This week’s read will be a mere trifle, so first bear with me through a bit of old-fashioned oratorical bluster:

“In our present rush to discard traditions, civil discourse, and all traces of the old in favor of ‘what can we try now,?’ we forget that in the early 20th century our most basic economic tool of trade, the medium of exchange itself, what we refer to as “money,” was itself discarded, wrenched completely from its moorings in the name of Keynesian modernity. Dollars, pounds, francs, yen, marks - the whole lot had gone artificial, had become constructs of language, faith, and credit, no longer linked together through gold convertibility. Without convertibility, money becomes words, mere babble. Undisciplined by gold, the power and value of money itself becomes a matter of government fiat, a government aided by the complacent ignorance of an uninformed citizenry who ask only for bread and circuses, guns and butter, full medical benefits, and a comfortable retirement, ideally through no effort of their own.”

- Arthur Unnoan, from Hard Money, Soft Money,, c. 1997, Doomsday Press

In short, money was once a store of value, and a medium of exchange. Today, the store is closed, the value is gone, and we're left with only the function of exchange. So, once you realize that holding onto what passes for money today is in fact dangerous to your wealth, what’s stopping you from buying gold?

A major psychological obstacle to hedging against our ‘home currency’ is that it’s very hard to act alone, against the tide of the vast majority, so to speak. Buying physical gold is a very private and solitary act. It’s definitely something that you do alone, and no one wants to be alone. Acquiring gold involves you stepping outside of your normal habits, and doing something that today is considered to be quite out of the ordinary.

Psychologically, taking the steps to buy gold is a very hard thing to do. And when something is hard to do, we naturally look for reasons not to do it.

The primary reason for modern Americans is that purchasing gold just seems so weird. Is anyone else that I know doing it? After all, we have no evidence that our friends, neighbors, and co-workers are taking any steps to insure against a weakening dollar, so there’s a certain comfort level in knowing that we’re all going to go down together. Sure, it would be a bad thing if your assets wasted away as the value of the dollar continued to shrivel. But since everyone else’s will also, how bad could it be?

The converse attitude prevails when the winds significantly shift.

Imagine an upward trend in gold, one that is sustained over the course of a few years. Once a market like that gets established, the fear of the lonely weirdness of buying gold disappears, replaced by the fear of being too late to the party. After all, a rising market means that someone is buying the stuff – could it be that our friends, neighbors and co-workers are acquiring gold and not telling us?

An ugly thought arises - Is it possible, despite what I previously thought, that we’re not all in this together? Are my friends and colleagues actually better prepared than I am? Have they hedged their bets (meaning their dollars) and not told me?

And that is exactly the sort of anxiety that drives markets.

You might remember the story about the frog: Throw a frog into a pot of boiling water, and he’ll make a frantic effort to escape. But place him in a pot of tepid water, put that pot on the stove, turn the heat on, and something remarkable happens. The frog, according to this fable, sits complacently in the pot, and because the gradual change in temperature never seems alarming at all, is boiled to death.

The gradual death of your dollar assets by a continuous, year-by-year compounding price inflation therefore has two psychological components which can lead to financial inertia: That of the human, and that of the frog.

The human aspect is the sense that we’re all in this pot of tepid water together, so why should any one of us worry?

The frog aspect is that the damage to our wealth is so gradual that we never become very alarmed by it, even when all the water has boiled away and our money is nearly toast.

Richard Smith