federal reserve
The Collapse of the Dollar and How to Profit from it
December 24, 2008 - 02:38 — bhugaOkay.
A pretty easy read, in which the Goldbug argument is pretty plainly laid out. 200 pages, said quickly: only smudging the gold with your own grubby fingers is good enough to save you from the government.
The underlying causes, which I agree with, are pretty well laid out. There are some conspiracy theories about the fed 'manipulating the price of gold', which are generally about the fed secretly selling gold to make the dollar look better. They are supported by a few snips from meeting minutes in 1995. I'm skeptical: I just don't think that the markets are that stupid. If they are, then isn't this theory complaining that the price did not rise fast enough and become a bubble, when more people should have realized it needed to happen right away?
Whatever. I'm no fan of the fed, but this is way into attributing to malice what can be attributed to serendipity.
At any rate, like most goldbugs, they highly recommend getting your hands on your gold up close and personal. No ETFs, pooled accounts, or gold certificates for a true gold-hoarder. They even have snips of legalese from the biggest silver trust ETF to prove how nefarious it is. What, they can suspend the creation/redemption of baskets if they are legally prevented from selling silver? What's the difference from having it on hand in that case? I won't be able to buy bullets in shady metals deals from all of my goldbug friends? Whatever.
Gold is money. But let's have a little perspective. Gold miners are not an asset class for diversification. Read Terry Coxon.
I lived through a brief bit of goldbuggery myself, in which I had to physically restrain myself from purchasing a shack on the bayou down around my hometown, get me a safe full of gold and shotgun shells, and spend my days rocking on the porch while the world collapses outside. I think this is a human cognitive bias.
I believe that this emotion is the same, on a large, heart-clutching scale, is the same one that makes humans make bad decisions about loss. Very few people would purchase, for $100, a 50% shot at $220, even though that 50% shot is worth, mathematically, $10. Meanwhile, a $1 lottery ticket worth $0.15, but with a tiny chance at $35k, is snapped up wholesale. Studies have confirmed it, over and over: our brains are broken. We do not understand risk. We fear loss much more than we appreciate the chance for gain, even when they are equivalent. Further, we fear much more things we have no control over--such as currency collapses run by foolish economists with voodoo formulas that have failed as many times in the last 100 years as they have been tried.
So we're helpless against the possible loss of all of our wealth, supplanted by the comforting knowledge that the last few times this kind of thing happened, everyone was calmed by a soothing world war to clear the slate. A perfect storm for our monkey brains, but, I think, not for the rational mind.
The main reason for this is that I don't think there's much that can be done if it comes down to owning physical gold. If you need physical gold, you need a gun, too, and I need to have bought a plane ticket 2 months ago. I fully believe that we're marching down a historical path that led to war 70 years ago, and I see no reason why that's impossible today. But it seems infinitely more sensible to me to be ready to run than to clutch at my wealth. If the world goes to shit, I will probably lose everything; I may not be able to get away in any case. I do not forsee scenarios in which clutching at my property does any better than accepting its loss. Shit happens.
I shall continue to invest as though the world will not come to an end (although more conservatively since Bernstein). I really need to figure out how to make the PP work when you don't know your end-game currency.
The Panic of 1907
December 23, 2008 - 21:15 — bhugaGreat.
This book is very well done--academic enough to satisfy my need for information, and enough flair of the characters involved to make a good yarn. It traces the banking panic of 1907, in which a few New York banks failed and caused a worldwide run on some institutions. It's the proximate cause of the creation of the federal reserve.
The book is important to free-marketers such as myself, as it shows that a world without a fed was not a rosy place. Bank failures and panics were common, especially before the fed, and this one, in particular, was handled by JP Morgan, who basically acted as the Fed. He put up enough of his own money, and more or less coerced the other banks and trusts to put up enough of their money, to save the system as a whole.
The story is the usual: a proximate cause, a credit bubble, and everyone wants their money at once. Some interesting points arise, however.
First, there's a lot of problems in a world where everyone has a central bank but you. One proximate cause of this run was the Bank of England's banning of American finance bills, which were paper that was exchanged for gold in London and brought to America and later converted back into dollars by selling pounds. This was essentially arbitrage against seasonal weaknesses of currencies, and harmless, but the BoE banned it in 1907 and the result was a shortage of money in the states (and an artificially strong pound). One can imagine how difficult it would be for an American bank to compete in such an environment.
The authors do a survey of literature and attempt to discuss what causes bank panics in the last third of the book. It's pretty striking how detached from reality most of the economics on this is. None address the issue that it's completely rational to try and get your money out of a bank in a hurry at the first sign of trouble: everyone knows it only has a small percentage of funds on hand. Instead, economists seem to believe that if everyone just behaved, it would all be okay. There are serious epistemological problems with a field that can believe a large-scale game of spanish prisoner will not be subject to occasional panic. This is to say nothing of the fact that banks all borrow short and lend long. In an equilibrium--what economists love to talk about but is impossible to achieve--this would be fine. But since life changes, this will simply fail every so often. Big surprise.
Austrians love to hate fractional reserve banking and the fed, and I'm generally with them. The fed has had a century to prove that it hasn't really helped a lick in dealing with the evil business cycle, and even if things sucked before it, it's time to get rid of it. But it's still important to remember why the fed came about in the first place. Combatively low interest rates by central banks make for a much more elegant and understated form of economic warfare, and we know how governments like war. Still, if I ran a country, I'd turn out my central bank overnight. My currency would appreciate a hundredfold overnight and my citizens would enjoy a dramatically improved standard of living. If the rest of the world wants to be so clever as to debase their currencies so that my people can take all of their useful goods, who am I to tell them no?
