The New Empire of Debt: The Rise and Fall of an Epic Financial Bubble (53 page)

It is easier to be smart than to be good; that’s why there are so many smart people, and so few good ones. Smart men get elected to high office. They run major corporations.They write editorials for the newspaper. Pity the poor good man; he goes to parties and has nothing to say that is not mocking and cynical. Others talk about their smart deals, their smart ideas, their smart plans and successes. Women crowd around them; a smart man grows taller as he speaks.The good man shrinks.

But in economics and investing, it is virtue, not brainpower, that really pays off. “All the world is moral,” said Emerson. It is moral in the sense that if you are careless enough to step on a hoe, the handle will hit you in the face.

One generation takes the virtuous path. The next is likely to slip off, honoring the old virtues in speech, but not in act. The oldest generation of Americans remembers the Great Depression. They borrowed reluctantly, saved eagerly, and made the United States the greatest power on earth. Their children still talked their parents’ talk, but didn’t mind walking off in a different direction when the wind was at their backs. And their grandchildren? The newest generation seems to have no regard whatever for the virtues of their grandparents or the futures of their grandchildren. They disregard the wisdom of the dead, and load up the unborn with debt.

The end of the empire may be near or far. We don’t know. Washington will probably not be sacked any time soon. But the imperial money—the dollar—is in grave danger. America’s central bankers not only fail to protect it, they invite the barbarians to destroy it . . . slowly.

It is as if the police had not only gone on strike, but started holding up liquor stores and mugging pedestrians. Since the central bank won’t protect your wealth, you’ll have to do it yourself. How? In the old-fashioned way—by packing heat . . . holding reserves of your own. Traditionally, what the central banks hold in reserve is gold.

Mr. James Surowiecki wrote a wise and moronic piece on gold in the
NewYorker.
His wisdom is centered on the insight that neither gold nor paper money are true wealth, but only relative measures, subject to adjustment.

“Gold or not, we’re always just running on air,” he wrote.“You can’t be rich unless everyone agrees you’re rich.”
¹

In other words, there is no law that guarantees gold at $450 an ounce. It might just as well be priced at $266 an ounce, as it was when George W. Bush took office for the first time. Since then, a man who counted his wealth in Kruggerands has become 200 percent richer.

But gold wasn’t born yesterday, or four years ago. Mr. Surowiecki noticed that the metal has a past, just as it has a present. He turned his head around and looked back a quarter of a century. The yellow metal was not a great way to preserve wealth during that period, he notes. As a result, he sees no difference between a paper dollar and a gold doubloon, or between a bull market in gold and a bubble in technology shares.

“In the end, our trust in gold is no different from our trust in a piece of paper with ‘one dollar’ written on it,” he believes. And when you buy gold, “you’re buying into a collective hallucination—exactly what those dot-com investors did in the late nineties.”

Pity he did not bother to look back a little further. This is the moronic part. While Mr. Surowiecki looked at a bit of gold’s past, he did not see enough of it. Both gold and paper dollars have histories, but gold has far more. Both gold and dollars have a future. But, and this is the important part, gold is likely to have more of that, too.

The expression,“as rich as Croesus,” is of ancient origin.The king of historic Lydia is remembered, even today, for his great wealth. Croesus was not rich because he had stacks of dollar bills. Instead, he measured his richness in gold. No one says “as poor as Croesus.” We have also heard the expression, “not worth a Continental,” referring to America’s paper money during the Revolutionary War era. We have never heard the expression, “not worth a Kruggerand.”

Likewise, when Jesus said,“Render unto Caesar that which is Caesar’s,” he referred to a denarius, a coin of gold or silver, not a paper currency. The coin had Caesar’s image on it, just as today’s American money has a picture of Lincoln,Washington, or Jackson on it. Dead presidents were golden back then. Even today, a gold denarius is still about as valuable as it was when Caesar conquered Gaul. America’s dead presidents, whose images are printed in green ink on special paper, lose 2 percent to 5 percent of their purchasing power every year.What do you think they will be worth 2,000 years from now?

A few years before Jesus, Crassus, who had made his fortune on real estate speculation in Rome, decided to put together an army to hustle the east. Alas, such projects almost always meet with disaster; the attempt by Crassus was no exception. He was captured by the Parthians and was put to death in an unusually cruel and costly way. He did not end his days with paper money stuffed down his throat, and certainly not dollar bills. No, they poured molten gold down his gullet—or so the story has it.

Gold has a long history. And during its history, many was the time that humans were tempted to replace it with other forms of money—which they believed would be more convenient, more modern, and most importantly, more accommodating. Gold is hard to find and hard to bring up out of the earth. By its nature, the quantity of gold is always limited.

Paper money, by contrast, offers irresistible possibilities. The list of bright paper rivals is long and colorful.You will find hundreds of examples, from assignats to zlotys, and from imperial purple to beer suds brown. But the story of paper money is short and predictable. Since the invention of the printing press, a new paper dollar or franc can be brought out at negligible cost. Nor does it cost much to increase the money supply by a factor of 10 or 100—simply add zeros. It may seem obvious, but adding zeros does not add value.

Still, the attraction of being able to get something for nothing has always been too great to resist.That is what makes goldbugs so irritating: They are always pointing it out. Even worse, they seem to enjoy saying “There ain’t no such thing as a free lunch,” which comes as a big disappointment to most people.

Once people were able to create money at virtually no expense, no one ever resisted doing it to excess. No paper currency has ever held its value for very long. Most are ruined within a few years. Some take longer. Even the world’s two most successful paper currencies—the American dollar and the British pound—have each lost more than 95 percent of their value in the past century, which is especially remarkable since both were linked by law and custom to gold for most of those years. For the dollar, the final link to gold was severed only 34 years ago.

Some paper currencies are destroyed almost absentmindedly. Others are ruined intentionally. But all go away eventually. By contrast, every gold coin that was ever struck is still valuable today; most have more real value than when they first came out of the mint.

Central bankers reported in early 2005 that 70 percent of them were increasing their reserves of euros. As for the world’s erstwhile and present reserve currency, the dollar, they seemed to have, not growing reserves, but growing reservations. We also have reservations about the dollar. Whatever it is worth today or tomorrow, we are sure it will have less worth eventually. That it is not regarded as worthless already is remarkable. The average dollar is nothing more than electronic information. It exists thanks only to the ability of digital technology to keep track of it. Relatively few dollars ever make it to paper, and many of them end up in the pockets of Russian drug dealers and African politicians. Most dollars in most people’s accounts are not even graced with the image of a dead president; when the end comes, they won’t even be useful for starting fires.

It is imperial vanity that keeps the dollar in business. And it is vanity that will make it worthless. Economists want money they can control. Central bankers want money they can debase. And politicians want money they might get their mug on.

The trouble with gold is that it turns its back on world improvers, empire builders, and do-gooders. It is money that no central bank promotes and none destroys. It is money that exists only in a tangible form, a real metal—a number on the periodic table. “Gold goes up and down, just like other kinds of money,” say economists.Which is true. “You can protect yourself from inflation in other ways,” say the speculators.True again.“Gold pays no dividends or interest,” say the investors.True.

Nor will gold cure baldness or add inches to your most private part. Even as money, gold may not be perfect. But it is better money than anything else.

Gold was around millions of years before the U.S. dollar was invented. It will probably be around a billion years after.This longevity is not in itself a great recommendation. It is like buying a suit that will last longer than you do; there is no point to it. But the reason for gold’s longevity is also the reason for its great virtue as money: It is inert; it yields neither to technology nor to vanity.

The world improvers will always be with us.They will spend more than they have, boss other people around, and generally make the world a worse place to live. They will offer proposals like those of Thomas L. Friedman. The nice thing about gold is that it is so unresponsive. It neither laughs nor applauds. Gold is money that no central bank promotes and none destroys.

Paper money is a handy tool for the world improvers. They use it like politicians use civil service jobs and generals use heavy bombers—to get their way. Whatever the vapid ideal du jour, it takes money to pursue it. Given enough money, the poor can be fed and housed. The middle classes can be given free medical care and low-cost loans for houses. The upper classes can be given contracts and favors. Enemies can be summoned up, bombed, and reconstructed. Bread, circuses, war—the imperial program costs money.

How to get more money for these great new programs, these marvelously worthwhile ideals, these fabulous public spectacles? Gold flatly refuses to cooperate. It doesn’t even give a reason. Instead, it stays as mute and reticent as a dead man in front of a television. No matter how persuasive the advertising, the man is not going to go for it.

Paper money, on the other hand, barely needs encouragement. Start up the presses! Lower the interest rate! Relax reserve requirements and lending standards! Sell more bonds! Create more paper! Paper money is ready to go along with anything. Like George W. Bush, it never met a boondoggle it didn’t like. Sooner or later, it ends up as worthless as the projects it was meant to pay for.

Gold is merely the subversive investor’s way of protecting himself.

Is. Was. Will be again. If things remained the same, there would be no need for verb tenses. But things do not remain the same, they change.

After a long while of remaining the same, investors begin to underprice change. A speculator can make money by betting against the present tense. But not always, not when the present tense only came into being recently. For that case, investors still price things based on the past. But after a long spell, investors begin to believe that that which is will be forever. They make their bets on a false premise by underpricing risk, underpricing change, and overpricing stability.

Everything in life has a beginning, a middle, and an end. Each day that passes in which present trends do not come to an end brings us a day closer to the day when they will.

“Stability leads to instability,” said economist Hyman Minsky. The longer things remain stable, the more people become convinced that they will never change.As long as the camel’s back doesn’t break, why not heap more straw on it?

We know the past tense—how America’s empire of debt was built. What we don’t know is the future tense—how and when it will end. It is like our own death; we know it will happen, but we don’t want to think about it. Still, it is the sort of thing you want to be prepared for all the time. A sensible man may not know the hour or the place of his demise, but he does not doubt that it is coming. If he is smart, he is ready for death any day of the week. So is a sensible investor ready for the day a great empire collapses. He doesn’t know when it will happen. And the longer it doesn’t happen, the more he believes it may never happen at all. But nature smiles neither on vacuums nor monopolies. Empires are a monopoly on force; they don’t last forever. What is peculiar and promises to be entertaining about the U.S. debt empire is that it is more absurd than most; which is to say it is less likely to last very long.That does not mean that the United States will disappear. But you should be prepared for a write-down of its debt and its dollar at any moment.

You do not want to go to your grave after saying an unkind word to your mother. Neither do you want to wake up to a dollar bust with a pile of Treasury bonds and pieces of green paper.

There is never a good time to die. Nor is there a good time for a depression and monetary collapse. Still, death happens. Be prepared. Say something nice to your mother. Offer a bum a drink. And buy gold.

Notes

1
Claes G. Ryn, “Appetite for Destruction: Neoconservatives Have More in Common with French Revolutionaries Than American Traditionalists,”
American Conservative,
January 19, 2004.

2
John Chuckman,“America’s Imperial Wizard Visits Canada,” December 6, 2004,
http://www.countercurrents.org/us-chuckman061204.htm
.

3
Ramsay MacMullen,
Corruption and the Decline of Rome,
Yale University Press, 1990.

1
Margaret Wilson Oliphant,
The Makers of Venice, Doges, Conquerors, Painters and Men of Letters,
Burt, 1897.

2
Ibid.

3
Edward Gibbon,
The Decline and Fall of the Roman Empire,
Everyman’s Library, 1993.