bank and trade a $20 bill for a $20 Saint Gaudens gold coin with almost an ounce of pure gold in it. Even in gold's darkest days when fiat was riding high (around 1999/2000) you still needed at least $250 to get the same amount of gold. That's 12x what you needed in 1932. Now you need almost $1,500 to get the same gold -- about 75x what you needed in 1932.
<< <i>You might not like what he is saying, but it's an excellent article. >>
I don't say this to be insulting, but if you think this is an "excellent" article on gold, I really suggest you need to read a lot more things that have been written in this area. Even if you strip out Krugman's usual claptrap about conservatives, Fox News, etc. (which have absolutely nothing to do with the main drivers of gold's price -- which is buying by China, Russia, etc.), there's nothing original or insightful at all in Krugman's article. There's no argument in there that hasn't been made a thousand times in other forums and by other authors. It's just a jumble of political attacks, criticism of those who buy gold, and attacks on those who advocate for the gold standard. It's amateurish for the enormous facts it ignores -- including that the US has been a net seller over the last decade, per official trade statistics, while central banks in Russia and China have been adding hundreds of tons to their holdings. An article which tried to address that, rather than navel-gazing at what's happening in the US alone (and even there, missing much of the story) might be insightful or even excellent. This effort by Krugman isn't even average.
It's unfortunate that you find it necessary to denigrate Krugman (and me) in order to express your views. I simply do not believe in the gold standard. And, I am not alone in that belief.
<< <i>I don't say this to be insulting, but if you think this is an "excellent" article on gold, I really suggest you need to read a lot more things that have been written in this area
It's unfortunate that you find it necessary to denigrate Krugman (and me) in order to express your views. I simply do not believe in the gold standard. And, I am not alone in that belief. >>
That makes 2 of us....On this perma bull board, we are in the minority.
<< <i>
<< <i>I don't say this to be insulting, but if you think this is an "excellent" article on gold, I really suggest you need to read a lot more things that have been written in this area
It's unfortunate that you find it necessary to denigrate Krugman (and me) in order to express your views. I simply do not believe in the gold standard. And, I am not alone in that belief. >>
That makes 2 of us....On this perma bull board, we are in the minority. >>
Can I join that club?
main drivers of gold's price -- which is buying by China, Russia,
This I disagree with completely. The main driver of golds price is speculative buying of paper gold. Do you think China and Russia drove the price to $1900? You think they want to "pay up". Russia might be that stupid, but not China.
Gold was probably undervalued at 300-400 for a long time. It was underowned--everyone wanted stocks. The equity market blew up in 2000 and the only relative values were gold and real estate. Real estate blew up, so all that was left was gold. Has nothing to do with central bank buying (although their support doesnt hurt), or Indian wedding ceremonies or US debt. Gold has now reached a level at which it is probably appropriately priced. And it will most likely trade in a range for many years until some material event changes perceptions.
Knowledge is the enemy of fear
In any event, whether or not we're on a gold standard shouldn't be based on "belief"... there should be arguments and evidence put forth to explain a position. There's none of that in Krugman's article.
Cohodk, feel free to post a link supporting your argument on the reasons for gold's price rises over the last 11 years. I've never seen anyone attribute such a long trend (versus just daily movements) to "paper" trading.
In God We Trust.... all others pay in Gold and Silver!
ed4sp
Just to stir the pot ? ! ? !
HH
1947-P & D; 1948-D; 1949-P & S; 1950-D & S; and 1952-S.
Any help locating any of these OBW rolls would be gratefully appreciated!
I did not say it was bad to hold gold, just that the economy is not managed with it. GDP and the money supply however we choose to calculate that term has grown exponentially since the early 70s, while the government's holdings at Ft. Knox are unchanged. GDP was 1.113 trillion in 1971 and in 2012 GDP was 15.094 trillion.
Now the argument can be made that gold was about $40 an ounce compared with the current $1,477 and thus there is more gold value now. But I go back to the idea that the government is not actively managing the gold reserves, for good or for ill.
<< <i>seriously... there are 100 million americans who are true believers in stocks, etc... can't they just leave the 50 of us who believe in PMs alone?
What happened was, a few million Americans joined the "true believers" with "the faith" and participated in the Relic Revival for a few years. And oh what a party!
The singing of hymns, the dancing around the idols, the reading of the scriptures, Gold is at ANOTHER NEW HIGH, can we get a halleluja?
Well, the apocalypse continues to refuse to come, and folks are starting to leave the festival and get back to work, and getting on with their lives.
But wait: "We have the Faith!" "We are REAL True Believers!!" "Keep on stackin'!!!" "THEY are Evil and WE are the Rightous!"
(and if that bothers you to read that, if it makes you mad at me personally, that ought to tell you something important, if you'll be honest with yourselves)
I wonder why folks who hate PMs so much hang out on a PM forum . . .
No one here "hates" precious metals ( I happen to have a big box of them, becuse I think (and say) that "no one ever went broke with a big box of gold and silver")
No, it's just that not everyone shares the belief that they are (to quote the immortal Meat Loaf) " the only thing in this whole world thats pure and good and right"
Liberty: Parent of Science & Industry
<< <i>Krugman also thinks debt doesn't matter....... nut! >>
it will only not matter when they decide not to honor it
"Interest rates, the price of money, are the most important market. And, perversely, they’re the market that’s most manipulated by the Fed." - Doug Casey
<< <i>The federal government does not consciously keep any percentage of assets in gold. What needs to be remembered is that the gold in Ft. Knox has been there a VERY long time. It has neither been added to, nor subtracted from in decades. This is the same gold that was valued at $300 years ago and now has a market value of $1,477 as of the last Kitco valuation on April 12, 2013.
Monetary policy does not even recognize gold as a factor anymore. While it has a most interesting set of fans and detractors in the marketplace, the total value of above ground gold is a drop in the bucket of worldwide assets. All the paper gold is just speculation and IMHO often manipulated as is the silver paper market. A very slippery slope for the average guy.
I enjoy watching and occasionally buying and selling numismatic gold, but my diversified portfolio has less than one percent in metals. To each his own. >>
It's literally impossible for the quantity of US gold to have been unchanged over the past decades. After all, the FED and Treasury still conduct gold swaps and leases with other nations.
The quantity of physical gold is not so much the issue as to who actually owns it (leases, swaps, sales, etc.). The US is a gold depository for many other nations. And if the gold was
leased, swapped, or sold, it's still here physically....and on the books as owned by both the US....and by nation it was swapped or leased to. Gold swaps are a part of monetary policy
today. But that kind of data is more closely guarded than our nuclear weaponary. Open up both sets of gold books of each nation to the public and then let us be the judge if gold is
still a factor in central bank policy. If the gold was truly unimportant, all of it would have been sold off by now. The world's gold is roughly on the same order as the world's printed
currency stocks. I don't think anyone thinks that all the dollars, yen, yuan, francs, pounds, etc. circulating the world are insignificant. But both gold stocks and currency stocks pale to
the total digi-currency and digi-debt on balance sheets. I think the US actively manages gold flows..... but makes it a point to show that the official inventory (8133 tonnes) and price
($42/oz) never change. The last thing they want to do is to shine a light on things and give additional importance to gold.
<< <i>
Cohodk, feel free to post a link supporting your argument on the reasons for gold's price rises over the last 11 years. I've never seen anyone attribute such a long trend (versus just daily movements) to "paper" trading. >>
I believe the creation of the gold ETF (GLD) to be largely responsible for the runup. It allowed the equities guys and small traders to play in a market that is extremely thin.
As stated here everyday, physical metals can be difficult to attain, so why would any serious investors even want to play? They wouldnt. But with GLD, it was easy for anyone to own 100 or 1000 oz of gold. And they could buy and sell in a second---no trips to the coin shop. They didnt have to buy guns to secure their stash. They didnt have to worry whether their homeowners policy would cover in case of loss or theft. Paper gold in the form of ETFs pushed gold higher. We can argue the reasons for this buying, but thats moot. Gold probably would still be higher today than 10 years ago simply because it was an underowned asset class. I wrote 6 months ago that gold was now overowned---and vehemently contested--but the pieces have fallen where they are now.
Gold has again attained some respect--obvious in its current valuations, but it is not salvation. Rather it is just another asset that will trade relative to other assets.
And since the pendulum probably swung too far in one direction, it will probably swing too far the other. When it reaches that extreme, start stackin'.
Knowledge is the enemy of fear