the dollar vigilante blog
Japan and Libya's Effect on Gold
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Ed here. Jeff is on a plane back from Galt's Gulch in Argentina to Mexico tonight and will be filing a full report to subscribers on that in the next few days so I am filling in with some thoughts on recent events.
The events of the last few days have centered around Libya and Japan - or at least the knock on effects of those events. We saw the BOJ crank up its money printing, the ECB probably won’t tighten as much now, and the Fed won’t pull QE2 early. So the market feels better about going higher. This could take gold up to $1600 or so and then we get a decent correction; the one that started a couple weeks ago ended prematurely.
The Japanese tragedy is in and of itself not a reason to buy gold. You can see that in the short term, if you were Japanese, the gold price has been falling relative to your yen holdings. If the BOJ didn’t inflate in reaction to this event then there’d be little reason to buy gold because of it. However, this reaction does highlight an important question. We know that inflating the money supply does not create wealth or stimulate real growth. This is why gold is going up to begin with this past decade – because, as I’ve said in the past, everyone looks to the government to solve their problems, and the government can only "solve" those problems in one of two ways: by printing money or by taxing you for it. And if they tax you they won’t get re-elected. So they always choose to print.
So you get these morons out there who think the government has to do this in order to rebuild “the economy”, and they pull out their broken window fallacies and talk about how good this all is for “the economy”, "jobs", whatever. Critics like me are simply inhumane, they retort, as if I would prefer that the economy stagnates and people starve.
There is another way. The free market system can do wondrous things. In the fifty years following WWII, not only did the free market rebuild Japan and West Germany, but put them up among the world’s leading engines of growth (after the US). In places where government planning bodies were in charge, like East Germany, the difference was clear.
But people cannot wrap their heads around how such things can happen, especially without government.
Henry Hazlitt used to write that the good ideas had to be relearned by each new generation. Our generation is just learning it now. It’s going to hurt because our generation is particularly slow, thanks to the public indoctrination camps - sorry - school systems.
So that’s why gold will continue to go up. One day it will change. Or at least I hope so. People will start to realize that printing money simply shuffles wealth around from one area to another, and worse, it taxes wealth creation in the process. They realized this in the late 1970s. Ask Ron Paul. He was there.
The US voted in Reagan. The UK voted in Thatcher. The public was tired of big government, inflation and taxes. Ron Paul was put on a commission which studied the possibility of going back to a gold standard. They never got anywhere near where they promised, which is why we’re back to this problem. But, the point is that it wasn’t just a fad. It was a reaction to the double digit inflation of the times. The current generation needs to go through that again before it learns.
So, to the extent that events in Japan lead to more printing of money then, yes, the Japanese tragedy is bullish for gold. People’s grasp of economics has not improved over the decades. It has materially worsened. They don't teach us much about money in the government schools and even the Economics that they teach in the Universities is more fraud than fact - likely by design.
The stuff in the middle east is a different animal. It is complex. I have mixed feelings about it myself because I know half the reason the West is over there in the first place is because the sunni muslims have always relied on either Britain or the US to protect them from control by Iran and the shia muslim majorities in many “kingdoms.” Now there are so many possible reasons for the unrest over there, including the possibility of withdrawal by the West, which is something we want.
But, nevertheless, it won’t be smooth. And it might even lead to a war over there, which the hawks in the US like to use as a reason not to withdraw.
I don’t really like to write about this stuff because the military chess board is a ruthless place and I don’t have enough knowledge about the various relationships.
It is part of the same problem in the end, however. If the world were on a gold standard governments could not afford the wars they are involved in today, and there’d be no question of the West withdrawing from the middle east because we would not be able to afford it. If, instead of printing the money, the government said that it will increase taxes for everyone by $20,000 this year to fund their ongoing intervention in the middle east in the name of democracy there would be, as Jeff says, a lot less "Gotta Support The Troops" going around!
Without the ability to print money there’d be no military industrial complex.
So, in my opinion, one way or another, the unrest in the middle east is a symptom of the circumstances that are driving gold prices up fundamentally.
The monetary system that has built up the US “empire” over the 20th century is crumbling. It's The End Of The Monetary System As We Know It (TEOTMSAWKI)... and I feel fine.