“All money is a matter of belief.”
– Adam Smith
Gold is taking a solid beating these days. It’s been slipping for a while, but when China revealed that it’s reserves were less than believed it really fell – quickly slipping below $1,100 per ounce when one mysterious trader dumped everything. It’s now more than a third off its 2010 peak and nearly everyone believes that it’s doomed to slip below $1,000 per ounce by the end of the year.
What happened? Isn’t gold the ultimate money in an unstable world? The short answer is no, and this has as much to do with the rise of the US Dollar as anything. But in the end gold is not as much a form of money as it is a barometer of fear – a commodity that appears to be in much shorter supply today than it was just a few years ago.
After years of low interest rates and quantitative easing that amounts to more or less printing $4.5T, it would be easy to predict that inflation is bound to rise eventually. More dollars means, by supply and demand, that they have to be worth less, yes?
But the opposite is happening as the US economy charges ahead as the strongest economy in the developed world. While we have stopped stimulating our economy, Japan and Europe are only accelerating their programs. The US is poised to lose the currency war with the strongest currency standing – and a guarantee of lower prices for a lot more than just gasoline in the near future.
Another summer re-run, this one from 2012. It’s still valid, if more than before, as Russia and other nations work to reduce the influence of the US Dollar.
Imagine a single currency, all around the world. No more converting between Dollars and Euros and Pounds, the money in your wallet is your ticket to ride anywhere.
Sound like a fantasy? Throughout history it’s been more or less the standard. The coins from one era might come from Rome or Madrid or London or Beijing, but one accepted unit of exchange was the norm until very recently. In many ways, the standard now comes from twelve Federal Reserve banks in paper form, printed with green ink.
But we’re a global society now, with total worldwide trade taking up nearly $8T of the global product of $52T. Is it time for a new global currency that isn’t subject to the needs and politics of one nation? More and more, the answer is “yes”. But getting there, as with anything international, is the hard part.
“The long run is a misleading guide to current affairs. In the long run we are all dead.”
– John Maynard Keynes
A step back can be very illuminating, especially in economics. History teaches us an awful lot when we are willing to pay attention to what it says to us (which is almost never). The long run is also a good way to get away from current fashions, trends, and all the ways that everyone can fool themselves. Of course, as Keynes tells us, you run the risk of making a completely different mistake in the process. At least no two economists ever agree on anything, so there’s plenty of wiggle room.
It’s the bigger version of your typical financial reporting – “Stocks fell today on news that blah blah blah …” when in fact it was just a drippy grey April day in New York and everyone felt lousy.
A decade-plus trend, the increasing price of gold, is coming to a spectacular end. This may mean something very important – if it’s not the last gasp of the last bubble to work its way through our system.