Zeihan on gold

[cordex]

Some of you turned me on to Peter Zeihan's youtube channel.  He's obviously very knowledgeable and always very confident in his pronouncements, but sometimes it seems like he makes significant errors and may not understand the foundational concepts as well as he claims.  Today he had a piece on gold backed currencies vs fiat currencies:
https://www.youtube.com/watch?v=-rANSHB4q1Y

Fundamentally I agree with him - gold backed currencies lack the flexibility to enable the economic expansion necessary for the modern world.  However, Zeihan goes on to say that the scarcity of gold in comparison to the currency needed becomes a source of "massive inflation".  Later on he repeats that because there isn't enough gold to satisfy the demand you'd have "hyperinflation triggered by the currency itself".  That's exactly backward, isn't it?  In a system where an ounce of gold is worth $20, scarcity of gold would increase the buying power of $20 leading to enormous amounts of deflation.  Radical deflation isn't a positive thing either (except to people holding a ton of cash or gold), but that's a really basic concept to misunderstand if you're putting yourself out there as a subject matter expert.

Maybe he just repeatedly misspoke, but it's not the first time I've noticed him confidently tout something that simply doesn't make sense.

[HankB]

On gold and inflation . . . let's turn back the clock to around 1910.

Back then, an ounce of gold or a $20 bill would buy you (for example) a nice men's suit  . . . . or a Colt revolver and a box of ammo. By 1923 - 100 years ago in the post WWI era - you'd have to add a couple of bucks.

Today, for the cost of an ounce of gold, you can still get a Colt revolver and a box of ammo. Or a pretty good men's suit. For a $20 bill . . . 

[cordex]

Yes, an ounce of gold has roughly maintained purchasing parity looking at those products for those specific time periods (although I'm guessing $2k will get you a much nicer suit than I've ever owned), but that is both cherry picking and missing the point.

If today everyone needed to use gold-backed currency to buy groceries and pay their mortgage then an ounce of gold would buy a hell of a lot more.  If all gold ever mined anywhere - jewelry, electronics, museum pieces, bullion, etc) was used strictly to back the $20.9 trillion in US currency currently in circulation each ounce of gold would be worth $2,821.45 in modern money.  If anyone wanted to keep their wedding bands or computer chips then obviously that would cut into the amount of gold available to back currency and drive the value up even more.  If any other country wanted to own gold for anything, that would drive the value of gold up even more.  The US holds about 26.5% of global wealth, so if we also had 26.5% of global gold an ounce of gold would be worth $10,646.99.  The US currently possesses something like 4% of the above ground gold reserves.  At that ability to back, an ounce of gold would be worth $70,536.32.  Gold is not currently plentiful enough to make for a reasonable backing for an economy as large as ours.

[MechAg94]

I may be looking at it wrong, but I think he is saying a shortage of the gold based currency would lead to inflation.  Maybe that assumes there is no other means of exchange to switch to.  I am not entirely clear on how that would work out.  It may relate more to how the countries are using their gold standard rather than the value of gold itself.

[WLJ]

Be our luck the day after we switch back to gold backed econ someone will announce they've developed a way to turn lead into for gold for pennies per pound.

[cordex]

I may be looking at it wrong, but I think he is saying a shortage of the gold based currency would lead to inflation. 

Scarcity of a currency (or the asset backing said currency) means less money is chasing more goods ... meaning the money is worth more, not less.  That's deflation.  Right?

[MechAg94]

Scarcity of a currency (or the asset backing said currency) means less money is chasing more goods ... meaning the money is worth more, not less.  That's deflation.  Right?

Sounds right.  The only thing I can think of is often countries start devaluing currency or printing more money to increase the money supply which leads to inflation.  That is more of a government action, not a direct result of using gold.  I don't know how he is coming to his opinion so I am not sure.

[JTHunter]

Sounds right.  The only thing I can think of is often countries start devaluing currency or printing more money to increase the money supply which leads to inflation.  That is more of a government action, not a direct result of using gold.  I don't know how he is coming to his opinion so I am not sure.

All of the government "give-aways" over the last 12-24 months (stimulus checks, etc.) are the main reason we have had 8-9% inflation over the last year.  The government printed tons of money for these "bonuses" but had no backing to support the paper.  This "devalued" the dollar to the point that prices HAD to rise to compensate for the diminished value.  Thus the "inflation" of prices. 

[Northwoods]

Be our luck the day after we switch back to gold backed econ someone will announce they've developed a way to turn lead into for gold for pennies per pound.

You can actually made gold by nuclear reaction, or in a particle accelerator (can’t remember offhand).  Not from lead IIRC, and it usually forms an unstable isotope.  So it’s not only far more expensive than the value of the gold you could produce much of it would decay radioactively anyway.

[Northwoods]

Yes, an ounce of gold has roughly maintained purchasing parity looking at those products for those specific time periods (although I'm guessing $2k will get you a much nicer suit than I've ever owned), but that is both cherry picking and missing the point.

If today everyone needed to use gold-backed currency to buy groceries and pay their mortgage then an ounce of gold would buy a hell of a lot more.  If all gold ever mined anywhere - jewelry, electronics, museum pieces, bullion, etc) was used strictly to back the $20.9 trillion in US currency currently in circulation each ounce of gold would be worth $2,821.45 in modern money.  If anyone wanted to keep their wedding bands or computer chips then obviously that would cut into the amount of gold available to back currency and drive the value up even more.  If any other country wanted to own gold for anything, that would drive the value of gold up even more.  The US holds about 26.5% of global wealth, so if we also had 26.5% of global gold an ounce of gold would be worth $10,646.99.  The US currently possesses something like 4% of the above ground gold reserves.  At that ability to back, an ounce of gold would be worth $70,536.32.  Gold is not currently plentiful enough to make for a reasonable backing for an economy as large as ours.

We’d have to devalue our currency by about 30:1 or inflate our currency a similar ratio to match the available gold to our currency.  Imagine being to buy a house for $10k instead of $300k.  Granted your salary would also drop from $100k to $3300.

Ultimately it doesn’t really matter what your salary is, or what some items costs in local currency.  It matters how many hours of your labor that item represents.  If it costs you 8000 hours of labor what does it matter if that’s $800 or $800k? 

[Bogie]

Given that gold is actually a fiat currency itself...
 
It has some manufacturing use, but you can't eat it, sleep under it, or boink it...
 
These days, I'd try to invest in some land that doesn't have a tax attached... Or tools.

[cordex]

Ultimately it doesn’t really matter what your salary is, or what some items costs in local currency.  It matters how many hours of your labor that item represents.  If it costs you 8000 hours of labor what does it matter if that’s $800 or $800k?

The numbers don’t matter, but it isn’t just numbers at issue.

The main weakness of asset-backed currency is that the asset backing it tends to be scarce and valuable and such things tend to be difficult to expand government holdings to match the needed money supply required for growth. To get it to match (or to hide taxation) regular debasement and devaluation is required, which violates the whole purpose of a consistent value, asset-backed currency. At that point you might as well go full fiat.

[MechAg94]

We’d have to devalue our currency by about 30:1 or inflate our currency a similar ratio to match the available gold to our currency.  Imagine being to buy a house for $10k instead of $300k.  Granted your salary would also drop from $100k to $3300.

Ultimately it doesn’t really matter what your salary is, or what some items costs in local currency.  It matters how many hours of your labor that item represents.  If it costs you 8000 hours of labor what does it matter if that’s $800 or $800k?

The problem is prices and salaries never shift at the same time or all at once so there can be a lot of pain in the transition.  I doubt the consumer or the employee will ever come out the winner.

[Northwoods]

The problem is prices and salaries never shift at the same time or all at once so there can be a lot of pain in the transition.  I doubt the consumer or the employee will ever come out the winner.

That’s definitely true in inflationary times.  A lot of economists like to say that holding lots of debt is great in times of high inflation.  Well, only if your income keeps up with the costs of living plus servicing the debt.  I mean, yeah it’s great to owe $500k on a house if inflation goes on a tear because your paying off old debt with new inflated money.  But that presumes you have an income rising fast enough to pay for food, heat, clothes, AND your mortgage.  If inflations causes all your non-housing costs of living to go up from $50k to $500k/year and your income only goes up from $100k to $400k/yr you’re *expletive deleted*ed.

[Bogie]

Speaking of which...
 
I wonder how many people have adjustable mortgages these days?
 
I remember what happened to real estate (and farming... and Willie and Neil are still playing off that...) when Jimmy was president...

[Northwoods]

Speaking of which...
 
I wonder how many people have adjustable mortgages these days?
 
I remember what happened to real estate (and farming... and Willie and Neil are still playing off that...) when Jimmy was president...

I’m sorry (well, not really) but anyone that didn’t refinance an ARM to a fixed 15 or 30 year mortgage when rates were under 3%, or least by the time it climbed to 4%, deserves to lose their house if they can’t afford the payments at 8%.

[MechAg94]

That’s definitely true in inflationary times.  A lot of economists like to say that holding lots of debt is great in times of high inflation.  Well, only if your income keeps up with the costs of living plus servicing the debt.  I mean, yeah it’s great to owe $500k on a house if inflation goes on a tear because your paying off old debt with new inflated money.  But that presumes you have an income rising fast enough to pay for food, heat, clothes, AND your mortgage.  If inflations causes all your non-housing costs of living to go up from $50k to $500k/year and your income only goes up from $100k to $400k/yr you’re *expletive deleted*ed.

I heard that during monetary troubles in Argentina, there was a brief time where silver/gold prices went through the roof due to the currency value dropping.  Some people were able to pay off loans with coins they had saved at a pretty good discount.  They also said the govt put a cap on that exchange rate pretty quick so that didn't last long. 

Just thinking savings in cash may not help you but assets such as precious metals and land probably hold their value best. 

[dogmush]

All of the government "give-aways" over the last 12-24 months (stimulus checks, etc.) are the main reason we have had 8-9% inflation over the last year.  The government printed tons of money for these "bonuses" but had no backing to support the paper.  This "devalued" the dollar to the point that prices HAD to rise to compensate for the diminished value.  Thus the "inflation" of prices. 

I'm not sure it's as simple as that.  For one thing we haven't had any "backing to support the paper" in a century.  Also GDP has been rising.  The labor market is still out of whack with a bunch of folks just not coming back to work, but the COVID extra unemployment checks are long gone, so I'm really at a loss as to why so many folks, especially low/unskilled workers aren't back to work.

In the US Inflation is also being driven by food, housing, and durable goods prices, which are well ahead of the overall inflation rate.

Certainly given the strong correlation to fiscal stimulus and inflation across the world, at least some of the inflation is the increase to the money supply (although, I confess my macro-econ is not good enough to tell you why) It's definately not the sole reason, and I'd question if it is even the leading cause of US inflation.

[Northwoods]

I'm not sure it's as simple as that.  For one thing we haven't had any "backing to support the paper" in a century.  Also GDP has been rising.  The labor market is still out of whack with a bunch of folks just not coming back to work, but the COVID extra unemployment checks are long gone, so I'm really at a loss as to why so many folks, especially low/unskilled workers aren't back to work.

In the US Inflation is also being driven by food, housing, and durable goods prices, which are well ahead of the overall inflation rate.

Certainly given the strong correlation to fiscal stimulus and inflation across the world, at least some of the inflation is the increase to the money supply (although, I confess my macro-econ is not good enough to tell you why) It's definately not the sole reason, and I'd question if it is even the leading cause of US inflation.

Well, since we’re discussing Zeihan in this thread, his explanation for the inflation is that it’s a result of losing so much boomer money from capital markets due their mostly being retired now, and there’s no where close to enough X’ers to replace them.  Plus we’re reshoring a crap ton of manufacturing which is driving a lot of economic activity.  Plus the millennials are finally hitting their consumption strides. 

While QE and stimulus bribes have their effect Zeihan says it’s a sideshow compared to those other factors. 

Who right?  🤷‍♂️

[Boomhauer]

I'm not sure it's as simple as that.  For one thing we haven't had any "backing to support the paper" in a century.  Also GDP has been rising.  The labor market is still out of whack with a bunch of folks just not coming back to work, but the COVID extra unemployment checks are long gone, so I'm really at a loss as to why so many folks, especially low/unskilled workers aren't back to work.

In the US Inflation is also being driven by food, housing, and durable goods prices, which are well ahead of the overall inflation rate.

Certainly given the strong correlation to fiscal stimulus and inflation across the world, at least some of the inflation is the increase to the money supply (although, I confess my macro-econ is not good enough to tell you why) It's definately not the sole reason, and I'd question if it is even the leading cause of US inflation.

The COVID checks might be gone but there is *something* the non working mother *expletive deleted*ers are getting from the government that allows them a very good standard of living. I haven’t figured it out exactly yet but it sure as hell ain’t the measly amount everybody says that the welfare is limited to because these *expletive deleted*ers all have 90k pickup trucks towing $200k boats to the lake on a Wednesday.

[HankB]

The COVID checks might be gone but there is *something* the non working mother *expletive deleted*ers are getting from the government that allows them a very good standard of living. I haven’t figured it out exactly yet but it sure as hell ain’t the measly amount everybody says that the welfare is limited to because these *expletive deleted*ers all have 90k pickup trucks towing $200k boats to the lake on a Wednesday.

About 10 years ago the Heritage Foundation found out that we were spending over a trillion dollars a year on some 80+ programs called "welfare" which was loosely defined as "unearned entitlements" (to distinguish this spending from earned entitlements like Social Security.) I've been wondering myself how the people who have rage quit or otherwise left the workforce are still able to eat - they can't ALL have moved back in with their parents.

Also makes me wonder why Social Security is gong to run out of money in 10 years potentially resulting in a benefit cut, but nobody - NOBODY! - talks about welfare running out of money. 

[MechAg94]

About 10 years ago the Heritage Foundation found out that we were spending over a trillion dollars a year on some 80+ programs called "welfare" which was loosely defined as "unearned entitlements" (to distinguish this spending from earned entitlements like Social Security.) I've been wondering myself how the people who have rage quit or otherwise left the workforce are still able to eat - they can't ALL have moved back in with their parents.

Also makes me wonder why Social Security is gong to run out of money in 10 years potentially resulting in a benefit cut, but nobody - NOBODY! - talks about welfare running out of money. 

I have heard there were many different overlapping "welfare" programs.  I didn't know there were 80+ but that makes a lot of sense. 

[cordex]

I’ve been watching Zeihan for a few months now, and I’ve gone from being impressed by the breadth of his knowledge to being disappointed by his lack of nuance and comprehension of fundamental concepts of some of the issues he discusses while pretending to be a SME. I obviously can’t speak to anything but a small fraction of the issues he discusses, but when he talks about something I’m pretty versed in, I realize he has about 80% of the understanding he pretends to have.

Way smarter than I am by a long shot, but so generalized that his brain is spread a little thin.

[MechAg94]

I’ve been watching Zeihan for a few months now, and I’ve gone from being impressed by the breadth of his knowledge to being disappointed by his lack of nuance and comprehension of fundamental concepts of some of the issues he discusses while pretending to be a SME. I obviously can’t speak to anything but a small fraction of the issues he discusses, but when he talks about something I’m pretty versed in, I realize he has about 80% of the understanding he pretends to have.

Way smarter than I am by a long shot, but so generalized that his brain is spread a little thin.

I was thinking he is better with international trade and relations than US domestic politics, but that may be because I know very little about international trade and relations.  But yes, he is some who may make you think about stuff you weren't considering, but I am not sure I would bet the farm on him. 

[MechAg94]

The COVID checks might be gone but there is *something* the non working mother *expletive deleted*ers are getting from the government that allows them a very good standard of living. I haven’t figured it out exactly yet but it sure as hell ain’t the measly amount everybody says that the welfare is limited to because these *expletive deleted*ers all have 90k pickup trucks towing $200k boats to the lake on a Wednesday.

And those people probably still look at you and think you are rich. 

I may have it wrong, but I also remember hearing govt disability was rolled into Social Security many years ago.  But there is no fraud or corruption in that system so that can't be part of the problem.