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OUR SIMPLE IDEA: SHOULDN'T A PERSON WHO HAS VIRTUAL WEALTH, ALSO OWN A BOX OF SHINY GOLD COINS?
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(August 19,1999) For thousands of years, money has been gold. Yet today, vast sums of money are credited electronically to large numbers of people whose only gold is a few grams of decorative jewelry. So what is money, anyway?
(August 19,1999) What is wealth and what is money? Today, we can ask these questions and start a healthy debate, but if you had asked those questions back in the year 1900, or 1600, or even as long ago as Biblical times, people would have questioned your sanity. Gold is money, of course, as is silver. You can keep your wealth in land, livestock, crops, or in your stock in trade, but ultimately its worth in the marketplace is expressed in money, i.e., gold. Gold and silver have been the currency of what we call Western civilization since the time of the ancient Greeks.

Of course, history lessons are boring, but bear with us just a moment. The very concept of money was born from the elements gold and silver. These scarce, malleable, and enduring metals allowed an inefficient system of barter to be replaced by the economic breakthrough of real trade. By coining standard weight and purity bits of precious metals, governments empowered its citizens to not only trade more easily, but also to save and accumulate wealth in a portable and permanent form.

Various issues of paper money have come and gone in the most recent centuries, but gold and silver have always had value through the turmoil and changes of history. Monetary substitutes (usually paper money, or coins with no precious metal content – things which are deemed to be money by government fiat) are subject to inflation, revaluation, or collapse, and are therefore good for only limited amounts of time.

That’s it. End of history lesson.

“And that’s all it is - history,” you might say. “We all know that gold isn’t needed anymore. The dollar, which we measure our wealth with today, is strong, and accepted throughout the world. And the dollar has no gold backing any longer, and hasn’t since 1970, yet it’s doing fine without it. There’s no need for gold today, the dollar has become the world’s currency, and it’s more useful than gold ever was.”

In other words, you’re saying that gold is obsolete. In a nutshell, that’s the modern case against gold, that it’s now useless. The electronic dollar has taken its place, and our economy has grown so large, necessitating the flow of so many dollars around the globe acting as the world’s currency, that gold just doesn’t cut it anymore. We have decided that gold no longer has a place as currency. It’s too slow, and there’s just not enough of it at present prices to be much good as money.

So basically what we have now is the fiat electronic dollar, controlled in supply by the Federal Reserve Bank, acting as the world’s reserve currency. Gold, because of its scarcity, just can’t be controlled as easily as can the current “virtual” dollar.

Ever since the dollar was cut loose from its gold backing in 1970, the Fed has waged a battle against inflation and the inflationary expectations implicit in higher gold prices. This was a losing battle during the 1970’s as gold soared from $40 in 1970 to over $800 by January 1980. But in the early 1980’s, gold (and oil) prices started weakening, and fell throughout the 1990’s until this year, when gold hit a 20-year low of $252. And inflationary expectations have fallen right along with it.

And so it is being said that the Fed has achieved a victory over gold, and our miraculous economy and stock market over the past few years are a testimony to the righteousness of that victory and the primacy of the dollar as a world currency. We have achieved a vibrant economy, a strong dollar with minimal inflation, and possibly a new era in economic growth, aided by unprecedented leaps in technological advancement.

They call it the “Goldilocks” economy: not too hot, not too cool, everything’s “just right.” Call it a new era of growth, a new paradigm, the end of the business cycle – an economy that just won’t quit.

“Ultraprosperity” is the phrase used in the September 1999 issue of “Wired” magazine in Kevin Kelly’s article “Prophets of Boom, Five Champions of the Endless Upswing.” In this article, we find the upcoming book “Dow 36,000” by Hassett and Glassman to be outdone by one Charles Kadlec, whose book will be entitled “Dow 100,000: Fact or Fiction.” But why stop there? With a little prodding, Kelly got author Harry Dent (“The Roaring 2000’s”, a title which refers to the century, not a Dow level) to extrapolate the Dow to “250,000 to 400,000 at the middle of the next century.”

Now that’s optimism. Let’s call it Ultra-optimism. And far be it from us to scoff at what can only be called a downright cheerful set of predictions about the future ahead of us.

But so much of this rosy scenario, this idea of a glorious new era, is based on a state of economic and fiscal bliss stretching far off into a future of…endless perfection. A future without business cycles, monetary cycles, or inflation, and the achievement of a stable and constant dollar which will continue to be strong because…well, just because so much of the whole world economy is depending on it being that way.

In other words, we’re to believe that everything has changed. Human economic history, with its financial booms and crashes, monetary inflation and deflation, all of that is now over, is just “history.” We’re beyond all that, and in a “new era.”

But just what if our recent stock market boom doesn’t really portend the end of the business cycle, and a new permanent plateau of prosperity? And do the Fed’s recent triumphs in holding down the price of gold, really mean the end of gold’s role as the ultimate store of value over the past few millennia?

What if gold is not dead, but is only temporarily being ignored while our current boom roars on?

For the sake of just-in-case, we hold to a very old-fashion thesis: that the simple and time-honored way to insure one’s wealth is to convert a portion of it into a box of gold coins. And such insurance can be bought very cheaply today. As with most types of insurance, you hope that the occasion never arises in which you need it, but you will certainly sleep better for having it.

If you have substantial assets today, and do not own some gold, then you have, in effect, passively accepted the ultraprosperity notion that everything we know about economics and money itself has changed, permanently, and for the better.

Such a notion is, of course, possibly true. But how wise is it to make such an all-or-nothing bet?

To add a bit of gravity and balance to his article, Mr. Kelly also interviewed that grey eminence, Walter Wriston, former Chairman and CEO of Citicorp/Citibank. This Q&A we thought was worth quoting here:

Kelly: “What are the dangers of ultraprosperity?” Wriston: “There is a generation growing up who think that markets only go up. There is a generation like mine, who grew up in the Depression, and who turn out the lights when they leave a room. If we have a prosperity boom for ten years and the Dow reaches 30,000, we’ll have a world where the lights burn very bright and there’ll be no one left alive to remember to turn them off.”


 

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