Paul Krugman, "Bits and Barbarism": Head of Gold, Legs of Clay

"Your majesty had a vision of a statue, very large and extremely bright; it stood in front of you and its appearance was terrifying. The head of the statue was of fine gold, its chest and arms of silver, its trunk and thighs of bronze, its legs of iron, and its feet partly of iron and partly of clay. As you watched, a stone separated itself without any human hand, struck the statue on its feet made of iron and clay, and broke them in pieces. Then the iron, the clay, the bronze, the silver and the gold were all broken into pieces which became like the chaff on a threshing-floor in summer; the wind blew them away without leaving a trace. But the stone which had struck the statue grew into a huge mountain that filled the whole earth."

- Daniel 2:31-35 

Surely you remember how Daniel interpreted for Nebuchadnezzar II, the king of Babylon, his troubling dream. Nebuchadnezzar II? Reigning from 634 – 562 BC, he created the Hanging Gardens of Babylon and destroyed the First Temple in Jerusalem. Daniel is said to have prophesied the conquest of Babylon by Cyrus, King of Persia, in 539 BC.

Today, is there another nation whose foundation has been undermined by its leadership? Let's get back to that in a moment. But meanwhile consider the value ascribed to gold by women and men some 2,600 years.

Of course, if you are a Nobel prize winner in economics, you are permitted to be ignorant of history, and in his latest New York Times op-ed entitled "Bits and Barbarism" (http://www.nytimes.com/2013/12/23/opinion/krugman-bits-and-barbarism.html?_r=0), Paul Krugman writes of gold and bitcoin:

"Talk to gold bugs and they’ll tell you that paper money comes from governments, which can’t be trusted not to debase their currencies. The odd thing, however, is that for all the talk of currency debasement, such debasement is getting very hard to find. It’s not just that after years of dire warnings about runaway inflation, inflation in advanced countries is clearly too low, not too high. Even if you take a global perspective, episodes of really high inflation have become rare. Still, hyperinflation hype springs eternal.

Bitcoin seems to derive its appeal from more or less the same sources, plus the added sense that it’s high-tech and algorithmic, so it must be the wave of the future.

But don’t let the fancy trappings fool you: What’s really happening is a determined march to the days when money meant stuff you could jingle in your purse. In tropics and tundra alike, we are for some reason digging our way back to the 17th century."

Mind you, I'm not saying that the human obsession with gold is rational, but as can be gleaned from the Old Testament (see also Genesis 2:12), this "bug" dates back to a time long before the 17th century, and habits are hard to break.

Imagine if the Federal Reserve Bank dumped its hundreds of thousands of gold bars into the ocean. Heck, America's health care system was trashed renovated almost overnight by Obama. Why not change the underpinnings of America's currency and watch what happens?

Yes, in what's left of his second term, let's see if the president, with the able advice of his beloved New York Times columnists, is able to construct a new edifice with legs of clay.

Daniel, where are you when we need you?

William Cohan, "At Long Last, Stocks Get a Jolt": Non Sequitur

In a New York Times op-ed entitled "At Long Last, Stocks Get a Jolt" (http://www.nytimes.com/2013/06/22/opinion/at-long-last-stocks-get-a-jolt.html?_r=0), William Cohan exults over the recent decline of the stock market:

"The Dow Jones industrial average has nose-dived more than 500 points, or over 3 percent, since the Federal Reserve chairman Ben S. Bernanke’s somewhat upbeat, if ambiguous, statement on the economy on Wednesday. Hurrah!

. . . .

What happened to change the mood so dramatically, so quickly? Is the panic selling justified — or is it just the first glimmer of hope that the Fed will finally take the metaphorical morphine drip out of the arm of the capital markets and allow the forces of supply and demand to set long-term interest rates?"

No question about it: Given that people could no longer expect any reasonable rate of return on their savings at the bank, they flooded stock markets with funds and created yet another bubble that would ultimately burst.

But Cohan's conclusion leaves me scratching my head:

"The good news is that, finally, the artificial high might just be coming to an end. No addiction is healthy and this one is no exception. Weaning ourselves off the Fed’s cheap money will hurt. Between the sudden collapse of bond prices and the sharp drop in the stock market, investors are now feeling some pain. Good. A healthy economy demands that the price of borrowed money be set by the market to correspond with risk, not be distorted by a half-decade’s worth of interventions from a central bank.

As we saw throughout much of 2007 and 2008, when markets badly misprice risk it can have disastrous consequences for economies throughout the world. The sooner we get clean, the better."

Okay, half a decade of intervention from a central bank might well have caused investors to underestimate stock market risk.

But prior to 2008, underestimation of real estate risks by banks and their gullible customers also created a bubble, which eliminated many leading banks and financially crippled those who took loans to buy housing at inflated levels and those willing to buy derivatives backed by housing loans.

As long as I can remember there have been "bubbles" of different kinds involving mispriced risk, and there always will be.

Consider what has happened to the price of gold over the past nine months.

Consider Facebook's 2012 initial public offering of stock at $38 per share.

Consider the dot-com bubble (1997-2000) prior to the real estate bubble, which brought on the 2008 calamity.

Okay, Jeffrey, there will always be mispriced risk and bubbles. Smart ass that you are, how do you manage your finances?

Or stated more kindly, how do I seek to mitigate risk in an ever changing world?

Fortunately, I don't have so much money to throw around, so I buy what I want at a price that I can afford. I bought the real estate that I wanted and built my house with a loan which was limited in amount and could not lead to repossession.

Regarding investment in shares, experience has taught me to invest in companies where I am actively involved by choice, have my finger on the pulse, and can seek to influence management. Yes, I realize this is not practical for many investors, who alternatively seek to spread their risk, but with the passage of the years, it has become axiomatic for me. I only work and invest with people whom I trust.

My purchase this past week of an MRAP (Mine-Resistant Ambush Protected vehicle) in Afghanistan (see: http://jgcaesarea.blogspot.co.il/2013/06/david-brooks-humanist-vocation-in.html and http://jgcaesarea.blogspot.co.il/2013/06/the-incredible-shrinking-president-he.html)? I didn't say that I was free of foibles.

Paul Krugman, "The Antisocial Network": In Broccoli I Trust

Antisocial? Me? No way! So what if I'm digging a moat around my house and populating it with crocodiles?

In his latest New York Times op-ed entitled "The Antisocial Network" (http://www.nytimes.com/2013/04/15/opinion/krugman-the-antisocial-network.html?_r=0), Paul Krugman derides bitcoin, a new means for paying for online transactions, and gold. Krugman writes:

"The similarity to goldbug rhetoric isn’t a coincidence, since goldbugs and bitcoin enthusiasts — bitbugs? — tend to share both libertarian politics and the belief that governments are vastly abusing their power to print money. At the same time, it’s very peculiar, since bitcoins are in a sense the ultimate fiat currency, with a value conjured out of thin air. Gold’s value comes in part because it has nonmonetary uses, such as filling teeth and making jewelry; paper currencies have value because they’re backed by the power of the state, which defines them as legal tender and accepts them as payment for taxes. Bitcoins, however, derive their value, if any, purely from self-fulfilling prophecy, the belief that other people will accept them as payment."

Thus far, Krugman and I are in agreement, but then the professor goes on to say:

"The practical misconception here — and it’s a big one — is the notion that we live in an era of wildly irresponsible money printing, with runaway inflation just around the corner. It’s true that the Federal Reserve and other central banks have greatly expanded their balance sheets — but they’ve done that explicitly as a temporary measure in response to economic crisis. I know, government officials are not to be trusted and all that, but the truth is that Ben Bernanke’s promises that his actions wouldn’t be inflationary have been vindicated year after year, while goldbugs’ dire warnings of inflation keep not coming true."

I'm no goldbug and certainly have no use for bitcoin; however, I shudder over what will happen when the Federal Reserve ultimately raises interest rates. Will US stock markets collapse? Will it suddenly dawn upon America that massive federal debt, now over $16.8 trillion, is unsustainable and will never be returned, unless, perhaps, it is returned in bitcoin? And yes, I foresee runaway inflation sometime down the road.

Which is why I am so carefully tending my garden planted with broccoli, tomatoes, cucumbers and melons, which perhaps will one day be worth their weight in gold. Yes, I am exaggerating, but bad times are certainly ahead.

Paul Krugman, "Lust for Gold": What Happened to Krugman's Magical Platinum Coin?

In his latest New York Times op-ed entitled "Lust for Gold" (http://www.nytimes.com/2013/04/12/opinion/krugman-lust-for-gold.html), Paul Krugman concludes:

"But the runaway inflation that was supposed to follow reckless money-printing — inflation that the usual suspects have been declaring imminent for four years and more — keeps not happening. For a while, rising gold prices helped create some credibility for the goldbugs even as their predictions about everything else proved wrong, but now gold as an investment has turned sour, too. So will we be seeing prominent goldbugs change their views, or at least lose a lot of their followers?

I wouldn’t bet on it. In modern America, as I suggested at the beginning, everything is political; and goldbuggism, which fits so perfectly with common political prejudices, will probably continue to flourish no matter how wrong it proves."

I'm no goldbug. (You know where my money is invested.) But peculiar how Krugman has already forgotten his magical platinum coin.

In a January New York Times op-ed entitled "Coins Against Crazies" (http://www.nytimes.com/2013/01/11/opinion/krugman-coins-against-crazies.html), Krugman proposed that the federal government should mint a platinum coin to eliminate Republican meddling with Obama's spending spree:

"Here’s how it would work: The Treasury would mint a platinum coin with a face value of $1 trillion (or many coins with smaller values; it doesn’t really matter). This coin would immediately be deposited at the Federal Reserve, which would credit the sum to the government’s account. And the government could then write checks against that account, continuing normal operations without issuing new debt.

. . . .

[I]t’s the president’s duty to do whatever it takes, no matter how offbeat or silly it may sound, to defuse this hostage situation. Mint that coin!"

As best explained by Jon Stewart (see: http://www.salon.com/2013/01/15/jon_stewart_responds_to_krugman_platinum_coin_is_still_a_stupid_fcking_idea/), the idea of minting a trillion dollar platinum coin was a "stupid f#%*ing idea."

Gold bad, platinum good?

Four legs bad, two legs good?

Thanks once again, Paul, for the light entertainment. Now back to digging holes in my garden.