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Warren Buffett Is Wrong about Gold

Sep 10, 2016

27

OUZILLY, France - We're going back to basics here at the Diary.

We're getting everyone on the same page...learning together...connecting the dots...trying to figure out what is going on.

We made a breakthrough when we identified the source of so many of today's bizarre and grotesque trends.

It's the money - the new post-1971 dollar.

Imposter Dollar

This new dollar is green. You can buy things with it.

Yes, it has lost more than 80% of its buying power since it was put in place.

But still, it's not so bad.

Compared with the Argentine peso (current inflation rate: 47% a year), it is splendidly solid.

But the new dollar is an imposter. The old one was connected to gold at a fixed rate. And gold was anchored in the real economy.

The new dollar has no gold backing.

Billionaire investor Warren Buffett believes it's silly to pay someone to take gold out of the ground...and then put it back in the ground and pay someone to guard it for you.

But Buffett misses a vital point: Real money is essential to building real wealth.

It's what makes the economy operate smoothly. It helps us all decide when to buy and when to sell...when to invest and when to refrain from investing...and where to apply our scarce time and resources.

Real Money, Real Value

Real money has real value.

Gold-backed money increased about as fast as the mining industry could extract gold from the ground - which was about the same rate as the economy was growing.

So, when people got more money, they had a claim on more real wealth.

But the new money was phony.

Governments and banks could add as much of this new money as they wanted. But it did not create or even track real wealth; it just took it away from those who owned it.

It was as if Baltimore Orioles owner Peter Angelos tried to increase attendance at Oriole Park by printing extra tickets.

Like a counterfeit ticket to a baseball game, the new money didn't magically add a new seat to the stadium.

The Fed made funding readily available to the banks...and the banks lent lustily to their customers.

Each new bank loan created money that hadn't existed before. Out of thin air. No additional wealth attached. Just credits.

That's why some economists call this new system 'Creditism'. Because the new money is no longer based on real wealth, but on credit.

And the flip side of credit is debt.

You can see the problem already. There's no limit to how much real money you can have. Each additional dollar represents additional wealth.

Credit money is different.

With credit, you know you can increase your spending dramatically. But you know, too, that there is a limit to how much you can borrow.

Eventually, you reach a point where you don't have the cash flow to service the interest on your debt. Then it's time to open the book to chapter 7. Or chapter 11. You are insolvent.

New Credit Crisis

With real money, the more you have, the richer you become.

But as the quantity of credit money increases, the economy becomes more and more vulnerable to a turn in the credit cycle.

As the quantity of debt increases, the quality decreases. That's what's happening with corporate debt now.

You'll recall that, since 2008, corporations have been big borrowers. According to analysts at Goldman Sachs, corporate America has more than doubled its debt since the collapse of Lehman Brothers.

And that's a big problem...

Here's Michael Lewitt, editor of The Credit Strategist newsletter:

  • As of the end of August, 113 companies had defaulted on their debt in 2016, already matching the total number of defaults from 2015. The year-to-date default count was also 57% higher than a year earlier.

    In case anyone is paying attention (it appears they are not), the last time defaults were this high was in 2009 when 208 companies failed during the financial crisis.

Yes, get ready for a new credit crisis - this time centered on corporate debt.

'But wait,' you say, 'the feds can print money. They can make sure we never again suffer a credit crisis. Right?'

Alas, no. They can't create real money. They can only issue more tickets for seats that don't exist. That is, they can only make the underlying problem worse, by lending more money to more people who can't pay it back.

The first big crack in the credit money system came in 2008, when a giant fissure broke open between mortgage debt and the homeowners' ability to pay it.

House prices fell. One in 20 houses was in foreclosure by 2010...and the suicide rate had risen 20%.

And here's the big, dirty secret of the system...and why the rich love it so much...and why they're giving millions to Hillary Clinton to keep it going.

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First in Line

When the housing bubble popped, about $800 billion (our estimate) worth of housing went into foreclosure.

Houses are real assets. When owners couldn't pay, the houses went to the banks that had lent the money against them.

These banks hadn't built the houses. They never owned them. They never earned the money that they lent to buy them either.

Nor did the money come from savers who had deposited their money in the bank. It was money that no one ever earned. It was fiction.

But this didn't stop banks using this fake money to capture real wealth - our houses.

And this is how the rich - heavily concentrated in the financial sector - get richer, thanks to the new credit money system.

It increases the values of their stocks, bonds, and real estate (thanks to low interest rates and Fed buying).

It increases corporate profits, too, by lowering financing costs (and incidentally reducing returns to savers) and by boosting credit-fueled retail sales.

Most important - the rich are first in line when the counterfeit tickets are distributed.

Then you go to the stadium...and you find them sitting in your seats.

Regards,
BILL BONNER Founder, Agora Inc
Bill


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

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5 Responses to "Warren Buffett Is Wrong about Gold"

Gautam M

Sep 12, 2016

A very good and informative article. I feel the fundamental flaw in credit based economy is it is prone for manipulation from those sitting in the corridor of power as real power now vested with those folks who can increase credit in the economy and thus can show more growth and more rewards and gratification for themselves. The situation we are seeing today is due to the gross misuse of those arbitrary power. Anyway manipulation can only go to a certain length post which correction or pricking of bubble is always due. The simple rule of credit based economy is you are living on tomorrow's money instead of accumulated wealth from past and present. This mortgaging of future generation will only go to a certain extent post which it has to stop.

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GOVIND

Sep 11, 2016

haven't ever read better analysis than this. Great!

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Deepak Padher

Sep 11, 2016

Dear Sirs,
I read all your articles. I like to read your articles. Really speaking I wait for your articles. There are good thoughts in the articles.
In this article and in many articles before, you have talked about 'Virtual Money' - The money which has no gold back-up etc. etc..

One thing I want to ask - Why money should have gold back-up only ?
Other metals are also being extracted from the earth and surely they have some value added in it.
Population is also increasing and hence man power is also increasing. They are working. They also add some value.
Population requires many things like food, clothing, shelter etc. These are produced by increased population. Some value is definitely added. Hence I think currency in increasing.

Sir,
I am a very layman and do not know what economics ( Micro and macro ) is.
But I think things are still moving without gold back-up. on the contrary now they are moving very fast compared to previous speed.

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Indrakant Sulibhavi

Sep 10, 2016

What will happen if all gold mines disappear? Do you think easy credit policy is a polished way of stealing hard earned money of household by corporate sector?

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sanjay parijat kaul

Sep 10, 2016

Most beautifully conveyed.... even a layman can understand... Would await for more such articles...

Thanks

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