Saturday, May 30, 2009
Mona Lisa or Ben Franklin?
When Paradigms Shift
When paradigms shift, the change occurs in the minds of men. The changes are subtle at first, but then, almost over night, the whole world sees a monumental shift. The subtle changes are happening right now, in plain view, even in the mainstream media. You need only to know what to look for.
Storing Wealth or Making Money?
In the olden days, there was a difference between what you collected as a store of wealth and what you traded or deployed into the marketplace to make money. Man has a basic need to collect and store wealth. This need derives from the awareness of his own mortality. Every man knows that someday he will grow old and die. And in those later years, he will need to draw from the wealth he has stored throughout his productive years.
Today's international financial and monetary system has evolved to where the demarcation line between the two, wealth-storage and trading-to-make-money, is hopelessly blurred. To see an example of this, look at the traders who play in the gold markets. Why are these traders drawn to the gold markets when there are many other markets with much higher leverage and profits? Perhaps it is because they have an innate understanding of the way things once were, yet they are hopelessly confused by today's international financial and monetary system.
The evolution of this system has bestowed upon the governments and bankers of the world a way to skim value from the wealth you store during your productive years. It is as if they are not only clipping the coins that pass through their possession, but they are also coming into your home and clipping the coins you have hidden for later use.
In order to achieve this magical feat, the system has grown excessively complex. And under the weight of its own complexity, it is now collapsing. Soon we will find ourselves back in the olden days, where there once was a difference between wealth preservation and "making money".
The evolution that brought us here took 100 years. The return trip will seem almost instantaneous when it is later recorded in the history books. And for a person to gain an understanding of what is changing, now, in the midst of the transition, will later be recorded as one of the most valuable "epiphanies" ever.
The Productivity of Debt
What is debt? In the olden days, if I saved an ounce of gold I had two choices. I could simply hang on to that ounce of gold forever, or until I needed it in my old age, or I could loan it to you. But if I loaned it to you there were a couple of vital requirements. First, I would only loan it to you for a productive purpose. You would need to prove to me that you had a way to grow the investment through productive means. This would ensure not only that I got my gold back, but that something good, some profit would come out of the exchange.
The second requirement would be collateral. Just in case your attempt at productivity failed, I would want to receive something of equal value to my loan. This collateral could be something you already possessed like a family heirloom, or it could be my ownership rights to whatever you used the gold to purchase, like farm land or farming equipment. In either case, if I didn't get my gold back (and some profit), I would at least get something of equal value back. Without collateral and a productive purpose, I might as well just hang on to my wealth in the form of gold.
Today we are encouraged by bankers and by our government to deploy our savings into the marketplace without either of these guarantees, neither productivity nor collateral. Even entire nations (like China) "invest" their savings in the non-productive, non-collateralized debt of the United States government, supposedly the safest investment on Earth. China is slowly realizing the flaw in this paradigm. Accordingly it is asking for guarantees (collateral?) and also diversifying into physical gold.
Today we have been conditioned to believe that debt does not need to be productive as long as the economy is growing. We loan our money to (invest in) companies that do not pay dividends simply because we believe new people (suckers?) will later pay us a higher price for these companies. We loan money (through fancy securities) to people for the unproductive purpose of home ownership. And in many cases, because of the excessive complexity of securities, we don't even retain the collateral rights to the underlying house.
The whole system has evolved to where there are no guarantees. Securities are no longer secure. We loan money to someone in the hopes that they will loan it to someone else, and they will loan it to another person, and that somewhere at the end of the line, someone will be productive. But instead, it has become an infinite loop of non-productivity... with no collateral. Today, debt is completely unproductive, without guarantees. So why do we even bother to part with our money?
Fiat Versus Physical
What is money? This question explains why we are willing to part with our money for such risky and unproductive promises. It is because for 100 years now, money has been steadily declining in purchasing power. It has failed in its third and final function, to be a store of value. So the system that evolved has taught us that we cannot just hide our money in the mattress and hope to later pay for our "golden years". Today, we must send our little (dollar) soldiers out into the world and hope that they multiply.
This brings us back to those traders that play in the gold market. They choose gold because they understand the problems with fiat money. Yet they use gold in the same way that fiat money works, they trade it back and forth hoping to profit from price changes. The same way we loan to (invest in) non-productive companies with the hope that someone later will pay us more. And in doing so, they never even touch the physical gold metal.
This is the ultimate confusion of fiat and physical. We instinctively know one thing, yet we are completely immersed in something else. The gold that these traders trade is no different than fiat money. It is a piece of paper that holds its value based on faith in the system, and it can be created from thin air (in great quantities). It is someone else's non-productive, non-collateralized debt. We lend them our money with the hope that someone else will later pay us more for that debt.
The paradigm shift that is now in progress will change the gold market from this fiat paper gold market (price betting) to a purely physical gold market (wealth reserve). When this happens, it will be instantaneous. When this happens, your fiat paper gold will disappear like a magic trick, and your physical gold will suddenly feel like the Mona Lisa herself.
The current paradigm we live in contains many firmly held beliefs. These beliefs have developed over many decades and have been passed down for several generations. Most of these beliefs are flat wrong. And as one by one they are shattered in plain view, we will see the paradigm shift.
Here are a few of the current beliefs. A house is more than just a home, it is the most important investment you will ever make. The right balance of stocks and bonds offers predictable long-term risks and returns. The modern economy requires an ever increasing supply of money. Deflation is bad. Inflation targeting (by central banks) is good. US Treasuries are a risk-free investment. Gold is only a hedge. I could go on and on. Can you think of a few?
There is an old saying, "You can't teach an old dog new tricks." This is true. Unfortunately this mean that the most vulnerable to a paradigm shift will be the last to recognize it. But as I said, the signs of change are already on TV for all to see.
I have the TV on today in the background. I am not actively watching. But just in passing I have seen two examples of the change in the minds of men that leads to a paradigm shift.
The first was a lady reporter talking about General Motors. She was talking about how the government is investing $70 billion of taxpayer money in a company that the market currently values at only $457 million! She made the statement, "Nothing is risk-free these days." Would you call that an understatement?
The second was a housing expert talking about how houses should only be purchased as a domicile, and not for any other purpose. He talked about property taxes and maintenance and all the reasons houses are expensive to own. He talked about the fallacy that a house can be a retirement nest egg. And he stated that houses should never have been considered speculative investments, as if he was sharing an age-old wisdom. Well, actually he was, but I wonder if he was saying the same thing five years ago.
Think about an object that means "great wealth" to you. It can be an old family heirloom or a fine painting in a museum. Now imagine that you are holding that object in your hands. Imagine it is yours, to do with as you please. Imagine you are a wealthy person and this object in your hands proves it.
Now ask yourself a few questions. Would you actively trade this object with other people, handing it back and forth, in order to make dollar profits from the fluctuations in its dollar value? Would you leverage this item (take a loan against it) in order to make dollar profits investing in non-productive, non-collateralized companies, knowing that if your investments go down you will lose this object of wealth?
And most importantly, ask yourself this. Under what special or extreme circumstance would you sell this item?
This is the paradigm shift that is underway. In the minds of men, physical gold is becoming this object of "wealth". Over the last year I have seen the change in the minds of some very unlikely people (in my own family). So I know first-hand that this is under way.
This change is not only happening in the minds of individual men, but it is also happening in the board rooms of national treasuries, sovereign funds and central banks.
The economy of man is an unimaginably complex biological organism. It is an ecology. And as with any ecological system, when stress is applied the system adapts and evolves. This is happening right now in the human ecology, the planetary organism made up of 6.75 billion individuals, each dealing with stress in his or her own way.
Some have had the foresight to take positions that will be massively beneficial as the paradigm shifts. This was the message of Another ten years ago. This is also the message of the Euro. Even with its many flaws, the Euro is positioned to benefit greatly from a paradigm shift to FreeGold.
The US dollar maintains its link to gold even without the gold standard. It must. This is because the US dollar competes against gold for global wealth reserves. This creates an inverse relationship between gold and the dollar, a relationship which must be managed. But very soon the dollar will either release its control over gold in an effort to save the unproductive debtors, or it will be forced to relinquish control over gold as productive creditors hoard all remaining physical gold in defense against the collapse of the unproductive debtors.
The Euro, on the other hand, has severed its link to gold. It now holds gold as they did in the olden days. The Euro holds gold as a wealth reserve giving it the credibility that comes with wealth, as well as a universal reserve to be deployed only in the most "special" of circumstances. The Euro holds its gold "marked to market". This means that as the price of gold rises, so does the value of the Euro's reserves. In turn, this lends rising credibility to the Euro. This is the opposite of what happens to the dollar as the price of gold rises.
We can all position ourselves like the Euro. Or we can stay positioned with the dollar. The choice is ours. The paradigm shift is happening whether we like it or not. The subtle changes are already there to be seen. We only need to know what to look for. And when this thing happens, when the dollar and gold part ways and head off in opposite directions, gold will be closer in value to the Mona Lisa than to a Ben Franklin.