Ode to Joy

June 20, 1997

(Ode: from the Greek oide, meaning song or as a suffix meaning way or path from the Greek hodos)

Oh friend, no more these sounds!
Let us sing more cheerful songs, more full of joy!
Joy, Daughter of Elysium...thy magi power re-unites
all that custom has divided
all men become brothers....

How many recognize these words as those of Schiller, the great German poet, which Beethoven used to conclude his magnificent 9th Symphony. Many have heard the powerful strains of Beethoven's symphony and been touched to the depths of their souls. Since my last Seven Golden Threads article, I have pondered the relationship of Beethoven's symphony with gold and global markets. I am inspired by a man who wrote a magnificent mosaic of music when completely deaf. I wonder if our "ode" of gold will be a shiny path that leads to a triumphant and joyful chorus? Please indulge me as I provoke a still deeper contemplation of the market quilt.

Beethoven inspires goldbugs and investors alike to leave, for a moment, the cacophony of the feet of the market masses and contemplate, in the silence of the wilderness, what we hope to accomplish from our fascination with and investment in gold. Some say that the division between earthly existence and a spiritual existence may be very thin. Indeed, at times one might think that the path of our physical and economic path parallels our spiritual path.

In my last post I provided shreds of evidence or intelligence that, taken together, might leave us believing in an article of faith that gold, in all its splendour, will have its reward in a market out of touch with the economic realities of supply and demand. I also pondered the possibility that conspiring forces may be orchestrating a brilliant chess game with every move and counter-move mapped out and carefully executed. Like a marionette and his puppet, the puppet ( the unexpecting and duped masses) is pulled in the desired direction at the puppet's ultimate expense. We could imagine the ultimate triumph of the marionette as the most powerful lever known to humankind - a single medium of exchange.

Some of you would no doubt refute such a scenario of calculated control as preposterous. Perhaps so. Consider the failure of OPEC to conclude on cornering global oil pricing. But suppose that the few influential forces that can and do pull the strings of the puppet, including Central Bankers, international financiers, and key corporate citizens, are by their own actions unwittingly playing into a grander scheme? What should we make, however, of the June 12-15 45th Bildberg Meeting in Atlanta; a private meeting of some of the most influential business and banking elite of North America and Europe who came to discuss such issues as China, Islam, EMU, energy, growth, and corporate governance. The whose-who include As one Gold-Eagle participant noted, what is unique about the Bildberg meeting is its secretive nature, its participants (who attend in an unofficial capacity and are unaccountable to an electorate), and whose objective is to develop a common understanding or position on key issues related to foreign affairs and international economy. One can only dream about being a fly on the wall or seeing a transcript of the meeting minutes. Consider too the ongoing negotiations, in private, of the Multilateral Agreement on Investment (MAI) through the OECD?

As in Seven Golden Threads the persistent question that keeps repeating itself is: so what? To what end would these supposedly well-meaning folks cloister themselves to discuss issues of such global importance, in a non-official capacity, and with such enormous influence on the global economy through their official capacities as corporate presidents, political advisors, and bankers? As with other matters of the market, information is never complete.

Can We Deal with Excess Supply?

One of the ironies of our times is the unusual phenomenon of excess supply of goods, services, and even fiat currency. A mathematician friend recently observed that while economists and central bankers have been adept at dealing with scarcity, they do not appear to know how to deal with excesses of supply, whether that be currency or irrational market exuberance. Economics tells us that the forces of demand and supply will move to a market clearing equilibrium price. Yet, it appears that the markets are ignoring or abandoning such laws of economics on a regular basis, even in the so-called future markets. I have watched with amazement that despite evidence of scarcity in supplies of palladium, platinum, silver, and gold (in order of importance of scarcity) there has been virtually no sustained reaction in terms of price to the evidence of supply constraints. Did we miss something? Perhaps we missed a decree, similar to that of Gordon Thiessen (Governor of the Bank of Canada) when he suggested before a Canadian parliamentary commission in November 1995 that the "multiplier" effect (the proportion of credit created by our banks to their legal tender) no longer exists? Is the market system broke? How much evidence of scarcity does the market require to start even a tempered reaction or must we wait for a stampede? Have not our markets become perverse when only significant constraints, such as those looming for palladium and platinum, will send the market lurching recklessly forward?

The Golden Chaperone is Missing in Action

My earlier golden thread suggested a state of excess liquidity or fiat currency pumped into our global monetary system since the early 1930s, when gold began to be decoupled from the U.S. dollar. The golden chaperone was conveniently extracted from the prom's dance floor. The U.S. dollar left the sobering rhythm of the line dance to vault merrily fueling excesses in consumption by all Western industrial nations. It is ironic that Alan Greenspan spoke these very words as a young economist (they appear on the front page of Gold-Eagle website):

"The abandonment of the gold standard made it possible for the welfare statists (government bureaucrats) to use the banking system as an unlimited expansion of credit. In the absence of the gold standard, there is no way to protect savings from confiscation through inflation... Deficit spending is simply a scheme for the "hidden" confiscation of wealth. Gold stands in the way of this insidious process." Alan Greenspan

Has Greenspan done a "Gordon Thiessen" or does he secretively still abide by this tenet? If he does abide by the role of gold as chaperone than has he indeed found himself cornered on the dance floor with no room to manoeuvre and no alternative dance step. It would be fascinating to have a heart to heart talk with this most influential man in the quiet of a desert.

A Glut of Money Supply, Consumption Frenzy, and Debt

A recent chart from the Federal Reserve Board shows just how ludicrous the money creation game has become. A chart showing year-to-year percent change (monthly average) in M2 money supply shows M2 expansion zooming from less than 1% in December 1994 to a growth rate of 5.8% by March/April of 1996, settling back to just above 4% today. At the same time consumer debt payments increased from roughly 9.7% of disposable income in December 1993 to over 11.3 % today (consumer instalment debt has shown a similar increase). There are some who have suggested a peculiar coincidence between the occurrence of these increases in M2 money supply and Clinton's election and policy directives.

U.S. debt continues to mount through the wonderful powers of inflation and deficit financing. Greenspan is caught in a dangerous corner. To raise interest rates to cool an increasingly super irrational market may create an unwanted knee-jerk reaction and blow to the U.S. economy. On the same hand raising rates will simply exacerbate the interest costs on the continually mounting U.S. debt. Yet, he knows the market and the U.S. economy are also dammed if his hand is forced not to raise rates; against his rational best wishes. So, we observe Greenspan attempting to cut the engines on the Titanic which is steaming towards that fateful iceberg in the murky darkness where information, known to only to the captain and some advisors, is deliberately withheld or manipulated leaving the passengers in false sense of blissful and euphoric slumber.

I believe Greenspan knows we are doomed. The iceberg does loom. The musical chairs must stop. The game only continues so long as we have enough players willing to play and pay the price for U.S. debt. How many more players can the U.S. convince to hold ever increasing piles of U.S. debt? That iceberg could be any one of the "death plunge" triggers Donald McAlvany wrote of in his Part V article "Meltdown."

Despite this evidence, we cannot help to marvel, as we watch through the portal of the ship, at what has been possible as a result of fiat currency and monetary policy for the past 70 year journey. Lest we forget that we have all benefited from the enormous liquidity that, in part, made our standard of consumptive living possible. Easy money and easy credit, like a magic wave of a monetarists wand, has made possible unparalleled economic well-being for the masses. We have more goods and services than we know what to do with. All possible through the ingenious monetary system and the power of the money multiplier of banking .

Whither Nature's Capital?

Sadly, the consequences of the liquidity bubble and the debt trap have had the greatest impact on a commodity not traded in the market: the environment and nature's capital. The vast amounts of goods and services produced with the mountains of fiat currency has systematically consumed nature's capital at unsustainable rates to the point that we are facing real natural capital constraints. Evidence abounds: food shortages, famine, floods, global warming, greenhouse gases, declining East Coast fishery, destruction of forests and timber capital, and depleting oil and gas reserves. Ironically, nature's capital, which is unaccounted for in financial markets, has been liquidated despite available information on its scarcity. Ironically, monetary policy in concert with the market system has given us unbridled power to ignore the very laws of physics (the first and second laws of thermodynamics). These fundamental tenets of physics are conveniently ignored by most economists or discounted as "sky is falling" rhetoric that we may actually be runing out of nature's capital without suitable human-made substitutes. We continue to live according to the article of faith which believes human-made and natural capital are substitutes. One needs only to consider how ludicrous this belief is when considering the abysmal failure of Bioshpere II in Arizona 3/4 a project which failed to recreate a self-sustaining ecosystem. Our arrogance towards our natural environment as having the capacity to produce ever more supplies of natural capital and environmental services is incredible. We even go as far as to ignore the basic tenets of economics; that of scarcity of supply. Have we forgotten this rule? Or are we deaf in din of an irrational parabolic market treadmill?

As a gold bug I sit and listen to the strains of Beethoven's final movement and I think about the final years of this century as we enter a new millennium. We are indeed living in interesting times and face some of the most significant challenges since the dawn of the Industrial Revolution. It is tragic that we have become blinded to the real scarcities of physical assets which have made our prosperity possible. Consider the myopia of our markets where the current Dow Jones 30 has seen a steel company removed from the index. Herman Daly, noted environmental economist and former advisor to the World Bank, leaves us with some interesting thoughts. Herman's vision of a full-world economy where the economy (as a square) is pushed up against the bounds of the global ecosystem (as a circle) was ultimately rejected by the World Bank since this would challenge the logic of years of pro-development policies which conveniently ignored the entropy laws of thermodynamics. As with gold, how long can the scarcity of the goods and services of nature's capital be ignored? As Daly notes, what good is the sawmill without trees?; what good is a fishing boat without fish; and what good is a cellular phone or laptop computer without food to eat?

Into the Wilderness

As I go into the wilderness to recharge my intellectual capital, I leave you with these lingering thoughts. They may not be what you expected on Gold Eagle, but, I believe they are pre-requisites to a more holistic perspective to the global market quilt.

One thing we can contemplate in the desert is the scarcity of time as well as the importance of our basic needs. This experience puts us in touch with the reality that in the end, time is ultimately scarce.

Whether goldbugs live to experience the joys of a golden "ode" or not, is perhaps irrelevant in the grander scheme of existence. As goldbugs, are we not also pursuing the same objectives in a game whose desired outcome is to benefit from the misfortune and folly of the crowd? Are we not then obliged to be noblesse oblige 3/4 from the French meaning the obligation of people of high rank or social position to behave nobly or kindly towards others.?

I am reminded of Beethoven's final strains of his symphony and Schiller's poem:

"World do you know your Creator?... above the stars must He dwell!"

In the end, should we not be pondering these words?

Can gold and goldbugs maintain their noblesse above the din of the maddening crowd?

Beethoven and Schiller are no doubt smiling as I post this tribute to their work!

10 karat gold is 41.7% pure gold.