Tuesday, November 30, 2010

650 Years of Silver Prices and what it means

This is a 650 year graph of silver prices in terms of 1998 dollars (blue line) and silver/gold ratio (gold line) from 1344 to 2004. (To have a clearer view of the graph, you can go to http://goldinfo.net/silver600.html 
At first glance, it will seem that the price of silver is going down. But take note that this all the prices u see on the graph is in terms of 1998 dollars. What does this mean? I'll provide my 2-cents. 

In 1477, the price was $806 (806 "1998" dollars). Ever since the "peak" back then that you see on the chart, the price of silver in 1998 dollars has been declining steadily. Take another point in time, say the year 1998 when the price was $5 (5 "1998" dollars - I can't really see very clearly since the chart is so small, but let's take it as $5)

Now, if you live in 1998, you can take $5 and go buy an ounce of silver for $5. Suppose you decide to travel back in time to the year 1477. You bring along your $5 with you and approach a silver seller back there. Will he sell his silver to you for $5? DEFINITELY NOT! Not with your "1998" $5 note! He will demand $806 "1998" notes from you! Even if back then, silver priced in "1477" note is $1, he will not sell his silver to you for your $5 "1998" note. 

So what do we see here. The dollar has lost so much purchasing power between 1477 and 1998. A silver seller back in 1477 will demand more than 160x of the dollar that you use in 1998. This chart does not show that silver is falling in value, but rather, it is showing that the dollar is falling in value. 

Tuesday, November 9, 2010

US default 1971, Supply Vs Demand

After WWII, the world was under the Bretton Woods System. All currencies were tied to the USD, and the USD in turn was redeemable in gold. Back then, the US possessed about 22,000 tons of gold, or about 75% of the world's monetary gold!

By 1971, the US had only 7200 tons of gold left, and owed other nations close to 40,000 tons. Alarmed at how fast gold was leaving the US, President Nixon conveniently announced that the USD will no longer be convertible to gold, therefore closing the gold window. The world currencies started 'floating' against each other, without any tie to a physical stuff whatsoever.

In my view, this is equivalent to a default by the US. The US now has unrestrained power to print money to repay its debt. The world quite foolishly agreed to what the US did, because they thought that the USD was as good as gold. 

Back then, the US was still a creditor nation and had a manufacturing base. Fast forward to today, it has become the largest debtor nation in history! It will be much harder to dig themself out of debt this time round, because they are not producing much stuff as a nation. Exporters to the US will suffer for a while, but if they can retool themselves and sell to other nations, then they will be much better off, because the currencies of other nations are sounder than the USD. 

If the USD tanks, it does not mean that demand will drop sharply and the world will be doomed and gloomed, because the purchasing power lost by the USD will simply be transferred to other currencies. The largest creditor nations to the US, China and Japan, will benefit greatly given that they no longer have to throw good money after bad. They will no longer lend to the US. A huge burden will be suddenly lifted off their backs. Their currencies will appreciate relative to the USD, and purchasing power will shift across the Pacific Ocean.

People will do well to get out of the USD or US-denominated assets and into hard assets (commodities) or other sounder currencies.

It's all about keeping oneself in an asset that will gain in PURCHASING POWER. 

I will quote from my memory 2 of my favourite excerpts from Peter Schiff, with some of my comments added in:

1) If you take US out of the globe, you are left with the producers (Asia). The producers can consume their own products just as well as the US. Everyone will have a higher standards of living! The Chinese will no longer have to work as hard, just to produce stuff for the US, and then lend money to the US so that the US can buy the Chinese-made stuff. If you take the rest of the world out of the globe, you are left with the consumers (US). Who is going to produce for them and how are they going to survive? So you see, the US is the one holding the rest of the world down right now. 

2) (Can't remember the exact details for this one, but the idea is there): Imagine 5 people stranded on an island. One of them is American. The other 4 are Asians. These 5 people need to survive, and they need to gather food and cook, so each of them are assigned different tasks to do. Everyday, one of the Asians is assigned to the role of fishing. The 2nd Asian is assigned the job of collecting firewood. The 3rd Asian collects fruits from all over the island. The 4th Asian is responsible for cooking. And the American? He is assigned the job of eating. So at the end of each day they will gather around and eat. The American eats most of the stuff, leaving just enough crumbs for the Asians, so that they will have enough energy to do their job again the next day. 

Now, a modern economist will look at this island-economy and say: Look! The American is the engine of growth! Without his demand, all the Asians will have no job!!

Well, the reality is, the Asians can consume those food just as well as the American can. In fact, if they kick the American off the island, now they will have much more to eat. They may not even have to work as hard to feed the ravenous appetite of the American. They can take a day or 2 off, relax on the beach, etc.
There you go! Modern economists focus so much on 'aggregate' demand. They think that demand is everything. This is classic Keynesianism (Now I know why I have no interest in my economics class in university). Unfortunately, supply is what makes an economy. If you want to produce more, if you want more of other people's stuff, you have to produce some things yourself which you can then trade away. Demand is not so important. Everyone has demands for more materials and a better life. Even babies can demand for milk and toys and sweets. The problem is whether you can produce those goods, or whether you can produce something else to trade for those goods with someone else.

Economies don't grow with demand per se. And they certainly don't remain healthy due to 'consumer confidence', like most economists will say. To quote Tom Woods, if you think consumer confidence is so fundamentally important, why not pour money into researching a "happy pill" or something. That will keep everyone happy and confident and spending away, and the economy will not crash.

So, what is the US exporting to the world?? Paper money! And inflation! Why the world will accept this paper money is beyond comprehension. And this applies to all other currencies as well. The world should be furious that an elite group of people is controlling the money, taxing the population with inflation, and creating booms and busts in the economy and profiting from them.

If there are no central banks in the world, and if there is no fractional reserve banking system practised by the banks, the world will be a much better place. Less wars, less poverty, more individual liberty.

Saturday, November 6, 2010

$600 billion 'stimulus' package

Another nail in the coffin for the US economy, as simple as that.

Unfortunately, the Fed Chairman doesn't know history, economics and currencies. Or maybe he does and is doing this on purpose. If this is the case, then he will be the biggest criminal in the world.
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