Enlightened Economics

Economics for an Enlightened Age

Posts Tagged ‘deflation’

• The Allure of Gold: Now and through the Ages

Posted by Ron Robins on February 10, 2010

While respected sociologist Dr. Paul Ray reveals the rise of higher consciousness in society today, we also note the rise of something else unparalleled in our modern epoch: the declining confidence in developed countries’ paper currencies. This is clearly evidenced by that eternal barometer of currency health—gold.

Having seen gold’s U.S. dollar price rise four-fold over the past decade and with substantial gains in all currencies (while outperforming every other major asset class), gold is resuming its historical monetary role.

Why is this happening? Mainly because of our gradual realization of what I call the Really Bad Three ‘Ds’ of the developed world:

1) Debt (The Global Debt Bomb, Forbes);

2) Derivatives (… the new ‘ticking bomb,’ Marketwatch); and,

3) Demographics (The 81% Tax Increase, by Bruce Bartlett, and Global Ageing Population–Financial and Economic Crisis Brewing, by Niels Jensen.

Also supporting gold’s ascent and paralleling Dr. Ray’s thesis of a rising higher consciousness globally, is the increasing appreciation of gold’s age old and alluring spiritual, cultural, and healing qualities.

Gold through the ages
Gold has enthralled people from time immemorial. In ancient Egypt, Egyptians ingested gold for spiritual, mental, and bodily purification. In India’s Vedic tradition gold is associated with the sun, light, fire, purity, life, immortality, truth, splendour—and long revered as money and wealth. In China, traditionally gold is owned for good luck. The golden dragon, the symbol of Chinese culture, stands for happiness, procreation, and immortality.

In Europe, the Greeks, Romans, Venetians, Dutch, Spanish and British, all found gold to be the ideal currency. Gold has historically been chosen as currency due to it being “durable, divisible, consistent, convenient, and have value in and of itself.”

In our modern era New Agers call gold “the Master Healer’… Gold symbolizes the purity of spirit and they attribute the power of cell regeneration, energy conductivity, communication transmission and energy purification to the metal… In the world of spiritual healing, gold has the emotional power to ease tension, feelings of inferiority, and anger as well as encouraging the realization of one’s potential and bringing comfort.” (From: jewellerysupplier.com)

Growing practical uses of gold today
Gold also has new and rapidly growing practical applications. It is used in electronics and computers as an extraordinary natural conductor of electricity which will not rust or degrade. In medicine, it is used to treat arthritis, and gold nanoparticles are central in much of biological research. In aerospace, NASA uses gold in a film to reflect infrared radiation and as a lubricant for mechanical devices operating in space.

Gold alloys are utilized in dentistry for fillings, crowns, bridges, and orthodontic appliances. Dentists find gold easy to work with, nonallergenic, and chemically inert. (See geology.com)

Perhaps the oldest and best known use of gold is for jewellery. Analysis of GFMS Ltd.’s third quarter, 2009 report, shows gold used in jewellery represented about 59% of usage and that gold for investment purposes accounted for 28% of demand; electronics 9%; other industrial demand for 2%; and dentistry 2%.

Inflation/hyperinflation/deflation fears increase gold’s attraction
However, it seems that for 2009 as a whole, something extraordinary happened: for the first time in decades investment demand for gold exceeded that of jewellery use. Gold is being purchased as a hedge against the anticipated currency chaos resulting from the Really Bad Three D time-bombs of uncontrollable Debt, explosive Derivatives, and aging population Demographics.

The fears are that the governments and central banks of the U.S., E.U., U.K., and Japan, may of necessity create high inflation to alleviate the burden of their unsustainable debts and obligations. Unfortunately, inflation can get out of control, increase rapidly, and result in hyperinflation causing huge loss of confidence in the affected currency.

Central banks can generate inflation by printing money. Put simply, they flood the economy with almost free, ‘excess’ money, which forces a decline in value of each monetary unit, thus producing inflation. Countries (or anyone in debt) can then pay off their debts with money that buys a lot less—thus cheating their lenders. This has been common practice of indebted governments throughout time and is what ignites the lust for gold as the safe haven from the ensuing monetary and economic maelstrom.

However, renowned economics’ professors Carmen M. Reinhart and Kenneth S. Rogoff, as well as Dr. Lacy H. Hunt, and others, believe that deflation will rule. In deflationary periods, as in the 1930s, the money supply contracts, prices fall, debt deleveraging occurs, major financial system defaults occur, the economy shrinks, and government deficits and debts explode upwards. Even in deflationary episodes, investors fearing losses or government failure buy gold for protection. (See The Long Wave Analyst.)

Therefore, central banks in the developing world possessing the world’s largest reserves of developed countries’ currencies and debt are fearful of losses arising from any of the above potential conditions. So, to protect the value of their assets they do what central banks have always done—they buy that ancient metal of kings—gold. The central banks of China, India, and Russia, are among the biggest buyers of gold today.

Furthermore, as these developing nations grow they are investing increasingly in their own locales where investment returns are higher than in developed countries. Thus, their reduced buying or outright selling of developed countries’ debt and currencies is further lowering the value of those currencies and debt.

Gold’s new role
These developments are creating mounting instabilities in the world’s financial system and are encouraging discussions of a new global currency that might compete with or replace the U.S. dollar. Already, Brazil, Russia, India and China (the so-called BRIC nations) as well as developed countries such as France, are demanding the establishment of a new world currency order.

To accommodate these demands the International Monetary Fund’s (IMF) Special Drawing Rights (SDRs—a ‘basket’ of currencies used as money between central banks) may well be re-formulated to include new currencies and commodities. Theoretically, the re-formulated SDRs could even become the world currency.

Top gold analysts like Jim Sinclair see the linking of gold to both the SDRs and to the U.S. dollar money supply. By anchoring the dollar to a rising gold price the U.S. could likely stem the dollars declining value.

The downside of gold production
If proper safety and environmental rules are not followed the mining and production of gold can mean ill health for miners and mining communities, and environmental degradation. Mining and processing of gold ore usually requires the use of the highly toxic chemicals such as arsenic and mercury.

The ore after processing is left in tailings ponds, and if the ponds are not carefully designed, built, and maintained, the water from these ponds can contaminate water sheds, rivers, and farm fields. If not properly managed, there are real downside risks in the mining of gold.

However, there are two reasons why I feel more optimistic about gold mining in the future. Firstly, non-governmental organizations (NGOs) around the world are bringing to light those gold mining activities that are doing harm. In some cases NGOs have caused abusive mining operations to shut-down or to make major changes in their operations. Secondly, governments are implementing ever tighter health and environmental controls concerning mining.

These factors are slowing the amount of gold mined, as well as making the mining itself more expensive. Hence, as gold demand increases and the above factors help to restrain its supply, gold prices are likely to receive even further support. Incidentally, since the 1990s, global gold demand has substantially exceeded what is mined, while the amount of new gold found is unable to replace that mined.

To summarize, gold is re-incarnated
In the next few years the probability of currency and economic turmoil due to the Really Bad Three Ds—Debt, Derivatives, and Demographics of the developed world—will be greater than at any time since the 1930s. Similar turmoil has occurred innumerable times over countless millennia, and can be seen from the ancient civilizations of Egypt, India, China—to modern Europe. As turmoil occurs, gold becomes the store of wealth and assumes its role as the currency of choice.

However, gold is not only rising due to currency and economic instabilities. It is also rising because of its many fast growing commercial applications and particularly because of the allure of its age-old spiritual, cultural, and healing characteristics. In the era of higher consciousness where Enlightened Economics reigns, gold serves many key functions. The future is indeed golden!


© Ron Robins, 2010.


Posted in Consciousness/Psychology, Economics, Finance & Investing, Gold & Precious Metals, Personal Finance, Spiritual | Tagged: , , , , , , , , , , , , , , , , | 1 Comment »

• Interest Rate Manipulation and Loose Money Promote Economic Collapse

Posted by Ron Robins on April 6, 2009

Few people would compare downward central bank interest rate manipulation and loose money policies to Soviet style command economics. But I do. And I suggest that if these policies continue for much longer, it could lead to an economic collapse, something approaching that of the Soviet Union’s in the late 1980s. Consider the outcomes for the United States of excessively low interest rates and loose monetary policies in recent years fostered by the U.S. Federal Reserve:

  • A real estate boom and bust, with massive over-building.
  • Discouragement of savings which fell to all-time lows relative to incomes.
  • The taking of inordinate financial risks.
  • The creation of excessive debt, particularly by consumers.
  • The expansion of total debt far faster than either GDP or income.

Furthermore, the Japanese experience with many years of zero-based interest rates and easy money has enormously compounded its economic problems. Here is the situation in Japan today:

  • Japan cannot raise interest rates in any meaningful way due to its gargantuan public debt. To do so could bankrupt the nation. The country is trapped into lower rates.
  • Until recently, Japan had become the financier of ultra cheap plentiful loans that artificially boosted global asset prices. The so-called ‘yen carry-trade’, and, its recent collapse has helped crush global asset values.
  • Zero-based rates combined with major monetary expansion smashed down Japan’s exchange rate, making imports expensive and discouraged balanced domestic consumption.
  • A ‘cheap’ Yen gave Japanese exporters an unfair trade advantage relative to other developed economies, particularly that of the United States.
  • Japan has failed to pull itself out of an almost twenty-year slump.
  • Japan has produced a situation of significantly diminished resources to fight its present downturn, not only due to the enormity of its government debt, but also because of deteriorating savings in recent years and lack of domestic consumer demand.

With central bank rates of zero per cent proving inadequate to get individuals and companies borrowing, and banks lending again, governments now seek to lower their bond yields. Thereby rates for mortgages, auto loans, consumer loans, etc., are also manipulated down, hoping to kick-start consumption. Hence, the U.S., Japanese, British and other central banks are engaged in a massive ‘printing money’ exercise to buy huge quantities of their respective governments’ bonds in an effort to lower their bond yields and create the easy money. Such policies usually have the following outcomes:

  • If successful, debt levels go from really bad to extremely bad!
  • Short-term artificial demand stimuli distort longer term supply/demand relationships. Look what has happened to the American auto industry arising from zero-cost financing a few years ago. It appears that much of the increased sales was at the expense of future consumption and has helped shape the horrendous situation for the industry today.
  • Financial and economic imbalances mount, producing an ever more unstable economic environment. As Stephen Roach, Chairman of Morgan Stanley Asia, wrote on March 10, 2009 in the Financial Times, “Policies are being framed with an aim towards recreating the boom. Washington wants to get credit flowing again to indebted US consumers… It is a recipe for disaster.”

Economies with excessively loose monetary policies and who force interest rates to ultra low levels for extended periods of time eventually succumb to a massive top-heavy debt structure which at some point ‘topples over.’ These countries then suffer either a deflationary debt implosion/depression in which much of the debt is liquidated, or the country’s central bank instigates a huge inflationary push to reduce the value of all credit market debt in the country by vastly increasing the amount of currency and the expansion of its money supply.

A big inflationary push frequently leads to a lack of confidence in the country’s currency and hence the possibility of ‘hyper-inflation’ occurring as everyone unloads the country’s currency for real goods or other currencies. Argentina earlier this decade and Zimbabwe recently, are examples of central bank sponsored inflation that led to no confidence in their currencies, resulting in hyper-inflation. The inflationary approach is what appears to be favoured by the American, Japanese and British central banks.

From an Enlightened Economics perspective, the actions of manipulating down interest rates and the over printing of money by central banks fall under a terrible fallacy: the belief that we can resolve our short-term economic problems by going more into debt and not concern ourselves with the long-term consequences. A global consciousness has to arise which understands that manipulating markets, most especially interest rates and money supply, leads to highly unstable economies which in time either implode or explode!

Sometime in the next few years we will again learn history’s lesson concerning long periods of ultra-low interest rates and loose money. And the lesson is that by artificially enforcing such policies for extended periods of time leads to an inevitably unwieldy mammoth debt structure that eventually crushes the economy. As I mentioned at the beginning of this piece, it is comparable in my view to that of the Soviet command economy which finally imploded after trying for decades to make it work.


© Ron Robins, 2009.

Posted in Banking, Monetary Policy | Tagged: , , , , , , , , , , , , , , , , , , , , | Leave a Comment »

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