I've edited both slightly for clarity. Here's D. P.'s critique:
For years I have followed your blog with high regard, impressed with your sense of awareness and lack of hyperbole. Particularly on topics of philosophy and social culture your insights have been consistently keen.Bill's reply quotes excerpts of D.P.'s argument and responds to them. D.P.'s excerpts are italicized:
Unfortunately, with your recent reflections on current economic concerns, voiced by your brother Bill and affirmed by your posts, you have wandered beyond [your] areas of expertise.
We can begin with the reflections on inflation. Inflationary trends include an incredibly diverse range of asset pricing influencers. It is ironic that Bill's ominous prophecies originate in an historically low inflationary period and find foundation in government actions, some of which are explicitly enacted to initiate inflation - in order to combat its evil twin - deflation! Recent evidence (see Japan since the early '90s) suggest this risk to our economy is at least as significant as Bill's inflation predictions.
Your post also claims to identify the value of gold as "cheap" without fundamental support. This is not surprising, as determining a value for gold is virtually impossible. Unlike other assets, including other metals, gold has limited utilitarian application. As such its value is strictly a human attribution, some might say, a human fiction. Gold can likely best be described as currency; acting, as it has for most of its human history, as our original currency. Gold's recent market behavior reflects this, for, as we see the world's currency standard, the dollar, fall, we see gold rise. The dollar's fall, though, has also been partially orchestrated by the Fed.
In general, I do not support such an active Fed and would prefer static dollar volume, allowing for truer market valuations, but the fact of these various purposeful actions suggests (as claimed by Fed leaders, and reflected by historic Fed behavior) contrary actions can be implimented as well.
My concern with Bill's prophecies of gold's gilded future is this; my professional experience suggests that any asset class which experiences extended appreciation exponentially larger than its historical norm (a bubble!) is destined for a catastrophic fall; which isn't to say it will be so, nor when it will occur.
I could critique away at the posts, pointing out the fallacy of Bill's claims "that no entity...is interested in" investing in US debt, or his "zero risk investment claim" (time-value of money risk), but the pickin's are too easy. Suffice it to say that Bill is over his head; which isn't to say he is necessarily wrong. More likely, his is a broken clock.
As for our overall economic plight, I would argue that, at the root of economic success is the person, the individual. At the individual level humans worldwide continue to prove their resourcefulness. Humans, it seems to me, find their founding motivation primarily in one thing, to live better, for themselves and their families! Therein lies my hope.
With over 25 years of expertise in the world's financial markets, I have noted that in each and every year the sirens of economic disaster have sung. In those few years in which actual relative disaster does occurs they become the darlings of the market media, and their doomsday soundbites only contribute to hightened irrationality. They are the broken clocks of my industry.
As for our overall economic plight, I would argue that, at the root of economic success is the person, the individual. At the individual level humans worldwide continue to prove their resourcefulness (see China's transition in only a decade toward free markets). Humans, it seems to me, find their founding motivation primarily in one thing, to live better, for themselves and their families! Therein lies my hope.
Unfortunately, with your recent reflections on current economic concerns, voiced by your brother Bill and affirmed by your posts, you have wandered beyond areas of expertise.Bill closes with a quote from the famous economist Ludwig von Mises:
You don’t have to be an expert to see what’s coming. All one has to do is observe what real, proven experts are saying and doing, i.e Bill Gross, manager of PIMCO, the largest bond fund in the world (over $1 trillion), who recently sold 100% of their holdings of US Treasuries saying:
“Unless entitlements are substantially reformed, I am confident that this country will default on its debt; not in conventional ways, but by picking the pocket of savers via a combination of less observable, yet historically verifiable policies — inflation, currency devaluation and low to negative real interest rates.”Other experts are saying the same thing.
We can begin with the reflections on inflation. Inflationary trends include an incredibly diverse range of asset pricing influencers.
While “asset pricing influencers” may be included, they are not the cause of inflation. Inflation is ultimately defined as an increase in the money supply relative to GDP. Is it a coincidence that the Fed discontinued publishing M3, the statistic that reflected the increase of dollars several years ago?
It is ironic that Bill's ominous prophecies originate in an historically low inflationary period and find foundation in government actions, some of which are explicitly enacted to initiate inflation - in order to combat its evil twin - deflation! Recent evidence (see Japan since the early '90s) suggest this risk to our economy is at least as significant as Bill's inflation predictions.
Historically low inflationary period? So far in 2011 (3 months) we have these increases in commodity prices:
Your post also claims to identify the value of gold as "cheap" without fundamental support. This is not surprising, as determining a value for gold is virtually impossible.
- Silver - up 37.6 percent
- Cotton - up 35.0 percent
- Oil - up 20.0 percent
- Cocoa - up 19.8 percent
- Coffee - up 19.8 percent
- Corn - up 17.8 percent
- Gold - up 4.5 percent
- Lead - up 3.8 percent
Wrong again. The “fundamental support” for the claim is found in D.P.'s own words, “as the dollar falls, the price of gold rises”. If it is apparent that the dollar is going to fall further in value, it’s intuitively obvious that the price of gold is going to rise! Further, determining a value for gold is not “virtually impossible”, it’s done every day at the COMEX and in London.
The dollar's fall, though, has also been partially orchestrated by the Fed.
So what? The point is to protect one’s self from dollar devaluation, regardless of the cause. Further, at some point, the Fed is going to lose control of the devaluation and a currency crisis will occur. This is exactly what Bill Gross is saying and why he dumped his US Treasuries.
My concern with Bill's prophecies of gold's gilded future is this; my professional experience suggests that any asset class which experiences extended appreciation exponentially larger than its historical norm (a bubble!) is destined for a catastrophic fall; which isn't to say it will be so, nor when it will occur.
D.P. says it “is destined for a catastrophic fall” and then backtracks with “which isn’t to say it will be so”. At any rate, he’s correct that most if not all parabolic bubbles crash. So the question, then, is: Is gold in a bubble? Not when not one in a thousand have it in their portfolios. Not when you see people selling their gold for cash. Not when you don’t see people standing in lines waiting to buy gold coin. Not when the dollar has much further to drop.
I could critique away at the posts, pointing out the fallacy of Bill's claims "that no entity...is interested in" investing in US debt, or his "zero risk investment claim" (time-value of money risk), but the pickin's are too easy. Suffice it to say that Bill is over his head; which isn't to say he is necessarily wrong. More likely, his is a broken clock.
Maybe I should have stated: “no entity in their right mindis interested in...”. If this weren’t the case, why is it that the Federal Reserve has recently become the number one holder of US Treasuries, surpassing Japan and China? Answer: Because the Fed is the buyer of last resort. When the US can’t sell it’s debt, it has two choices: raise the interest rate paid on them to make them more attractive (lipstick on a pig) or the Fed buys them. To raise rates would be disastrous as we already pay $500 billion a year in interest. A third option would be huge spending cuts (and tax increases) – not likely.
“Time value of money risk”?! Where would D.P. suggest one put his money? In a savings account in a bank that pays a negative interest rate? Further, just how much risk of loss is there on, say, $1000 invested in items that will eventually be consumed anyway?
As for our overall economic plight, I would argue that, at the root of economic success is the person, the individual. At the individual level humans worldwide continue to prove their resourcefulness. Humans, it seems to me, find their founding motivation primarily in one thing, to live better, for themselves and their families! Therein lies my hope.
Humans worldwide will continue to prove their resourcefulness until they don’t. How resourceful were all the unprepared humans after Katrina - so disappointed by their failed faith in their government for help?
I’ve read several times that today’s is the first generation of Americans whose standard of living will be less than that of their parents.
“Hope” is not a strategy.
"There is no means of avoiding the final collapse of a boom brought about by credit [or monetary] expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of the further credit expansion, or later as a final and total catastrophe of the currency system involved."