So why is everyone so sure what gold will do during
deflation?
Nobody knows how gold will respond in a deflation. NEM famously did well in the first Great Depression, which however does not mean that NEM, or gold held in some other form, will do the well in a second great depression. But it does mean that deflation, per se, does not torpedo gold as a store of value.
I think Slider’s admonition to watch the film of the opposing team, rather than the film of your own team, is good advice -- but not easy to do.
Let me make the case AGAINST gold by first making the case for it.
The case FOR gold turns on a few simple (but nevertheless profound) points about politics:
1) (Deep) politics.
The political system in the USA is broken. It is broken because it is based on the assumption that the economic pie always expands.
Now, however, the economic pie in the USA is not expanding. This is a big problem because we in the USA have no ideas, or philosophy, or shared religion that lets us deal with contraction in an way that people consider to be fair. It is inevitable that we postpone coming to grips with the problem of contraction, because to come to grips with it means to take the cards, and deal out bad hands to lots of people. The method of postponement that we have chosen is to borrow money. We have been able to do so for a long time because of historical accidents (US dollar as reserve currency, recycling of the dollars from China, etc).
A long time does not mean forever, however.We have run into the ground our strategy of achieving delay by means of borrowed money.
Now we come to a second, equally simple point about politics.
2) (Shallow) Politics.
Intelligent and moral people see no solution to our problems given our current intellectual framework. Precisely because such people are moral and intelligent, they stay away from the political arena, leaving the space to be occupied by goons, knaves, bottom feeders, scum bags, innocents, agenda driven manipulators, etc. etc.
(You can get bent out of shape by this if you want to, but to do so is a waste of time. America, as She used to be, is as dead as a deer in the bushes by the side of the road. The corpse of the deer has assets linked to it – i.e. complex proteins --- and is being fought over by vultures, 'posums, flies, box turtles, maggots…. Their job is to finish the job of destruction, and recycle the assets. )
Put politics 1) and politics 2) together.
Linked to this corpse called America is a vast amount of borrowed money . Borrowed money is what? It is a CLAIM on stuff, services, property, etc etc.
Once the Chinese, the Japanese, the Persian Gulf oil producers, the Russians, not to mention all of us living inside the corpse, realize that the corpse is dead, and is being carved up, all of them on the outside, and all of us on the inside, are going to take our CLAIMS and start using them to claim things like oil, land, services.
The case for gold is that some borrowed money (i.e., some of the vast number of claims floating around in the world) are going to be used to claim gold, which, as we all know, is an asset that just is, i.e., an asset not linked to a liability. Once the process of claiming starts in earnest, not many people have to use their money to claim gold to send the price skyward.
So, to summarize: the bull case for gold is that the political system is dead (i.e., incapable of dealing with problems under the current dispensation); and secondly, that claims linked with the dead system are going to be used to claim gold.
The bear case for gold is the reverse of this argument.
America is not a corpse being fought over by carrion feeders; and all the claims now in existence are going to be absorbed in a manner that is orderly.
When I see our political system showing signs of coming to grips with our problems, I will become less gold-buggy. As of now, however, I will trust the carrion feeders to be themselves and keep on feeding on the carrion. Gold may not be the answer, (and it is not my only answer), but I tend to like it precisely because I don’t know what the answer is. |
