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October 20, 2009

Paperbugs
by Adam Brochert

It is now time for the tables to turn once again. It is now time for the paperbugs to take their medicine. It is now time for the "Don't Worry, Be Happy and Invest in Stocks Forever" crowd to come to realize they were not only wrong, but arrogant in the face of overwhelming evidence to the contrary.

The paperbugs, as I am now going to start calling them, place all their belief in a paper system destined for failure. Paper fiat money has never worked throughout history and central banks have never benefited society over the long term. Kenneth Gerbino exposes the ridiculousness of paper money in one brilliant quote:

"If you don't trust [G]old, do you trust the logic of taking a beautiful pine tree, worth about $4,000 - $5,000, cutting it up, turning it into pulp and then paper, putting some ink on it and then calling it one billion dollars?"

Yet, such is the logic of the paperbugs. They believe confidence in men is eternal and more reliable than nature. Hasn't history exposed the folly of such beliefs over and over? Gold is money not because any one individual calls it that but because people and societies over the past few thousand years have figured out that it functions well in this role for multiple reasons. The main reason is basic: people in power are not to be trusted! Why is the collective wisdom of millions of people and hundreds of societies less valuable than the decree of a few scheming bankstaz and their paid-for bureaucratic bozos?

I am not saying that we will return to a Gold standard monetary system any time soon. I am saying that this crisis exposes the folly of the paperbug. Believing in paper money when it can be created out of thin air with no work required is childish. If it is not childish, then it can only be nefarious (i.e. if one is an insider, paper money makes perfect sense). The ability to print money out of thin air is intoxicating and highly addictive. Our government and its drug dealer, the federal reserve, have taken the road more frequently traveled and are now in the terminal stages of addict and enabler, respectively.

The paperbugs believe in fairy tales like the fact that the non-federal, for-profit federal reserve corporation is smart and knows what it is doing. The paperbugs believe government apparatchiks know how to "stimulate" an economy. I guess this is because governments have always been the driver behind economic prosperity, growth and innovation in "free" markets, right? This is why communism, fascism and socialism have always produced the strongest and most innovative economies throughout history!

It is time for paperbugs to admit that their beliefs are bizarre and not worthy of serious economic discussion. Monopoly money cannot be the basis for a sound society. Look at what has happened to the United States since we severed the final tenuous link to Gold in our monetary system in 1971! We have lost our advantage over the world. We have lost our prosperity (no, it's not coming back soon for the "average" American), lost our manufacturing base, been through a horrible inflation (the 1970s) that required usurious interest rates to tame, and have been through serial unprecedented bubbles in stocks and then real estate that are now going to continue exploding for a decade or two.

I am not saying Gold would have prevented all of these things, but Gold brings stability. It is boring. Paperbugs know that paper money is never boring. It is a manic-depressive master over society. Loose money fuels a boom and tight money results when the speculation has exhausted itself. The swings are getting wilder precisely because our money is not real. Our monetary system is a fantasy better told as a bedtime story to gullible children than as a basis for a "modern" society.

Paperbugs believe CNBC and Larry Kudlow are telling the truth. Paperbugs believe the U.S. Dollar will maintain its grip over the world and is a viable global reserve currency. Paperbugs believe government "stimulation" is anything besides a complete oxymoron that drains the lifeblood of an economy. Paperbugs believe Gold is worthless and the paper promises of corporations are priceless. Paperbugs believe "stocks for the long haul" is something besides a marketing campaign designed to "rip your face off" over the long haul. Paperbugs believe Ben Stein knows something about economics and the stock market. Paperbugs are permabulls on financial markets.

What paperbugs don't understand is that promises have to be kept consistently by the entity making them to maintain their value. The U.S. government, in aggregate, has past the point of no return. They cannot live up to their promises. They have promised too much and cannot deliver. That means every promise inherent in the currency units of the United States has much less value to the rest of the world. Paperbugs fail to understand that paper is about confidence. Confidence in the United States and its financial system is declining rapidly, which means our paper games are being exposed for the fraud that they are. We can recover, yes, but it will take a decade or two and we will likely be a much weaker nation on the other side.

As the pendulum of time and greed swings in different directions, the Dow to Gold ratio will continue its inexorable decline towards one. Paperbugs will cry and scream and continue to call Gold worthless or a bubble until it is in its final blow-off stage. Then CNBC will tell the paperbugs to buy Gold and Gold stocks right near the top so that their corporate masters can sell to the frenzied paperbugs - sort of like what's happening right now in the general stock market.

The trick for Gold bulls will be to recognize when the final peak in the relative value of Gold is near, then to trade that Gold for stocks, real estate, or some other undervalued asset class of interest. We are a LONG way from that point.

Adam Brochert
http://goldversuspaper.blogspot.com/

Markets and cycles are my new hobby. I've seen the writing on the wall for the U.S. and the global economy and I am seeking financial salvation for myself (and anyone else who cares to listen) while Rome burns around us.