The Rude Awakening
Baltimore, Maryland
Thursday, March 29, 2007 ------------------------------ - Heads you lose, tails the house wins,
- Wealth creation morphs to wealth transfer,
- Gold for everyone and plenty more…
------------------------------ Reflecting on our gold, Joel Bowman reports from Southern California… Yesterday, your editor took a moment to admire a vast gold stockpile. Fortunately, this gold is not the kind that can be exchanged for goods or services and thus, is not likely to cause any wars. While omnipresent and invaluable, it can not be bought or sold, it can not be withdrawn, owned or squabbled over…or even replaced with paper. This gold, for better or for worse, recedes shortly after the arc of the sun contracts, and finally disappears, behind the horizon. Because we can't take a sunset to the bank, and because people who live on fresh air and sunshine are usually very hungry, we must investigate alternative stores of wealth. Dan Amoss, editor of Strategic Investment, joins us today to discuss the merits of wealth creation vs. wealth transfer. After a long train ride, Dan arrives at a conclusion about a different kind of gold…the kind they make into bars and store in bank vaults. Read on below for today's column… ----- 3 Days Left ----- Open - For a Very Limited Time… Agora Financial's The Resource Reserve Now you can get all of our commodity-related publications together in one easy package
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By Dan Amoss I think more clearly on a train. The rumbling helps focus my mind… Passengers are very much a part of their landscape, yet detached - a perfect occasion to sit back and think about the world that flies past the window. Here in America, the world that flies past the window is one in which capitalism has become a wealth-transfer process instead of a wealth-creation process. Without genuine wealth-creation, however, the U.S. dollar's value will become increasingly suspect. A few weeks ago, as I was rolling up the tracks from Baltimore to New York, my gaze landed on an oil refinery. A little while later, I spotted a casino. Then I started to think about these two very different forms of capitalism - one that relies on an intensive investment of physical capital and one that relies almost entirely on paper money. Is one these forms of capitalism inherently better than the other? Does one of them produce a more enduring prosperity? Yes, to both questions. Passing by Sunoco's Marcus Hook Refinery, you can't help but admire this feat of engineering. Situated on the Delaware/Pennsylvania border, this 800-acre campus covered in miles of steel pipe has the capacity to crack 175,000 barrels of crude oil into refined products in a single day. Harrah's Chester Casino & Racetrack does not produce gasoline. It does not produce anything…except a transfer of wealth. It stands in stark contrast to the refinery. The only similarity between the two is that you wouldn't want either in your backyard. Yet in the all-important calculation of gross domestic product (GDP), a dollar pumped into Harrah's one-armed bandit is treated the same as a dollar Sunoco invests in maintaining its refinery. For those who only look at surface numbers, GDP can be a very misleading gauge of economic health. In itself, it tells you nothing about capital formation. Will America's capital formation process continue in a sustainable manner when investment dollars are constantly diverted away from refineries because they are too "capital-intensive?" The ability to cheaply unleash crude oil's chemical energy is made possible by intellectual capital that has compounded over the years, thanks to consistent investment in research. This intellectual capital translates into material wealth when it's combined with physical investment in steel, concrete, and the like. Productivity improves as this process of intellectual and physical investment is repeated and refined over time. Compare this with intellectual capital stored in the minds of mathematicians writing algorithms for Harrah's computerized slot machines. Casinos are good businesses because the house always wins. But aside from the entertainment value they provide, they do not add to the capital base of the U.S. economy. Instead, casinos are a vehicle to transfer wealth from gamblers to Harrah's shareholders. While this casino's perpetual profits add to overall corporate earnings numbers, does it really create wealth? Who contributes more to the wealth creation process in the United States - the maintenance worker at Sunoco's refinery or the Ph.D. mathematician writing algorithms for Harrah's? As I consider this question, our train approaches the Philadelphia stop. The urban decay surrounding the University of Pennsylvania's ivy-draped buildings comes into focus. Ghosts of factories long dormant stand hollow. This landscape must represent the picture of progress to proponents of the "information economy." Most Penn students are trained for roles in finance, medicine, and law, while most residents of surrounding communities face a bleak future in this very same information economy. Someone in China is able undercut entry-level manufacturing wages by 90% in order to earn a standard of living that approaches the U.S. poverty level. This leaves noninformation workers the option of working in unexportable service industries. Not all of us can enjoy the privilege of thinking for a living. But all Americans do have the right to vote, and we have every reason to expect a louder populist voice at the ballot boxes as we head down the bumpy transition to an information economy. As most populist politicians have done in the past, they will make promises that can be paid only through newly printed paper money. Paper money is popular under democracies. Under the control of a central bank, paper money provides modern economies with the illusion of great flexibility and resilience. Without the rigidity of the gold standard, bad bank loans are easily swept under the rug. But what are the long-term costs of paper monetary systems? How can an economy develop in a healthy, sustainable manner when wealth's scale constantly changes? Contrary to popular opinion, paper money is not wealth. Paper money is a claim on wealth. It only has value to the extent that it can be exchanged for things - a bushel of corn, a gallon of gasoline, a dental cleaning, or an Intel microprocessor. When the government prints more money, it gives a public fixated on asset prices the illusion that they are growing wealthier, when, in fact, they are growing poorer. As paper money becomes more and more plentiful, the producers of valuable products will eventually demand more units of money in exchange for their product or service. Investors should expect the current momentum behind populist political movements in the U.S. to grow stronger. This will be bad for bad for the dollar, bad for longer-maturity bonds and bad for the stock market, but good for gold prices. The global economy now floats on a sea of paper money. This grand monetary experiment has been in place for only a few decades - a mere tick in the clock of civilization. We know how this show ends, having seen previews in Weimar Germany and several banana republics. Will the price of gold ultimately increase from its current $620 to $3,000 per ounce? I expect that it will. A better way to frame this large number is to flip the ratio from dollars per ounce to "ounce per dollars." Investors who hold gold will be very reluctant to sell it when dollar holders around the world anticipate the endgame of paper monetary systems. For its holders, gold will serve as a solid bridge on the journey from this monetary system to the next. Joel's Note: Just a quick one for goldbugs and resource investors alike here…the Agora Financial Resource Reserve, our lifetime resource trading and information service, is about to close. If you're a biotech investor or more inclined to follow the small-caps, this may not be for you…but if you're a resource trader, you should probably take a look at what's on offer. Here's a link for you if you're interested: 3 Days Left - Agora Financial's Resource Reserve ---------------------------------- | 
