Commodities plunge, gold soars

I took heat in other threads for maintaining that gold was more currency than commodity; you can always sell it and use it, in effect, as a currency. Thus, as true commodities like oil and copper deflate, gold goes up during times of economic uncertainty. No, you can’t buy a candy bar with it, but gold is always, always the safe haven during a crisis, and if this isn’t a crisis…. I think this theory holds water.

Meanwhile the dollar is doing great, for now. That’s not due to any great faith in the US economy, rather to the awfulness of other currencies (have you checked the Euro lately?). When the auto industry goes belly-up in April, the dollar will crash, hard.

Investors have taken to terming the flight from risky assets into gold a new currency trade. The ongoing concern about the enormous task of getting the world’s banks on track — bedeviling investors across the globe — has produced a safe-haven trade into the likes of Treasurys and the dollar. However, the dollar’s success is, in some ways, a mirage, improving only because other major world currencies have been dreadful.

The dollar has strengthened in the last couple of months, along with gold, which is an odd occurrence, and speaks to the dearth of worthy investments around the world. But the shift to gold has picked up as “everyone is trying to devalue their own currency against everyone else,” says Sean Peche, manager at BlueAlpha Investment Advisory Limited in London.

Gold is nearing its highs from last summer.

That explains the dollar’s strength of late, one founded on risk aversion. Since the beginning of the year, the dollar has gained 9.5% against the euro and 2.3% against the pound, while gold, in dollar terms, is up 9.4%. The yellow metal closed up $25.50 to $967 an ounce Tuesday, highest since July 17, 2008. “Gold is telling you the dollar’s rally is not going to continue,” says Lance Lewis, fund manager at Lewis Capital Partners.

Please fasten your seatbelts. Gold is going to $2,000. I know, I have no idea what I’m talking about, as my earlier posts indicate. It was 880 when I last posted about it two weeks ago; now it’s near 1,000.

Dali is like heaven. It wasn’t on our agenda, we sort of stumbled here, and don’t want to leave. Onto Chongqing tonight.

______________

Richard Burger is the author of Behind the Red Door: Sex in China, an exploration of China's sexual revolution and its clash with traditional Chinese values.

The Discussion: 53 Comments

gold will almost never depreciate. while the dollar will go down the toilet when it is time to pay the billion and billions that is spent on Wall Street.

February 19, 2009 @ 11:52 am | Comment

“Dali is like heaven. It wasn’t on our agenda, we sort of stumbled here, and don’t want to leave. Onto Chongqing tonight.”

Cancel Chongqing; stay another night in Dali.

February 19, 2009 @ 1:01 pm | Comment

Richard, your bet was an easy one. Gold is a primitive symbol and will always prevail in troubled time. My precious…

Here’s a trend to watch: Right now everybody is praising the China US alliance. The future!!!!!!! The US can’t live without China!!! China holds all the cards!!!! China will recover the first out of this crisis. Wtf, this is such and absurd and first degree analysis. Again, let the news catch on! Let the circus go on!

Watch out, how quickly it will deteriorate in the coming months.

February 20, 2009 @ 1:33 am | Comment

Beyond the value of Gold, beyond the facade, who fired on the Chinese ship… And why ??

Why ???

February 20, 2009 @ 3:01 am | Comment

Richard, your bet was an easy one.

I took a lot of heat for it, Some who don’t understand how gold works said it would deflate along with wheat and copper and called me an idiot. And I made the bet more than two years ago, before the crisis was a crisis.

February 20, 2009 @ 4:16 pm | Comment

And I made the bet more than two years ago, before the crisis was a crisis.

Did you sell up, or have you kept your investment? If the latter I hope you sell at the right time.

February 20, 2009 @ 7:48 pm | Comment

“I took a lot of heat for it, Some who don’t understand how gold works said it would deflate along with wheat and copper and called me an idiot.”

I remember clearly these events, I was watching with an incredulous eye. I never understood actually why these people were arguing against such an obvious fact. Gold means nothing anymore, but it’s still a very strong symbol, that will prevail in these times of crisis, God knows why.

This medieval fascination for this piece of metal is beyond my comprehension, and obviously is bound to fail eventually. Meaningless it will become, once you are starving and trying to trade it for water or a piece of meat. Gold is a temporary shelter, the last pathetic hope of this skewed system.

February 20, 2009 @ 8:38 pm | Comment

Rather than talk about gold, I’m going to echo Richard’s comments on Dali – we just loved it. I want to go back! But we’re having a great time in Chongqing as well.

February 20, 2009 @ 10:53 pm | Comment

Bao, you have no idea what you’re talking about. Seriously. The fascination for this piece of metal is no more unusual than that with a piece of green paper. Unlike paper, however, gold has always maintained its value and has been highly valued from nearly the beginning of recorded history. Try doing some basic research into what makes it special as a metal and how it has been used as currency for quite a long time. Meanwhile, do you have a better suggestion as to where to place one’s money? The world will survive this depression, and those who make the smart investments now will come out far ahead.

Raj, I’ve been selling on highs and buying on lows, which worked pretty well until a few weeks ago. Now I am afraid to sell because once it gets past the psychological barrier of 1,000 it may not be worthwhile to try to time the market. It will go up and there’s no sense day trading.

Lisa, I really like Chongqing, though its sheer size is kind of terrifying.

February 20, 2009 @ 11:17 pm | Comment

Richard, my comment was meant to be philosophical. I understand the role that Gold has in our society. I’m surprised that you take my comment such at a first degree to be honest.

“Meanwhile, do you have a better suggestion as to where to place one’s money?”

Actually I do. Invest in resources, land, equipment, etc. If there is one lesson that this crisis is telling us it is: Do not live in debt. Credit is evil, pure and simple.

If I was to paint a bleak future, I’d say that the people that own things (resources, lands) will prevail over people sitting on a pile on golden metal. The world will survive this depression of course, but in what shape, that is the real question.

It has been said that cockroaches would survive a nuclear holocaust as well..

February 20, 2009 @ 11:29 pm | Comment

Bao, your exact words:

This medieval fascination for this piece of metal is beyond my comprehension, and obviously is bound to fail eventually. Meaningless it will become, once you are starving and trying to trade it for water or a piece of meat. Gold is a temporary shelter, the last pathetic hope of this skewed system.

“Philosophical”? Sorry, I can’t read your mind, but your words are pretty clear. It was your words I was commenting on. Meanwhile, if things get as bad as you say, then ownership rights to property will be meaningless in the all-engulfing anarchy. We may as well all slit our throats.

February 20, 2009 @ 11:32 pm | Comment

Richard, don’t you find it absurd to base an entire worldwide economy based on the scarcity of a specific type of metal? I mean, seriously, don’t you see the absurdity in this concept?

Put away for a second the established facts, and think about it… It makes no sense, at all. My point is that gold is the biggest symbol exposing the absurdity of the capitalism concept. Abstract and more and more meaningless.

What we are witnessing now, is a major global political and social change. The consequences of this crisis will echo for generations and generations to come. We are not dealing with a temporary situation here. It’s NOT gonna be OK in 2010. This is not a V shaped recession / depression / end of the world / whatever.

I still stand by my point that gold is meaningless (conceptually)… But to make a quick buck, then yes, follow the trend and invest. I agree with you on this point and you were right when most of the people were contradicting you.

February 20, 2009 @ 11:53 pm | Comment

Now I am afraid to sell because once it gets past the psychological barrier of 1,000 it may not be worthwhile to try to time the market.

Provided you can sell quickly, know where your “cut-off” point is and keep an eye on the market it’s all good. That said I don’t know how quickly it can plunge so if you find a more stable investment it might be worth shifting some of your “winnings” that way.

February 21, 2009 @ 8:30 am | Comment

Gold can plunge deeply in minutes and is not for the weak. However, ifyou have the stomach for serious risk gold is the place to be right now. I had to watch in pain for about 10 months as gold fell from 1,000 to near 700, and I hadn’t sold at the top. But I knew it was only a matter of time, because in the current situation there are only two long-term posibilities, the fall of the dollar and the rise of gold. After that miserable experience, I began selling on the highs and waiting for the dips. The problem is pinpointing the right ones.

Bao, all value is based on people’s agreement. A dollar is worth so much in goods only because we all agree to that value. Unlike paper, however, gold actually has value in jewelry, medicine, art, soldering, etc. Gold in and of itself has value. As with other commodities, the level of value is determined by our agreement about it. Gold however, has always been a stable investment in times of crisis. You can call this thinking meaningless and pathetic, but I definitely would not want you managing my finances.

February 21, 2009 @ 9:02 am | Comment

So if gold does go up and everything goes to hell, what good is it if it can only be redeemed for the newly devalued paper? If you don’t have it in your hand in spendable coin form, how will you access it? I know someone who says a few cases of liquor are a better temporary hedge, because people will trade anything for a drink. I think my question comes down to the idea that if it gets so bad that gold becomes the smart bet, you’d better hope that it stops at a very delicate point rather than going off the survivalist cliff.

February 21, 2009 @ 9:39 am | Comment

The recent downturn on Wall Street appears to be as a directly of loud mouth Chris Dodd opening his big mouth on the Senate floor talking about the “nationalization of banks.” It’s a shame that ignorant fat heads like him still get elected and are given access to the media. I wonder if there is a way to go after him legally.

On a tangentially related topic, the Republican morons in California are still bitter that several of their “own” finally stood on their own two feet and voted for a budget. Are voters in California immature and irresponsible? Yes. Are the elected officials from both parties self-serving opportunists with not a care in the world? Quite likely. I’m still looking for something, anything to be optimistic about.

February 21, 2009 @ 2:41 pm | Comment

It’s always a good investment to buy jewellery for the Misses – it’s a two way street.

Open a Gold account – maybe this will be the new alternative to having a bank account, at least there would be no question of what the exchange rate is when trading abroad.

February 21, 2009 @ 8:10 pm | Comment

So if gold does go up and everything goes to hell, what good is it if it can only be redeemed for the newly devalued paper? If you don’t have it in your hand in spendable coin form, how will you access it?

Well, Bill, if you have a choice between an investment that, like the average share of stock nowadays, pays you half the number of dollars you originally paid for it as opposed to another investment that brings you three times the number of dollars you paid for it, which would you choose, regardless of inflation or deflation of the dollar? Personally, I would choose the one that pays me more dollars. You see, as the dollar declines in value, the higher the price of gold rises, so when you have to cash out you get fistfuls of additional dollars. Now maybe you are attracted to the idea of making fewer dollars, to which I say, to each his own.

February 22, 2009 @ 1:45 am | Comment

Here is an opinion from the Economist about gold, to which I mostly agree.

http://www.economist.com/finance/displaystory.cfm?story_id=13167642

February 23, 2009 @ 1:41 am | Comment

MT, you’re just jealous, as usual, that you’re stuck with those stock shares that are now deflated to nearly nothing while you watch gold soar. Please, keep buying equities. Keep your faith in the US financial system! It’ll all work out in the end.

It’s fine and smart to keep buying down on US equities as they continue their downward spiral. (Rule of thumb, buy into a falling market, sell into a rising market.) However, for now and probably for the next three or so years, if you want to actually make money you can spend, equities suck. Long-term (as in, invest a small amount every month with the goal of taking out money after ten or 15 years) equities do make sense. In the near-term they are a total disaster. In the near-term, only precious metals and some commodities will be profitable. Oil is going to re-inflate, for example. But gold is the safest and most profitable play.

February 23, 2009 @ 8:51 am | Comment

Richard,

That was a lame attempt I picking a flame war. I was up for 2008 in my personal account and was up several hundred percent on my business trading accounts. On my personal account I sold almost all equities in 2005. I shorted a few financials in 2008 and started buying stocks after the market collapse in the fall. I am doing quite well with those positions. So clearly there is no reason for jealousy.

My investment horizon is decades (I have no need for the money now). I hope you manage to time the move out from gold to stocks correctly.

For me gold is like famous paintings. They hold any value only because other people think they have value. The reason why gold is an risky store of value is because there is no central bank regulating the supply of gold. You are at the mercy of gold mine production, whims of central banks about selling gold, and
Indian housewifes. The risk of the dollar going down (ie, inflation) is there only if you believe the Fed will not pull up interest rates if inflation starts to pick up (along with an economic recovery). Almost nobody believes that.

Finally, for investment advise, I would rather listen to Warren Buffet and the Economist magazine that a gold bug :)

February 23, 2009 @ 1:25 pm | Comment

MT, I was joking when I said you were jealous. I wouldn’t get into a flame war; this one is too easy to win.

About taking the Economist and Buffet as gospel, that’s your choice. They have both been spectacularly wrong before. And I’m glad you don’t think the dollar is going down. It has enjoyed a reprieve, for reasons the WSJ blog post cited above explains. And then it will crash and burn like nothing you’ve seen before.

February 23, 2009 @ 7:05 pm | Comment

Richard,

I don’t much about economics, so perhaps someone else can comment too, but to my mind a dollar crash and hyperinflation caused by printing money seems unlikely due to the fact that (a) a dollar wipe out also wipes out a lot of countries’ reserves – China included I presume. (I could well be wrong here and would welcome a correction) (b) printing the money won’t necessarily lead to inflation as the banks might just hoard the money a la Japan (c) if money leaves the US$ it has to go somewhere – I presume you say it will go to gold, but wouldn’t people rather have the money in a currency than in a precious metal. Surely the price of the currency is ultimately more predictable than gold’s as it is based on the economic performance of a country? This predictablility in the longer term evens out the risk on something which is, as you say, incredibly volatile.

Frankly I hope you are wrong. I’d rather live in a Japan style deflationary depression than a Zimbabwe/Weimar Republic style hyperflationary wipeout.

On another note, enjoying reading your travelogue. I spent a great few travelling round southern China when I lived there. Kept thinking “Why the hell do I live in Beijing?”. Bet you’ll find it tough to go back!

February 23, 2009 @ 10:14 pm | Comment

Richard,

I guess my humor sensor was buggy yesterday ;)

Just want to clarify what I said. When I say the dollar isn’t going down, I mean inflation wouldn’t get out of control. (ie, the dollar wouldn’t go down by more than a few percent a year compared to the goods average Americans buy) How the dollar behaves compared to other currencies is another matter. I believe the dollar should go down against the Yuan to help balance the trade deficit and to account for dramatic productivity increases in China. Same goes for currencies of other fast growing developing countries.

Compared to the dollar, the purchasing power of gold would vary wildly and it is very hard to forecast. Good luck getting it right.

February 24, 2009 @ 1:16 am | Comment

Si, I’m in a big hurry so I have I have to give a very, very short answer: in all times of crises, gold does well. Deflation and inflation. As people move out of equities and the dollar, many will turn to the only safe bet at the moment. Gold will be terribly volatile, and there will be frightening corrections. But the trend is up for at least the next couple of years. This is not my own theory and it’s nothing new. Check “gold” on google news every day and comb the articles. There will be contrary opinions, but you’ll see this is now a mainstream perspective. It could be totally wrong, but it’s served me pretty well the past two years. The last resistance point was 990; now it’s 1000. It may be several weeks before we cross it, but it’s inevitable that we do because the crisis is in its infancy.

MT, about inflation, we have to agree to disagree. I believe that whenever the government prints trillions of dollars and floods the system with the paper, inflation must follow at some point. It has happened every time. It may not be on the scale of Weimar, but it will happen.

February 24, 2009 @ 10:20 am | Comment

Richard,

You are likely to win the bet on gold, since I think it is quite likely that gold would go up in the short term. The reason has nothing to do with the dollar or inflation, but the tiny size of gold as an asset class. Look at the following numbers (from a little google research):

Total value of all gold ever mined: $4trillion
Total value of all gold held by gold ETFs: $30 billion
Demand for gold in 2008: $100 billion

compare that to:

Total value of all stocks: $40 trillion
Value of US fed govt debt: $10trillion
Value of Japanese govt debt: about $10 trillion

So even if a tiny percentage, say 0.1%, of other assets moved into gold, it would double gold demand. Since supply wouldn’t go up that fast, it would result is a massive price spike. (like what happened with oil). The downside is that when the trend reverses or when other assets start looking more attractive, gold prices would fall like a rock. (like what happened with oil). The effects would be much worse than for oil because much of gold demand (other than for jewelry) is not for use.

Numbers to give you pause:
Gold reserves of the US: more than 2 X annual gold demand
Gold reserves of the IMF: 1 X annual gold demand.
Total offical gold reserves: more than 7 X annual gold demand

Those reserves have no useful purpose. Many govts might decide to sell some of it, to help finance the deficits, especially if the price shoots up.

Good luck with the gold play.

February 24, 2009 @ 10:37 am | Comment

Richard,

You wrote:

I believe that whenever the government prints trillions of dollars and floods the system with the paper, inflation must follow at some point. It has happened every time.

Do a little more research before you write such blanket statements. The most recent example, Japan has been printing money for a decade and a half, with persistent DEFLATION.

February 24, 2009 @ 10:40 am | Comment

Richard,

The crucial difference between Japan and Zimbabwe is that Japanese central bank has a lot of credibility. When inflation pops up, nobody has any doubt that they will raise interest rates and drain Yen out of the financial system. So nobody has any interest in spending money now, because they are not afraid that money will be worthless a few months down the line.

The govt of Zimbabwe has no credibility. So everybody rationally spends all their money right now, because tomorrow it will be worth much less. Hence there is too much demand (than Zimbabwe can satisfy from its productive capacity). Hence hyperinflation.

The credibility of the US Fed is on par with the Japanese central bank than Zimbabwe.

February 24, 2009 @ 10:51 am | Comment

MT, there are many other examples of printing money leading to inflation and hyperinflation. I’m not familiar with the situation in Japan. Did they inject trillions of yen into the system. I was in Japan in May. If they’re going through a deflation they could fool me.

February 25, 2009 @ 5:33 pm | Comment

Richard,

Here is a graph showing Japanese inflation over the last few decades.
http://static.seekingalpha.com/wp-content/seekingalpha/images/20060829japan1.jpg
Since about 1994, Japan hasn’t experienced much inflation. The reason they didn’t have much deflation is because of “quantitative easing” (after they cut interest rates to zero)
http://en.wikipedia.org/wiki/Quantitative_easing
From the above article: “Quantitative easing is a term for when a central bank creates new money out of ‘thin air’ to inject into the banking system.”

“Quantitative easing was used notably by the Bank of Japan (BOJ) to fight domestic deflation in the early 2000s”

“In Japan’s case, the BOJ had been maintaining short-term interest rates at close to their minimum attainable zero values since 1999. With quantitative easing, it flooded commercial banks with excess liquidity to promote private lending, leaving them with large stocks of excess reserves, and therefore little risk of a liquidity shortage.[5] The BOJ accomplished this by buying more government bonds than would be required to set the interest rate to zero. It also bought asset-backed securities, equities, and extended the terms of its commercial paper purchasing operation.”

All this while the Yen has remained strong.
http://finance.yahoo.com/echarts?s=JPYUSD=X#symbol=JPYUSD=X;range=5y

February 25, 2009 @ 11:36 pm | Comment

So they didn’t undergo deflation to speak of. As I thought. How does this jive with your earlier comment:

The most recent example, Japan has been printing money for a decade and a half, with persistent DEFLATION.

Oops.

Also, I asked earlier if they flooded their system with trillions of yen hot off the printing press. Do you know if they actually did this? I’d love to read about how they did that and ended up with deflation. Neat trick. If it’s true, it’s an anomaly. But you seem to be backtracking about the deflation….

February 25, 2009 @ 11:45 pm | Comment

wikipedia says japan underwent deflation in the 90′s. the quantitative easing was undertaken to combat the deflation and the policy was ended in 2006..

deflation, disinflation, deflationary spiral are all terms that refer to graphs of the money supply and prices. the wonderful thing about economics is they can come up with these terms to describe what happened in the past by looking at graphs of what happened to the money supply and other parameters. as for predicting the future that is less easy. who knows which direction things are headed. maybe a little inflation, deflation, and disinflation will occur at different points in the recovery.

seems clear housing prices have to continue to drop from their unrealistic highs. how far down they go i would not guess, but at some point they get low enough that people can start buying again. eventually the force of population growth will continue to make land a scarce resource ensuring a general overall trend of increasing prices for housing. I bet when housing prices drop just below a year to year straight price growth rate of about 5% a year then the housing market will reach a bottom and prices are in line with 2 to 3 times median income. it will take a little longer to resolve all the leveraged debt instruments.

i could see how the US is or was in danger of seeing deflation with a reduction in money supply and a reduction in prices at the same time. i guess bernanke and paulson flooded the economy with money to counter that trend. what the impacts are or what happens next remain to be seen. I am sure ten years from now thousands of masters candidates in economics will be writing and arguing about the deflation, inflation, disinflation they see in graphs of the economic data from 2007 to 2011.

all i know is i am glad Jindal, Palin, and McCain are not running the show now. things would be a lot worse.

February 26, 2009 @ 4:16 am | Comment

Richard is right about gold, partially. It’s a very risky investment. Google it and watch the latest comments about this. Journalists are starting to speak about this phenomenon and how it might not be such a good idea. We are not living in 1930, the world has changed, gold is NOT shining in our eyes like it did 500 years ago. We can’t trade it for fur anymore and it won’t buy you food once things crumble in the US (and most probably worldwide).

And about the relations between China and the US souring, here’s a first link to the very start of this pseudo crisis, beyond the master bullshit tour that Clinton granted us with. Please China, we love you, please fund our debt!!!! We love you so much and we should walk hand to hand on the aisle, until death tear us apart as we say.

The US are in BIG troubles… We kneel, asking you to give us more money, please… pretty please…. Don’t you see that we DEPEND on you?

Clinton is a master, she’s awesome. Did you noticed how she planted the idea that the US were reluctant on human rights? Only for a couple of days, so that we can get this new shocking headline? Are you still day dreaming all of you and not getting it, what’s going on?

China rights ‘worsened’, says US

http://news.bbc.co.uk/2/hi/americas/7911226.stm

Did you ever think about a scenario where the US dollar crumble, and what’s left of it is higher in value than the rest of world? Sounds bleak, I agree, but do not under estimate what’s going on right now, you might be surprised.

Thank you Obabush (did he change any politics and military agenda from the Bush era so far Richard?) for giving us hope, but he’s right, the US will prevail. Big time, and the world will suffer, big time.

The biggest economic scam of the history goes on.

February 26, 2009 @ 4:36 am | Comment

The only way China can get more credibility and stop the bullshit, is by taking a very strong an globally destabilizing stance: Stopping buying the US debt. And my guess is that: They will, very soon.

This somehow, falls in line with the most recent outburst of our good friend, Putin.

We’ll see where it goes on from here. Happy times we live in.

February 26, 2009 @ 4:53 am | Comment

Richard,

You wrote:
Oops.
Also, I asked earlier if they flooded their system with trillions of yen hot off the printing press. Do you know if they actually did this? I’d love to read about how they did that and ended up with deflation. Neat trick. If it’s true, it’s an anomaly. But you seem to be backtracking about the deflation….

Did you look at the first graph? It shows that Consumer Price Index (CPI) in Japan declined every quarter from 2000 to 2005. It also had other brief periods of deflation between 1994 and 2008. So they had persistent deflation in spite of the quantitative easing. The CPI didn’t go below -2%. So the deflation was not very severe like during the great depression.

Nobody really prints much paper currency anymore (other than in Zimbabwe). The Fed is not doing it, and the Japanese didn’t do it. They just change numbers on computers to create money. Money is mostly electronic in the developed world if you haven’t noticed yet. From an economic perspective printing currency and creating money electronically are equivalent. And yes, starting in 2000, BOJ expanded its balance sheet by buying private assets (like commercial paper, corporate bonds etc.) using electronically created new money. The Fed is pursuing a similar policy now.

February 26, 2009 @ 5:54 am | Comment

Lindel,

I agree with you that it is hard to predict the future. But in my opinion, inflation would only return along with economic growth. The only question is whether you believe the Fed would raise interest rates then. I believe that they would.

all i know is i am glad Jindal, Palin, and McCain are not running the show now. things would be a lot worse.

Couldn’t agree with you more.

February 26, 2009 @ 6:01 am | Comment

Bao,

The only way China can get more credibility and stop the bullshit, is by taking a very strong an globally destabilizing stance: Stopping buying the US debt. And my guess is that: They will, very soon.

I hope they start doing that soon (as long as it is done gradually). It will cause the Yuan to go up and make US exports to China more competitive. That would be equivalent to the US govt borrowing and spending to create demand in the US economy (except that there won’t be any debt to pay off).

February 26, 2009 @ 6:06 am | Comment

“I agree with you that it is hard to predict the future.”

No it’s not.

February 26, 2009 @ 6:07 am | Comment

As I said before, the devaluation of the US dollar will be our very own Hiroshima, in 2009-2010.

February 26, 2009 @ 6:08 am | Comment

MT, again let’s agree to disagree since neither of us can prove what will happen. You can point to Japan, I can point to Weimar and Zimbabwe and many, many other places where pumping paper money into the economy has led to inflation. And I hope those aren’t the only two choices – Weimar insanity or Japanese stagnancy. My first bet based on current trends is on Weimar insanity and the breakdown of traditional social structures, but I sure hope I’m wrong.

February 26, 2009 @ 10:59 am | Comment

Richard,

Sounds good. I think we have argued this topic to death.

but, I sure hope I’m wrong

I couldn’t agree more ;)

February 26, 2009 @ 11:44 am | Comment

I just found this article about the the role of the dollar and its implication for China. Interesting to see the references in it about the devaluing currency scenario.

Niall Ferguson, author of a book called The Ascent of money.

America Needs to Cancel Its Debt

And this is an in-depth interview with him. I must say that I agree a hundred percent with his opinion, but of course he’s expressing it in a much better way than I’ve been able to do with my limited economic knowledge and my below average English writing skills.

There will be blood

February 26, 2009 @ 5:24 pm | Comment

I’ve posted the last page of one of the article in my previous comment, it’s 5 pages long. Here’s the corrected link.

There will be blood

February 26, 2009 @ 5:44 pm | Comment

MT,
I am not an economist, but it seems like we are in some ways charting new economic territory now. With Paul Volcker as an adviser I am sure they will be aggressive about countering any run away inflation with interest rate increases.

The Obama Administration seems focused on the immediate financial/banking problem and employment situation. possibly around 2011 there may be an inflation issue like you predict.

From a personal empirical observation, it seems to me I am paying less at the pump now, but still paying more when I go to the grocery store and out to restuarants here in the US.

I wonder what they call it if gas and housing prices drop, but food prices continue to raise?

As for the predictions of blood in the streets by some. After you have been through 4 or 5 economic downturns you are less fatalistic about these things.

I can see how the US and by extension the global economy will suffer a severe contraction the next 2 years because a badly needed deflation of the housing bubble is needed and the accompanying financial shennanigans.

We had an irrational exuberant dot.com bubble, then an irrational exuberant housing/debt bubble, now maybe Obama can try to get a rational investment in the economic future of the US bubble started by focusing on infrastructure, energy, health care, education. If we overshoot in those areas it seems there is still some residual benefit that was lacking in the dot.com and housing bubbles. artificial wealth creation in a dot.com company or totally impractical McMansions no one can maintain does not leave any long lasting economic value. Over investment in infrastructure, energy, health care, and education would provide some future economic benefit in the future.

February 27, 2009 @ 5:35 am | Comment

Lindel,

If you live in an urban area, inflation tends to be much higher than the national average. Here in NYC inflation is much much higher than the rest of the country.

I agree that house prices need to come down drastically to enable young people starting families to afford to buy a home without taking unreasonable financial risks.

About usefulness of bubbles, I think the dotcom bubble was very useful for the economy. Many of the companies from the bubble, like Amazon, Google, Ebay, Netscape etc increase the overall productivity whether they themselves proper or not after the bubble. Can you imagine shopping without the Internet these days?

February 27, 2009 @ 7:39 am | Comment

MT, that your most bizarre comment yet. Amazon and Netscape were kicking ass before the bubble formed. The bubble was a calamity that spurned hundreds if not thousands of useless, idiotic businesses (read the book Fucked Company if you have doubts). I know because I was in Silicon Valley from 1995 to 1998 working with these companies and watched it all happen.You don’t need a bubble to come up with great ideas. Most of Google’s best ideas were post-bubble, as were Apple’s. The bubble was tulip hysteria and in every way a bad thing. Precious little of that venture capital went to product development. It went to marketing, PR, insanely meaningless trade shows and big-ticket media events, Super Bowl ads that wasted millions of easy-to-get dollars in seconds, and obscene salaries for anyone who wanted to start-up a dot-bomb. If you believe the convenience of shopping on the Internet came about because of the bubble, you just lost a lot of credibility. Repeat: Amazon was kicking before the bubble started, and Netscape shook the world more than a year before it went public (which was a key starting point for the bubble).

Innovation – wonderful. Rampant greed that results in a pyramid scheme where most people lose everything – terrible. One is not dependent on the other. You can have innovation without puncturing the economy.

February 27, 2009 @ 9:27 am | Comment

Amazon, Google, Ebay, Netscape I have no problem with those. they were not dependent on the dot.com bubble. real technological innovation is good, but the incompetence and greed that produced “gardening dot.com” and other useless ideas in the late 90′s were not innovative or a necessary element to give us fedex, amazon, ebay or google. i have watched about 4 or 5 real estate boom and bust cycles in the washington dc area. this last one has set a record for greed and stupidity, and dishonesty. being some familiar with darpa net and the early predecessors to the internet, i know that the foundation for the technological innovation that brought the companies you named was laid in the 70′s and 80′s and was not produced by the wonderful manhattan venture capitalists.

they used smoke and mirrors to inflate the values of start up dot.com IPOs in the 90′s and then to inflate the values of houses in the current bubble.

sure innovation and good businesses have been occuring even during the bubbles, but they did not need the bubbles to happen.

February 28, 2009 @ 12:26 am | Comment

Lindel, precisely. MT can have as many bubbles as he chooses. For normal people, bubbles are bad. Innovation does not have to come in a bubble. Look at the iPod and Google Maps and the iPhone. Venture capital was behind many innovations, and VC investment is great. But bubbles are bad because they’re always a ponzi scheme with may more victims than winners, and they serve no purpose other than to create fake hope and hysteria and hype. We have to differ between the VC investment that catalyzed the bursts of creativity from the hype-driven bubbles that ensued.

February 28, 2009 @ 8:08 am | Comment

Richard, looks like messages with too many links don’t show up. Let me try again:
—————————————————————————–
Richard,

A little history:

Google was founded in 1998. People wouldn’t have written huge checks to Google in the initial years with no prospect of revenues or a business model (advertising revenue came many years later), without a buoyant equity market.

Most of Google’s best ideas were post-bubble
You have no clue what you are talking about. I work in the industry, and have many former colleagues working at Google. Their most fundamental innovation was the page-rank algorithm, which was developed in the 1990s.

Amazon IPOed in 1997. It continued to make losses through the bubble years, and came back to the market for more funds to keep its operations running. I doubt people would have funded it without the craziness of that era.

Netscape never made any money.

There are plenty of other companies which never made any money, but were acquired by other companies and the technologies they developed are still used. Ex: Hotmail (acquired by Microsoft), Fast Forward Networks (acquired by Akamai, its technology was crucial serving webpages fast, similar tech is used by google now)

Much of the fiber optic cable which carry Internet traffic now was laid by companies which never made any money.

In a rational market much of the above wouldn’t have happened or at least not as fast. Clearly there were many stupid ideas which got funded and a lot of money was wasted. But a lot of innovative companies were formed, workers benefited, and the economy prospered.

Bubbles helping economic development is not a recent phenomenon either. Much of the British rail network was built in the 19th century during a railway bubble. Most investors lost money, but Britain ended up with a vast rail network which helped the industrial revolution.
http://en.wikipedia.org/wiki/Railway_Mania

February 28, 2009 @ 10:14 am | Comment

Looks like the Economist agrees with me. That should say something about my credibility.
http://www.economist.com/finance/displaystory.cfm?story_id=12792903

February 28, 2009 @ 10:14 am | Comment

Richard,

You said:
We have to differ between the VC investment that catalyzed the bursts of creativity from the hype-driven bubbles that ensued.

Two problems.
1. You don’t know before hand what is going to succeed and what is going to fail. A bubble allows you you try a lot of ideas, including many for which the conventional wisdom is that they have no chance of success. Btw, what is the business case for youtube and facebook. They have no rational business plan yet.

2. A lot of the fibre optic cable which carries internet traffic was laid with massive amounts of capital during the late 1990s bubble. Most the the companies lost a lot of the money, but we end up with good infrastructure. (Without the bubble, there is a good chance that Internet access, especially international Internet access would be more expensive that it is today)

February 28, 2009 @ 10:20 am | Comment

Lindel,

I know that DARPA built the network technology for the Internet (TCP/IP etc.) Just like most innovations, the basic science is usually done by govts. But you still need massive amounts of capital to provide all the services to make the Internet useful. You also need capital to educate the public about the Internet (advertising).

I don’t understand why you think the real estate bubble was an unmitigated disaster. We still have all those houses and office buildings right? And because of the overcapacity, they would cost less to buy/rent than it too to build them. This would help reduce costs for new businesses. (Just like the overcapacity in the fiber optic cables reduced prices for customers below what it would cost to build them)

February 28, 2009 @ 10:26 am | Comment

Ah, once again MT is right because he found a link in the Economist. Good; the tech bubble was for the best. The real estate bubble was for the best. This has been an extremely enlightening discussion. I had wondered earlier why everything became a tug of war; now I know. I want everyone to savor this:

I don’t understand why you think the real estate bubble was an unmitigated disaster. We still have all those houses and office buildings right? And because of the overcapacity, they would cost less to buy/rent than it too to build them.

As I said, we now have a credibility problem here. The banks are being nationalized, Detroit is going out of business, kids can’t go to college, the debt has gone off the charts, America may be a financial basket case for a decade to come and MT finds a cozy silver lining.

Back to the tech bubble: This argument doesn’t belong in this thread and it’s a hot button for me because I was so involved with the VC people and with so many dot-coms, I hate seeing the history distorted. Most of the innovations of the late 90sa happened despite the concurrent stock market bubble. None – not one single one – happened because of frenzied, delirious, irrational exuberance (the usual components of a bubble). To equate one with the other is heartbreakingly wrong.

Netscape was the great innovator, creating mosaic and the first Internet tools for the common man. They did all of this years before the bubble. I guess I need to repeat: Amazon had its superb model in place long before the bubble started, and it has remained basically intact for 15 years. The only thing the bubble did for these companies, – the few that actually had a lot of value and innovation – was load them with unrealistic amounts of cash, pushing them to make idiotic acquisitions, to grow too fast and sometimes even to burn out. AOL is the classic example, the acquisition of Time Warner one of the textbook cases of irrational acquisition, made by what had been a leading company that had no rational right to such a high stock price. Of course, AOL’s model was running fine in the early 1990s before the word Internet was in the common parlance. The bubble didn’t make AOL. It destroyed it.

All of the good stuff survived the bubble, because the bubble was essentially irrelevant to it. Google’s famous algorithim may be its No. 1 innovation, but that of course survived and since the bubble they have come up with equally amazing products, like Google Maps and Gmail and Picasa and Google Reader. The stock market madness did not help google develop anything. They had the venture capital – they did not go public until long after the bubble had burst.

Finally, before I close this thread, which has gone way off-topic, I want to savor yet again these words:

I don’t understand why you think the real estate bubble was an unmitigated disaster. We still have all those houses and office buildings right? And because of the overcapacity, they would cost less to buy/rent than it too to build them.

Yes, now we know.

February 28, 2009 @ 1:10 pm | Comment

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