Stocks backed off a little yesterday. Gold lost another $28, bringing it to $1,221.
Where could gold go from here? Aw c’mon… you know. Up or down. Down or up. Or, of course, sideways.
The most deflationary analysts, such as Robert Prechter, are looking for a bottom below $500. The most bullish gold-bugs, on the other hand, tell us that the sky is the limit.
We stopped buying gold many years ago, when it went over $1,000. But we haven’t sold a single ounce. Who knows? We might need it. Besides, at $1,200, it seems fairly priced. Neither too hot nor too cold; the yellow metal is at room temperature.
But do you remember our prophecy from yesterday: sure-fire, guaranteed prediction #2: our monetary system will collapse?
Exactly when or how… well, we don’t know. But we’ll take a wild guess: when the money system goes down, gold goes up. Ergo, sometime in the future we’ll be able to sell our gold for more than $1,221.
And how, you may ask, gentle reader, did this come to pass? How did the money system get itself into such a vulnerable position?
We blame Milton Friedman. We had lunch with Mr Friedman many years ago. The question we should have asked never came to our mind nor to our lips: “How the hell do you know how much money an economy needs?”
The ‘great monetarist’ was spared having to search an empty cupboard for a suitable reply.
Friedman set the tone for discussion on the issue with his masterful work on the Great Depression. By way of background, a boom tends to increase borrowing. And the fractional reserve banking system leads to an increased supply of money when loans are taken out.
A recession, depression or de-leveraging, on the other hand, decreases the money supply as people pay down debt. In a downturn, said Friedman, with a shocking disregard for unseen consequences, the Fed should manage the economy by pushing up the money supply.
Bill Bonner on markets, economics & the madness of crowds
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Thus did he misguide at least two generations of economists and lead today’s Fed to its policy of quantitative easing. Got a slow economy? Don’t bother to wonder about the causes. Just push this button, marked “EZ Money Fast.”
Once they had fully absorbed Friedman’s meaning, there was no stopping them. Each time the economy tried to shuck some debt, along came the feds with more money and easier credit terms. Bad debt? No problem; just refinance at a lower rate.
The public fell for it. The Chinese enabled it. Wall Street encouraged it. And economists approved of it. Debt and trade deficits soared. Surely there must be some end, some resolution, some comeuppance for errant economists and their silly system. But whence cometh it?
In the meantime, we work with what we’ve got. And what we’ve got is a monetary system that seems antiquated to some and not antiquated enough to others. For us, it is both. It lacks the real old-time value of gold. And it lacks the real new-time value of simple, low-cost internet-based information exchange.
We can receive a copy of War and Peace via the internet at virtually no transaction cost. But if we want to pay for it, we must pay fees to zombie banks and credit card companies and inform the NSA of our reading habits.
What’s the alternative? When we last checked, bitcoin had lost $300, and then recovered to $1,000.
Our dear readers have accused us of many unfortunate errors. They are right about most of them. But as to bitcoin, they are mistaken.
We do not think bitcoin is likely to replace gold. Nor do we recommend you buy bitcoin as an investment. Bitcoin may be a better form of money than the dollar, at least for internet transactions. But it is doomed. It is not likely to be better than bitcoin 2.0. Or bitcoin 3.0. Or some version of bitcoin yet to be imagined, let alone produced.
If it is true that the supply of bitcoin is limited by computer programs, it is also true the supply of bitcoin-like successors is as expandable as the universe itself.
Digital money is the biggest innovation in currency in 6,000 years. Modern technology opens this universe up to us – exposing thousands of monetary galaxies and currency solar systems. Surely, we will find at least one planet hospitable to human commerce.
We await the discovery.
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Information in The Daily Reckoning is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. The Daily Reckoning is an unregulated product published by Fleet Street Publications Ltd. Fleet Street Publications Ltd is authorised and regulated by the Financial Conduct Authority. FCA No 115234. http://www.fsa.gov.uk/register/home.do
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