Which would you rather have: corn or gold? - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 13 August 2012
Which would you rather have: corn or gold? A  A  A

Ouzilly, France

Not much action in the markets on Friday...or all of last week. The players are at the beach. They're playing tennis and beach ball. They're not playing in the stock or commodities markets.

But the real story is not the zigzagging stock market anyway...and not the endless bobbing and weaving by European policy makers either.

And it doesn't really matter, either, whether Obama or Romney wins in November.

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The price of corn is soaring. But so what? The UN has urged US authorities to stop using corn to power automobiles. They're worried about a worldwide food shortage. People can eat corn. They can't eat petroleum. Besides, ethanol is just another flimflam scheme by the feds to redistribute money from the people who earn it to the people who control government.

In America, people use corn to power automobiles not because it cheaper energy, but because the US government requires it.

By the way, thanks to the forces of nature and venality, which is to say a record-breaking drought on the one hand and the feds' intervention in the markets on the other, corn has been the best thing you could have bought over the last five years. Better than stocks. Better than Treasuries. Better than oil. Even slightly better than gold.

This is not to say that the 'investments' are of equal value. Neither is an investment. Corn is a speculation. Gold is just a way to preserve wealth, not a way to earn more. As an investment gold sticks. But as a way to hold wealth, it is unbeatable. Which would you rather have: a few gold bars buried in the yard or a crib full of corn on top of it? Rats don't eat gold.

Also, still sidetracked by gold, there was an article in the Financial Times last week in which Peter Tasker advised investors to sell their gold and "send their kids to college."

Tasker notices that gold is expensive in terms of other consumer goods. On that basis, he believes it is time to sell. In his mind, it is "just another financial asset," so it should be bought when cheap and sold when dear.

There is some truth to that. Gold goes up and it goes down. If you own gold, you think you are smarter when it is going up rather than down. But it is a mistake to think about it at all. Gold is merely a convenient way to store wealth, because rats don't eat it. And if you bury it well, the two legged rats won't find it either.

Fundamentally, gold is real money, not just another 'financial asset." And it protects you from both inflation and deflation. There is no counterparty risk when you own gold. There's no one on the other side of the trade who can go broke and destroy your investment. And gold adjusts much more quickly and surely to monetary inflation that do other consumer prices. Over the last five years or so, the world's supply of central bank assets has approximately doubled. Consumer prices have not. But gold has doubled too, probably anticipating a big rise in the CPI.

But Tasker not only advises people to sell gold, he also suggests that they should use the money to 'send their kids to college.' Good luck with that trade, Peter. You'll probably lose money on both sides. In the end, your family will have no gold and another useless piece of paper - a college diploma.

But that's a different story.

Our story for today is the one no one is telling. And no one wants to tell it either. Because it doesn't fit easily into any narrative that people understand. It's a problem that doesn't come with a solution.

The problem is that the leading institutions of the last few hundred years are going broke. And not just financially broke. They're also going broke philosophically...economically...and practically.

On the surface, they're going broke because they're spending too much money. But at a deeper level, they're going broke because they are no longer viable. Or, to put it another way...they've passed the point of declining marginal utility. More 'investments' in these industries are not productive. Instead, they are capital destroying...making people poorer.

Gillian Tett, writing in the weekend Financial Times, shows a bit of what is going on. It involves a school district in San Diego. But the same could be said of many different industries.

The return on educational spending declined to zero about 40 years ago. That's when additional 'investment' produced no positive result. More money was spent. Test scores and other measures of actual school system output remained the same. The additional money was wasted.

But as the authors of "Why Nations Fail" point out, the elites get control of the government and then use it to prevent innovations and protect their power. The corn-state senators force the nation to put ethanol in gasoline. Military industry lobbyists insist on tanks that even the Pentagon doesn't want. And education industry lobbyists encourage local governments to keep spending - even when they don't have any money.

In the event, local school districts found it harder and harder to increase their budgets by raising taxes - perhaps especially in California. That left officials with a problem: how to continue spending money? They turned to those nice people from Goldman, JPMorgan, Barclays and other financial professionals, who showed them how to borrow now and pay later.

Which is what Poway Unified, one San Diego school district, did. It sold $105 million worth of 'capital appreciation' bonds. As the name suggests, these are not bonds that give you a current yield. Instead, the foregone yield compounds...unpaid...until 2033. Then, the bonds begin paying...and finally are redeemed in 2051.

Shrewd move? Or financial suicide?

When all is said and done, the school district will pay 10 times the amount of the initial loan. Which raises two questions:

First, if it costs 10 times as much as the initial loan it presumes that the educational output...the actual result of the investment...must be worth 10 times the investment. How likely is that?

Second, if the generation of '33 - '51 has to pay 10 times the amount invested by the school district circa 2012, how will it also pay its own educational costs?

Third, will the loan be repaid at all?

And here is where it gets interesting. Because - apart from the corrupt and suicidal institutions issuing the bonds - the situation casts some light on the attitudes of both borrowers and lenders. The former must believe that they won't ever have to pony up the full amount. The latter, on the other hand, are counting on it. One group might be right.

Both won't be.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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