Arctic Goldfinger

Ever since he was appointed Chairman of the Fed, Ben Bernanke has been trying to live down the nickname “Helicopter Ben.” It goes back to his academic days when he wrote a paper about the Great Depression which said, to make a long story short, that the Fed has the power to do whatever it takes to ward off a deflationary economic collapse including shoving money out of helicopters to keep prices from falling.

So what’s so bad about prices falling you may ask? The answer is complicated, but, to make another long story short, if people start to believe that prices tomorrow will be lower than they are today then they might save their money rather than spend it. That could cause the economy to decline because of decreasing demand and if such a downward spiral were to feed on itself you would have the makings of another Great Depression.

It shouldn’t be too hard, though, to imagine the consequences of the cure (the helicopter cash drop) that Bernanke mused about. People on the ground would figure out that the money falling to the ground is probably diluting the value of the money in their wallets and they would start spending it furiously. That would result in the opposite side of the coin from deflation — hyperinflation. And the result of would be the money eventually becoming worthless, as happened in Germany after WW1.

Because of the embarrassing nickname, Bernanke has, since day he was appointed Fed Chairman, claimed to be a stalwart inflation fighter. It is therefore surprising that the Fed yesterday cut interest rates like crazy. What it tells me is that the current economic mess is even worse than the insiders are saying and that inflation is considered the lesser of two evils if the alternative is a deflationary collapse.

The term “moral hazard” is familiar to a financial junkie, but its appearance in the mainstream press is new. For those not familiar with it, it means the risk you take, as a monetary authority (like the Federal Reserve), in encouraging risky behavior by bailing out risk takers who find themselves in trouble. The Fed has done it time and time again, but this is the first time it has been talked about very much. The reason it is being talked about right now, of course, is the “housing bubble” which has started to pop and take down a lot of lenders and speculators with it. Many innocent people are getting hurt, but many lenders and speculators, who thought the law of gravity had been repealed, are getting what they deserve.

I have the sense that it may be too late no matter what. This is a case, as the saying goes, of generals preparing to fight the last war. There is great pressure on the Fed to lower interest rates and soften the blow of the housing crisis, and that is what has triggered all the talk about moral hazard. In my opinion, it may not matter what the Fed does. The monetary house of cards we have constructed since 1971 is moving toward collapse because, as people will soon discover, the money in their wallets is turning to garbage right before their eyes and there is little they can about it. Except buy gold.

Money, by its very nature, is something that is of limited use in itself, but that all other people consider so valuable that, when you give it to them, they will give you real stuff in return.  You can’t eat money or drink money, but people will work hard to get it and sometimes will even kill for it. And it is obvious that modern life cannot exist without it.  If there were no money our only recourse would be barter.

And what a primitive world this would be if, in order to get a quart of milk, I needed to find someone who (a) has milk and (b) wants something that I have.  If I make shoes and he doesn’t need shoes then I get no milk.   Money is to the economic world as oxygen is to the biological world.  So how does something become money?  The answer is simple — when people are willing to treat it as money.  It can be seashells or copper plates or Euros, but the fundamental issue is always the same:  when I offer it to the guy with the milk will he give me the milk?  The answer will be yes when he is certain that whatever money I give to him can be offerred to others in exchange for whatever he wants.

So how did pieces of green paper with Presidents’ pictures on them become money?  Because the government said so and people were willing and remain willing to treat it as such.  The government helps their cause by making the money “legal tender.”  Therefore,  if I owe someone a debt they are legally REQUIRED to accept payment in the government’s money.  So is gold money?  You would superficially think not.  No government in the world recognizes it as money and, in fact, under the rules of the International Monetary Fund no currency can be tied to gold as the measure of its value.

Up until 1971 there existed vestiges of an official link between currencies and gold, but that year President Nixon officially severed any tie between the U.S. Dollar and gold.  It was said that he “demonetized” gold and economists at the time predicted that the price of gold would drop into the teens because it was now only good for making jewelry and filling teeth.

A funny thing happened, though.  The price of gold went up and has never looked back.  A simple and powerful truth was thus revealed — you can no more demonetize gold than unring a bell.  Gold, with the rarest exceptions, has always been money and is money right now.  Why?  Because people continue to think so Go anywhere in the world with a bar of gold and you will be able to get what you want.  Now, as always, it is perfectly suited to be money.  It is rare.  It is immutable.  It is divisible into convenient units.  In fact, it is deeply embedded in the human psyche.

Even though Nixon tried to “demonetized” gold, the winner still gets the gold medal, there is no standard higher than the gold standard and, when something is really good,  it is as good as gold.  And gold has one characteristic that puts it head and shoulders above dollars, euros, yen and rubles:  you can’t print it.  It is often said that you can’t eat gold or drink gold and that is true.  But the value of gold does not rest on its being all that good.  It is only a metal after all.  Its value rests on the fact that printed currencies are that bad.  Every paper currency eventually reverts to its inherent value — zero.  Gold never has and never will lose its value because it is first, last and always money.  True money. 

The purpose of this blog is to make the case for owning gold.  I own some myself, but have nothing to sell to my readers except ideas.  Gold is money and in the days that follow I will be offering my views on why that is important for everyone who wants to protect the wealth that they have worked so hard to acquire.  More later.

If you don’t already own as much gold as you can afford then start buying it — NOW.  It can be physical gold.  It can be gold stocks.  It can be the gold ETF (Symbol GLD), but it should be at least one of those and, if possible, all.  Don’t worry about timing your trades. There is no way to pick a good entry point. Do not try to trade in and out of the gold market. The market is strongly manipulated by Central Banks and short term traders get killed. Don’t worry about fluctuations in the gold price. Trust in the fact that it will go higher if not sooner then later.

Don’t even think about selling a single gram until (take your pick) gold is featured on the cover of Time Magazine, people you meet at parties talk about how much money they have made in the gold market or a gold quote is given every evening during your favorite network news show.  Then start selling gradually and systematically.

This advice, by the way, is the same that I gave yesterday and the same I will give tomorrow until one of the above scenarious (Time Magazine, etc.) comes to pass. Just think of dollars, pounds and euros as toilet paper futures and stay with the only real money in the world until everyone else jumps on the bandwagon. Then jump off and enjoy your wealth.

It’s true!  If you go to the Alaska Statutes (AS 44.09.110) it says: “Gold is the official state mineral.”

Herb Berkowitz, the author of this blog, is a retired attorney who lives with his wife, the Amazing Kathryn, in Anchorage, Alaska. He has lived in Alaska since 1970 and is an utter total 100% nutcase degenerate goldbug.