ERICOPOLY

I would imagine very comfortable - given that people seem to be very comfortable right now with no gold in the vault (some central banks (UK, Canada) have very little gold left. Right, most people are comfortable because most people don't don't think about these issues as they go about their daily lives. I used the wrong term when I said "people". Okay, at what point would the "hard money advocates" feel comfortable. You either keep your gold in the treasury and have redeemable notes in your wallet, or you take delivery of your gold by redeeming your notes. It's a confidence game -- maybe a war triggers the panic for redemptions... I don't know. But there must be a level where it become fiat-like. Under our present fiat system, we have no gold backing it (for all I know). So is 1 penny of gold backing it really going to make any difference? Or 10 cents? Hey, at least 10 cents on the dollar is better than nothing I suppose. I believe the US faced redemptions that it was unable to meet, and that's when we left the gold standard -- so the US had too little in the vault.

The questions of velocity of money and credit creation were deliberately left out as "an exercise for the reader" if you will. You could have one ounce of physical gold backing a trillion ounces worth of credit for example. But what kind of a gold standard is that? Because I don't know the appropriate levels of velocity or credit (and I know many here do), instead of making assumptions I merely asked if $960 of money supply per person could sustain a level of per capita GDP in excess of 10.5x that. Then you have potential panics where people want to redeem their money for gold -- imagine a run on the world bank. In any event, once you pick a given level of velocity and credit you can support a level of real wealth only up to that point. Then you have the same problem I initially posed -- how do you expand the supply of money to keep up with future needs? Would you then hope for an ever-higher velocity, or would you stretch your gold further with more credit?

It is a unit of measure -- yes. However, the scarcity of gold comes into play when an ounce of it is only enough to purchase a man's fine suit, and there is only 1 ounce per person worldwide. Are you suggesting that if gold were used as the world's currency then there need not actually be any gold in the vault? We already have that (possibly) here in the US (we'll see if Ron Paul gets his audit). Or rather, how much gold (fractionally) needs to be in the vault to back a given unit of measure. I initially asked the question of whether one ounce of gold per capita can support a level of GDP ten times that measure.

You're not allowed to purchase options on foreign exchanges. I was disappointed when they delisted from NYSE for this reason.

Another way to look at it. Your statement could, in effect, be used to argue that gold should be valued much higher. If gold were valued at $10,000, then we would have a cash supply of $10,000 per person. This demonstrates the fallacy of measuring value using a fiat currency. Broxburnboy said that one ounce of gold should purchase a fine man's suit. Now, if you revalue gold like you suggest then it would purchase several fine men's suits. So the store of value would be proven unstable. Based on his men's suit metric, gold today is accurately priced in dollars -- he claims this value has been a truism for a hell of a long time. Thus it's only $960 per person I'm afraid to tell you. The day that gold hit's $10,000 is the day that fine men's suit hits $10,000. We're not there yet based on suit prices. To quote him: "it will always cost about ounce of gold". (referring to the fine man's suit).

Except for earlier this past decade (and no doubt some future point in time) when an ounce of gold couldn't buy you 1/2 of a man's fine suit. TIPS didn't have that issue -- less volatility. TIPS are only as good as the government's guarantee though -- some degree of risk to that.

Yes I think that's true about the yields -- especially the after-tax yields vs inflation. I was born in 1973 and I'm conditioned to expect rising prices every year -- I wonder why people don't see the math. I think people who buy the 30 year treasury instead of the 30 yr TIPs are reaching for yield -- they're speculating that there will be a big deflation scare that will net them a huge capital gain, but they take a risk. One can buy TIPs as a store of CPI-linked value. The crime is that the CPI adjustments are taxed as capital gain -- a fix to that tax issue would make it a quite reasonable store of value, after accounting for the yield. There are accounts (IRAs) where that is a non-issue. TIPs pay a yield and if you think of the yield as making up for a possibly underreported CPI, then it actually holds value relatively well in the face of consumer price inflation.

Forgive me, but I can't see your point and I am trying to understand your point of view. No one is claiming that gold is the ONLY store of wealth and that the only capital anyone can have is there personal 3/4 oz of gold. However, gold, alone amongst the physical stores of wealth such as corn, oil, acres of forestland, farmland, intellectual property et. etc. has all the qualities that makes it ideal for use as MONEY. Indeed throughout history it has been used as such. It has intrinsic value (this seems to be the main point of contention in this thread), it is globally accepted as money because it has the following characteristics: portability (this eliminates land and such commodities as barrels of oil as candidates for money), purity (one gram of gold is as pure as any other), it is virtually indestructable and above all it cannot be inflated as can any fiat money (commodity future contracts, sovreign promises to pay, monetized debt etc.). When fiat money eventually is inflated as it invariably will to the point of paying of past debt with new debt, gold regains its appeal to creditors who wish to be reimbursed with uninflated money. It seems to be lost on a lot of people, that at today's current yields, sovereign debt instruments are guarantees to lose money going forward as their yields do not make up for the capital loss due to inflation. That is why gold has "outperformed" in terms of debased currencies.... Regarding my point of view... In a word: scalability. I'm exploring the limitations of a finite supply of money. It is desirable to have the supply of money grow with the needs of the economy, however it is not desirable for it to be abused. So there is some benefit that fiat money brings to the table that gold could not provide, yet it's difficult to keep the leaders from abusing the ability to create new money. Galbraith's book you recommended Money: Whence it Came, Where it Went pointed out that a moderate degree of inflation is desirable.

If gold were cash and allocated equallly to each of the world's inhabitants, the US buck would have zero value and all your measures of GDP would be in goldgrams or ounces- the yardstick would have changed. Because the total wealth of the world can be measured in US dollars now, there is no need to actually have that many dollars in existence. There is no claim that the gold is the only store of wealth, there are others - barrels of oil, bushels of wheat, acres of farmland, but gold alone amongst all the commodities has been used as money, because of its high intrinsic value, its finite supply (cannot be inflated), its indestructability and its portability. It is used as the ultimate store of wealth and indeed is used as a partial backing of all major currencies. It has the same convertible value in India, Peru, Timbuktu and Wall Street. Either you get it or you don't. I think every "gets it" if you are going to make those kinds of statements. Does anyone think dollars would have value if the world abandoned it and went to gold coin? Who here doesn't realize that gold is traded in Timbuktu, India, and Wall Street? Did anyone say that gold is the only commodity? That had nothing at all to do with what I wrote.

5.3 billion troy ounces -- global supply of gold 6,700,000,000 -- global human population There is 8/10 of an ounce of gold per person. $9,117 -- global GDP per capita 2008 (don't have more recent figure) So, on a gold standard, each person in the world has a maximum cash supply of $960 (if all gold were equally distributed as coin). I'm not an economist of course. But would global GDP fall if the global money supply were roughly 1/10 of global GDP? Once I get my $960 and allocate 100% of it to the family budget, how do I have room to purchase more things next year if somebody invents a new widget? Is there room for a new widget? If no money available for new widgets, does this deter innovation? Final question -- has fiat currency changed the pace of innovation? I really don't know -- but it's something I wonder about.

From what I understand the current price of WFC is only about 20% higher than what Fairfax paid. Somebody posted about a year ago that Fairfax got their WFC for roughly $19 or $20 -- I think they found that price from the ORH filings. The only reason I remember this is that about a year ago people were suggesting that Fairfax should dump it at $24.

Regarding Prem, I agree that he needs to protect against a potentially ugly climate. However, he must see the odds of that ugly climate as unusually high whenever he hedges an unusually high amount of his portfolio. 93% is practically the entire thing. At the start of last year he was completely unhedged. So I guess, to borrow from what somebody else said, it's the second derivative that matters. The slope of his hedging has changed in a major way, even though at pretty much all times he has to protect against that potentially ugly climate. He tends to hedge before the major crashes and closes the hedges near the bottom. Right now he's hedging. How many times has he gone as high as 93% hedged and what happened to the market each time?

I found this article worth reading -- it's at least a change of pace from the constantly negative: http://www.forbes.com/2010/08/16/pessimism-recession-economy-money-opinions-columnists-wesbury-stein.html And when your party is out of power, no matter what the economy is doing, it's always good to point out some data, or forecast, or sector that is not doing well. As a result, there is no political constituency for economic optimism and this has created an awfully pessimistic environment. For example, the pessimists are all talking about the fact that real GDP will be revised downwardly to an annualized growth rate of about 1% in the second quarter. What they don't tell you is that this low number was caused by a 35% surge in imports. That's right, consumers and businesses bought more from overseas (lots more), and since imports are a negative in the GDP accounts, it made the economy look worse. When we adjust for this, American households and businesses increased their spending at a 4% annual rate in the second quarter--over and above inflation. In the last 20 years this measure, which looks at just spending by domestic purchasers, increased at an average 2.8% annual rate. In other words, despite high unemployment and low consumer confidence, spending grew rapidly in the spring. So, what about the future? First, consumers are in a better position to spend today than at the start of the year. The personal saving rate is now at 6.4%. Excluding spikes due to special temporary government transfers, this is the highest level since 1992. Meanwhile, due to longer hours and higher pay per hour, private sector earnings are rising. So far this year, real (inflation-adjusted) cash wages are up at a 3.4% annual rate. Although some analysts bemoan lingering excess capacity, they need to look more closely at the data. In the past year the real economy has grown 3%. During that time, the utilization of industrial capacity has climbed from 68% to 74%. That climb, in part, is due to falling capacity as the capital stock depreciates. One more year of 3% growth, and capacity use could be at 80%, which is higher than the average in the past 30 years. Forward-looking companies can see this already and have already started investing, which is why investment in equipment and software is up at more than a 20% annual rate so far this year.

Right, if I were going to try to stimulate consumer spending for items that require credit I would make the credit cheaper. Cutting the tax rate to zero for the interest on such loans would do it. The reason being is that the lender could ask a lower interest rate and still make the same profit. It must have been discussed at some point... after all, muni bonds have this special treatment and it allows then to borrow money cheaper. Same would happen with consumer credit loans if they had an easier tax treatment. Or lets say the banks don't lower the interest rate -- at least they'd be more willing to lend with the extra profit (from no taxes) providing a fatter margin of safety. Given that this would help on the interest rate side of things for consumer loans, they could probably also raise the Fed funds rate at the same time a little bit to give retirees more income. Politically, people may get upset about the banks getting a lower tax rate. However, this other method they have of throwing money at banks (near zero Fed interest rate) doesn't guarantee that they will lend. My idea would throw the banks a bone only if they play ball. Citigroup just got recapitalized but they don't plan on doing much growth in the US -- they're instead taking their show on the road to developing markets. So the money that goes to Citi is in some ways a form of foreign aid.

That's my main gripe with Seattle -- if it's going to be this far north it had better snow! But it doesn't. What the heck do you do in the rain and mud? Snowing on the other hand: you have skiing, you can send the kids outside to play in the snow, and it gets so bright outside that you need sunglasses -- just like summer except cold. I think Vancouver is the same -- dark and rainy. Both places have ski areas near by, however I'd like the snow to be in my back yard.

I don't know where you live now, but I would be careful about Vancouver if you live in the southern latitudes today. I'm near Seattle which isn't quite as far north but the light situation here is depressing in the winter. It's not just the rain -- it's the fact that the sun rises at 8am and sets somewhere near 4pm. The part of the daylight that is missing is the very middle of the day where the sun ought to be somewhere high over the horizon making things feel really light. Instead, it just gets to where you'd normally expect it by lets say 10:30 am in California and then starts heading down again. So it's not just that the daylight hours are short -- it's that the very best and brightest part of the day is missing! It wouldn't be so bad if there were snow on the ground (reflecting light) -- but there isn't! However this doesn't bother most people who grew up in the northern latitudes. I did not, so I suffer. Sorry to hear about your surprising loss but it sounds like you'll wind up better off.

This govt is killing itself trying to show some kind of inflation - if they are going to fudge the numbers it would be in the other direction. No govt wants to be the one on record of a deflationary period such as what we are getting. That's what I think too. However people have argued many times that the government switched the way they measure CPI in order to do nefarious things such as rip off social security pensioners (the payments are indexed to the CPI). I went to ShadowStats yesterday and their numbers show that the old measure of CPI (the "shadow" stats) measures a stronger reading than the new official measure of CPI. So that's the funny thing -- if the government had never switched the measure of CPI then the inflation rate would presently look higher and people would feel less worried. Let's entertain this for a moment -- if the gold bugs are right, then we currently are having inflation but almost nobody believes it because we are "duped" by the CPI. Actually, the latest MKL conference call pointed out all kinds of prices that have been rising -- they seem to be making the same argument, that the CPI is understating the true inflation out there. Here is what they said on that conference call: "I don’t hear bondholders talking about things like the fact that Disney just raised the admission price and the tuition and medical bills among others continue to rise." It's funny though, everybody seems willing to accept such arguments when we're all afraid of inflation, and the media is hyping inflation, but when the media is hyping deflation we all seem to fall back on trusting the government CPI again. It's like we have a tendency to make things as scary as possible -- on the one hand get scared that we don't really have a handle on how strong inflation really is because you can't trust the government, but then once the fear is one of deflation we suddenly trust the government number because it is scarier. This is a strange collective behavior -- I suppose it is a caution instinct, but it's not that logical. People seem to trust whichever method scares them the most.

Let's say the rate goes back to 5% but you pay 40% tax. That's only a 3% yield at a 40% tax rate, which is where high income rates are headed. I rather make 7% tax-deferred compounding from solid blue chips than 3% after-tax compounding from bonds. If we're talking about very high grade blue chips, that's still more than twice the compounding rate.

Okay, well if the title of this thread is going to be about lies, then here is a topic of interest to me: Do people today believe the government is lying about inflation in the CPI? In the past year a number of people were very eager to point out to me the "ShadowStats" website published by John Williams that argues the government understates inflation. Are we to believe, now that we're facing very low inflation from the CPI which is scaring the market about deflation, that the government is deliberately understating inflation? The topic came up when I was arguing how gold had been rising faster than the CPI for a very long time, and therefore is likely to be significantly overvalued. People jumped out of the woodwork to announce that John Williams has the real data! So where are those people now? Why is it that when the deflation scare is based on the CPI, people aren't calmly saying that John Williams has the real data and that the government numbers overstate deflation risk? No doubt the John Williams fans are smugly saying that this deflation scare is a crock of bull. They know the government is deliberately reporting a low CPI to fool us into panicking about deflation. I'm sorry but it doesn't make sense. According to the ShadowStats theory the government merely has to go back to the old method of measuring inflation and all will be well on the deflation front for now.

True, however I'd rather have the Social Security of today than the 1930s situation where your savings went the way of a bank failure, leaving you with nothing at all. The workers of the 1930s who still had jobs could hoard their income -- today they can't do that to the same degree because a good portion of the would-be discretionary income is now being redistributed -- and those below-the-poverty-level incomes get spent immediately. So it's harder for us to pull back our spending quite like we used to -- however no doubt any pullback is still painful. The Grapes of Wrath (if written today) would be a different story with the whole family moving in with the grandparents, rather than the grandfather feeding from (well, you remember the book).

I'm willing to entertain this as well as a reasonable scenario and in fact I bought some Russell 2000 puts a week ago so that I can worry less while I contemplate what to do. I figure the stock market will more heavily discount the risk if everybody else begins to worry too -- hence the puts. But I have lingering questions. Right now Australia and UK for example are seeing approximately 3% inflation. Would Ben Graham stay totally out of equities or would he venture into foreign markets? If you are afraid of deflation, then go where there is relatively higher inflation.

Where can I find a jacket like Lacy's?

This is a very good point, and probably does have real relevance to the comparison. I would just add a few countervailing points to the mix: (1) just as most households today are 2 income households (or were), and so have some income coming in still, most households require two incomes to stay afloat, or at least two incomes to keep spending the way they were and savings a bit for retirement. So, losing one of two incomes probably means doing away with the saving, and drags out the housing situation because they have enough income coming in to keep the house payment up for a while, but like a structural deficit, will require selling the home long-term to downsize to a lower overall monthly payment; and (2) the way unemployment is calculated has changed so much over the past 15 - 20 years that it is probably way undercalculated today from how it was in the 1980s (i.e., the government keeps moving the line whenever it suits them with respect to unemployment and inflation, for political reasons). Overall, perhaps it's a wash? Here is something that never gets mentioned when comparing employment levels: Today everyone over age 65 is getting an income -- it's called Social Security, but they're not "employed". Logically though, an income is an income. This income is also reasonably secure. If instead of "employment" levels we were to focus on percentage of adults who live in a household with an income, that would perhaps be more meaningful in terms of measuring the level of financial insecurity out there.

The question is, do real returns matter?

I suppose in some cases half of that money is being given by the taxpayers -- it's money that otherwise would have been collected in estate taxes, so the drop in revenue will need to come out of somebody's hide. So all US taxpayers can feel like they've given something with this announcement :)