Bill Buckler Discusses The Last Price Standing Of "True Money", Answers The Only Question Relevant To Gold Bugs

Tyler Durden's picture

Bill Buckler, publisher of The Privateer Report, has released one of the most scathing critiques of paper money we have read to date: "Before it can be exchanged, wealth must be created. Wealth cannot be created out of thin air. By definition, an economic good is “scarce”. If it were not, there would be no such thing as economics or exchange. Neither would be necessary because no effort or choice in the face of alternatives would be required in order to provide the GOODS which further our lives. Before we can talk about money and the VITAL role it performs, we must stress this point. Money is NOT wealth, it is the means by which wealth is exchanged amongst those who produce it. Paper money is not suited to this function." So what is the only rational investment in times in which money's role is so often confused by pretty much everyone? "Ninety-seven percent of all existing Treasury debt has been created since August 15, 1971! Ninety-three percent of it has been created since Mr Volcker “saved” the paper Dollar in late 1979! Please note that the gain in Treasuries and the loss in the US Dollar almost exactly cancel out. Please note also that even the biggest gain in these paper markets fades into insignificance against Gold’s rise."And here is the answer all the "gold bugs" have been waiting for: "The paper money “price” of Gold will last as long as the attempt to make paper money “work” lasts. In the end, Gold will no longer have a “price” because it has reverted to its role as MONEY. Whenever and wherever that happens, that nation can return to the production of wealth - rather than “money."

Buckler's brilliant observations on the inevitable death of fiat, and gold's ascent to the status of "last price standing", need no commentary.

From the Mid-September Issue of the must read Privateer Report

THE LAST PRICE STANDING

Just under eleven months from now, on August 15, 2011, there will be an anniversary that will get little if any coverage in the global financial media. August 15, 2011 will mark 40 years since the momentous decision taken by the Nixon administration to cut the last tie between Gold and the global reserve currency, the US Dollar. We have no idea what the “price” of Gold will be on that date. The one thing we are certain of is that it will be many, many times higher than the mandated $US 35 per troy ounce it was when Mr Nixon made his fateful decision on August 15, 1971.

On September 14, 2010, Gold leaped $US 24.60 to an all time high spot future close of $US 1271.70. We would think that you have already checked out our $US 5 x 3 point and figure chart, but if you haven’t ...
http://www.the-privateer.com/chart/gold-pf.html

This chart shows a bit more than 28 years of the history of the $US Gold price, stretching back to the June 1982 bottom and showing in its entirety the current bull market which is nearing its tenth anniversary. At its September 14, 2010 close, $US Gold was up just over 16 percent in 2010 to date. Barring a fantastic turnaround, we expect 2010 to be the TENTH year in a row during which the $US Gold price has risen. We know of no
equivalent to this unbroken run in any other major investment market.

Of Money And Wealth:

It has been well said by several competent economic historians that there are only two kinds of paper money - those which are already worthless and those which are going to be worthless. There has never been an exception to this rule. At some point in the history of all PURELY paper currencies, prices expressed in them become irrelevant simply because they are no longer used as a medium of exchange. This process is always painful.

While the end destination of paper money can always be foreseen, the route by which it reaches its destination and the time it takes to get there cannot be predicted. But always, at some point in the proceedings, the declining “purchasing power” of the paper money re-awakens the dormant distinction between money (the medium of exchange) and wealth (that which is in fact being exchanged).

Before it can be exchanged, wealth must be created. Wealth cannot be created out of thin air. By definition, an economic good is “scarce”. If it were not, there would be no such thing as economics or exchange. Neither would be necessary because no effort or choice in the face of alternatives would be required in order to provide the GOODS which further our lives. Before we can talk about money and the VITAL role it performs, we must stress this point. Money is NOT wealth, it is the means by which wealth is exchanged amongst those who produce it. Paper money is not suited to this function.

The Global Fiat Currency Era:

Globally, it can best be described as 40 years of monetary chaos. In the US, cushioned by its stewardship of the global reserve currency, it can best be described as a decade of currency chaos - followed by a quarter century of serial credit bubbles - followed by a financial system collapse - followed by a desperate government and central bank holding action. This holding action is still going on, at an ever increasing cost to the future of the US economic system. As we said here in our previous issue (Number 661): “...the US Dollar is the world’s reserve currency. As long as this remains the case, the follies of the US government will remain the most important in the world and the follies of their central bank - the Federal Reserve - will remain paramount.”

These follies can be read directly from the grotesque - $US 400 Billion to $US 13,445 Billion - increase in Treasury funded debt since 1971. Almost 60 percent of that total has been incurred over the past decade. It can be read from the Fed’s manipulation of interest rates, specifically the year of 1.00 percent official rates in 2002-03 and the almost two years of ZERO official rates from December 2008 to date. It can be read from the REAL standard of living of the American people which has gone nowhere since the fiat era began and which has been going backwards since the GFC hit. It can be read from the stagnant nature of US paper investment markets since their 2000 highs. And finally, it can be read by the fact that the physical structure of the US is beginning to literally fall apart at the seams.

The Crumbling Infrastructure:

On September 9, there was a huge explosion in San Bruno, a heavily populated suburb of San Francisco. The explosion was the result of a rupture in a 30 inch (75 cm) gas pipeline. Thankfully, the loss of life was minimal but the destruction of property was vast. The pipeline was built in 1956, at a time when the area was sparsely settled. It has, apparently, been maintained just as sparsely ever since.

In August, a dam built 50 years ago collapsed causing widespread flooding. The famous Gateway Arch in St. Louis was finished in mid 1965. It is now quite literally rusting away. Power lines, sewer lines, roads, railways, bridges, viaducts and all the rest of the complex “infrastructure” on which modern urban (and living depends are in a state of decrepitude. Mr Obama’s latest plan to throw $US 50 Billion at the “problem” is laughable. For years, reputable US engineers have been warning that the bill just for getting the vast US infrastructure repaired, let alone replaced, would run into the multiple $US TRILLIONS.

Politicians love infrastructure spending, especially with money created out of thin air for the purpose. The spending is visible, especially when a politician gets to cut a ribbon opening a new bridge or freeway or dam. They don’t love infrastructure maintenance. The maintenance is invisible. Worse, it is a reminder that while the money used to build the infrastructure can be and is conjured out of thin air, repairs and maintenance absorb REAL wealth  which cannot be used for new “headline” projects.

The gas pipeline rupture in San Bruno is symptomatic of the entire situation. US federal government officials state quite plainly that they have recorded 2,840 “significant pipeline accidents” over the past two decades, more than a third of which resulted in significant death and injury. They go on to point out that the US has more than 2  million miles of gas pipelines and about 100 federal inspectors. Yep, that’s 20,000 miles per inspector. Clearly, “maintenance” is NOT a plum government job.

The funds necessary to build and maintain “public or “regulated” utilities are NOT earned on the market. They are extracted by law from the public. There is no pressure to maintain or replace them as they age. A private company which neglects its vital standing plant would go out of business, not being able to compete with those who do NOT neglect theirs. A government is different. It can extract the means it needs by force of law. The result is a working facade which hides a rusted-out functional core. The contrast is becoming more obvious every day in the area of vital infrastructure. But it is much more acute, if sadly less visible, in the area of financial infrastructure and its core - which is the MONEY.

Many Years Of Advance Warnings:

The warnings go back a bit more than ten years. In the bear market which followed the $US 850 January 1980 high, Gold fell below $US 500 to stay in June 1981. A year later in June 1982, that bear market bottomed with Gold just under $US 300. Those two points - $US 300 and $US 500 - formed a trading range in which Gold remained for nearly two decades. The Gold price exceeded the $US 500 level only twice - for very short periods - in early 1983 and late 1987. It dropped below the $US 300 level twice - again for very short periods - in June 1982 and again in February/March 1985. The first “advance warning” came in November/December 1997 when Gold dropped below $US 300 - and stayed there.

November/December 1997 was the point when what had been an Asian financial crisis went global. In early December 1997, President Clinton was attending an APEC (Asia-Pacific Economic Co-operation) summit in Vancouver Canada. On the first day of the meeting, he called the Asian crisis a “glitch in the road”. A decade later, President Bush used that exact phrase to describe the early stages of the GFC.

Twenty-four hours after Mr Clinton’s use of the phrase and after some sobering behind-closed-doors  conversation with his Asian colleagues, he had changed his tune. The “glitch” became a global crisis. Writing about it at the time - in our Early December 1997 issue (Number 338) - The Privateer described Mr Clinton’s about face over the Asian Crisis as “a global post-war turning point”.

This was so because for the first time since Bretton Woods and the elevation of the US Dollar to global reserve currency status, the US “authorities” suddenly realised that they could NOT stave off a financial upheaval all by themselves. They needed help for this one. And they got it, not least in the form of a globally concerted effort to debunk once and for all the REAL alternative to paper money - Gold. At the end of 1997, Gold was forced below a trading range which had confined it ever since mid 1981. And Gold remained below that trading range for well over four years, up until the beginning of April 2002.

Forcing Gold below $US 300 and its long-term trading range was a HUGE mistake made by the global financial “authorities” led by the Bank of England and their Gold “auctions”. It exposed their desperation as nothing else would have. It also made it certain that once Gold did regain the $US 300 level, a long bull market would be the outcome. In April 2002, Gold regained $US 300. It’s been all up from there.

The “Lost Decade” - For Paper:

As stated, Gold regained the $300 level on April 2002. On September 14, 2010, the spot future price reached an all time high closing level of $US 1271.30. That’s a rise of just under 324 percent. Over the same period, silver rose from $US 4.40 to $US 20.43. That’s a rise of just over 364 percent.

How have the “paper” markets fared over that same eight and a half year period? Here’s a sampling:

  • The Dow: 10301 to 10526 - a gain of 2.2 percent
  • The Nikkei: 11347 to 9299 - a loss of 18 percent
  • The (Australian) All Ords: 3350 to 4670 - a gain of 39.4 percent
  • The US Dollar Index (USDX) - 118.00 to 81.33 - a loss of 31.1 percent
  • US Treasury Bonds: 101.00 to 133.00 - a gain of 31.7 percent

Please note that the gain in Treasuries and the loss in the US Dollar almost exactly cancel out. Please note also that even the biggest gain in these paper markets fades into insignificance against Gold’s rise.

At the dawn of the 21st century, looking back over the previous five years, US investors were complacently looking forward to annual gains on their stock market of 20 percent “in perpetuity”. What they got was a decade of stagnant prices. In the period since February 2002, when the US Dollar began its long slide, the only “investment” to approach those expectations has been the precious metals. From February 2002, Gold has risen a compound 18.5 percent a year and silver, 19.8 percent.

Forty Years Of Unbridled Inflation:

In the period of ever rising paper markets and especially stock markets which took place between mid 1982 and the beginning of 2000, there was little if any mention of inflation or deflation. Over that period, the Dow in the US rose from 776 to 11723 points. That’s a gain of 1412 percent or a compound annual gain of about 16.25 percent. Not quite as good as Gold since 2002 but sustained over a far longer period.

In reality, this almost two decades of paper asset boom was inflationary to an extent that left the 1970s for dead. There were two reasons why the 1970s were and still are known as the “inflationary” decade. The  first was the HUGE increase in the amount of Treasury debt compared to the two preceding decades. The second was that the new money created by this increase did not go into paper assets, but into alternatives.

Consider the two decades prior to the “inflationary” 1970s:

  • 1950s - Treasury debt rose from $US 257 Billion to $US 290 Billion - up 12.8 percent
  • 1960s - Treasury debt rose from $US 290 Billion to $US 393 Billion - up 35.5 percent

Contrast that to the 1970s, the first decade of a purely paper US Dollar:

  • 1970s - Treasury debt rose from $US 393 Billion to $US 930 Billion - up 137 percent

You can see the stark difference, made even more stark by the fact that in the US, both stock and bond markets - the traditional paper markets - had a horrible ten years in the 1970s. It is a well known fact that had it not been for Fed Chairman Volcker and his decision in late 1979 to let US rates be set by the markets, the US Dollar would likely not have survived long into the 1980s as a purely paper currency. Tragically, thanks to 20 percent plus rates in 1981, the world was lured back into paper Dollars and the fiat currency era was prolonged - for another 30 years - and counting.

Consider the record over those 30 years, in the raw numbers as well as the annual percentage increase:

  • 1980s - Treasury debt rose from $US 930 Billion to $US 3,233 Billion - up 248 percent
  • 1990s - Treasury debt rose from $US 3,233 Billion to $US 5,674 Billion - up 75.5 percent
  • 2000s - Treasury debt rose from $US 5,674 Billion to $US 13,500 Billion (estimate) - up 138 percent

Ninety-seven percent of all existing Treasury debt has been created since August 15, 1971!

Ninety-three percent of it has been created since Mr Volcker “saved” the paper Dollar in late 1979!

Treasury debt is the ONLY backing the US Dollar has. Every bit of that debt rise is pure INFLATION.

Since 1982, the inflation has been reflected in serial credit-induced bubble markets. In the US, the last of the “market” bubbles, the real estate bubble, imploded more than three years ago. All that is left is the last of ALL the bubbles, the one in Treasury debt itself. That one is the very end of the road.

A Gold Bubble?:

Descriptions of the ever rising $US “price” of Gold have been veering into the “bubble market” category ever since the $US Gold price broke above its 1981-1997 $US 300 to $US 500 trading range at the end of 2005. The “bubble market” talk intensified when Gold topped its January 1980 $US 850 high at the beginning of 2008 and intensified still further when Gold established itself above the $US 1000 level in October 2009. It is still with us. We quote Mr George Soros from a Reuters article published on September 15: “Gold is the only bull market currently. ...I called Gold the ultimate bubble, which means it may go higher. But it’s certainly not safe and it’s not going to last forever.

The Wikipedia (which is as good a guide to popular perceptions as any) defines a “bubble” as: “trade in high volumes at prices that are considerably at variance with intrinsic values.” In economics, there is no such thing as an “intrinsic value”. Human beings impart value to economic goods by their buying or abstention from buying. The result is prices expressed in terms of money. As long as Gold is an “alternative” money, it will have a price. That will end once it re-assumes its age-old role as money itself.

The Morbid Fear Of Falling Prices:

If there is anything that keeps central bankers all over the world awake at night, it is their fear of falling prices. This is taken for granted right across the spectrum of those who administer or rely upon the global fiat money economy with the paper US Dollar at its centre. It is a most interesting phenomenon, given the fact that ALL rational economic action since human beings descended from the trees has been aimed at LOWERING the cost of producing economic goods. It is surely an easily grasped FACT that in an economy based on indirect exchange through the use of money, all eras of true prosperity have been eras in which the purchasing power of money was GROWING and prices were therefore falling.

It really is a rather simple proposition, if one actually thinks it through. If a unit of money is to be viable over the longer term, the term essential for the build up of new wealth through new and improved means of production, that unit of money must retain or INCREASE its purchasing power. If it retains its purchasing power, it will allow people to save. If it increases its purchasing power, it will encourage them to save. From the simplest economic endeavour to the most complex one, savings must PRECEDE production which must in turn PRECEDE consumption. The only form of money which has ever been found to maintain and increase its purchasing power is the precious metals. The only form of money which has always been found to lose purchasing power to the end point of extinction is paper.

One of the distinguishing features of every productive economic era in history is that prices FELL throughout the era. Even in eras of capital consumption like the one which began in earnest in 1971, the most successful products were the ones which FELL in price despite the galloping depreciation of the money. The best example of that in the modern era has been the prices of computers and electronics. In the face of all these economic FACTS, why are central bankers so worried about falling prices?

Real Money Needs No “Collateral”:

Sound money needs nothing behind it to perform perfectly all the functions of money. Unsound money, especially paper money backed by nothing but debt to be paid by future generations, is TOTALLY dependent on the prices of the collateral being held against the debt which “backs” it. For forty years, the world has operated on a debt-based monetary system which is fuelled by means of credit creation. It stands or falls on the assumption that the debt upon which it is based will, someday, be repaid.

The only means to assess the worth of the (paper) collateral which is the underpinning to the monetary and financial system today is to look at the PRICE commanded by that collateral on the secondary markets. Any reduction in the price affects confidence in the future viability of the money. The bigger the price reduction, the more adversely confidence is affected. When central bankers and politicians talk about “deflation”, they are talking about a fall in the market value of the paper which underpins the money they issue. Any fall in that market value literally undermines the foundations of the system. They know it, most of their victims do not. All they know is that what used to “work” no longer does.

The US central bank, the Fed, prints the reserve currency. The US Treasury prints the debt paper which is the only “reserve” behind the US Dollar. That being so, the global demand for Treasury debt greatly exceeds the demand for any other type of “collateral”. That has allowed the US to go on living beyond its means for far longer than it otherwise would have found possible. The limits to this situation were revealed in March 2009 when the Fed began monetising Treasury debt and were underlined in August 2010 when the Fed resumed their task. No matter what, the “collateral” value must be maintained.

The Last Price Standing?:

The paper money “price” of Gold will last as long as the attempt to make paper money “work” lasts. In the end, Gold will no longer have a “price” because it has reverted to its role as MONEY. Whenever and wherever that happens, that nation can return to the production of wealth - rather than “money”.

h/t Robert