Toilet Paper Production Defies Manufacturing Slump

April 16, 2009

For years we have all watched Zimbabwe in dismay as it printed trillions of dollars thinking it could out run the inflation rate. Recently however, the country finally woke up to itself and decided to allow prices to be set in US dollars and South African Rand which by default meant the adoption of these currencies.

Another Weimar style experiment had come to an ignoble ending. The best angle on the outcome is that the nation is now left with a lifetime supply of toilet paper and nothing more.

But lunacy is not the domain of banana republics such as Zimbabwe only. We now have the United States, the United Kingdom and Japan doing the same thing. To keep the masses largely at ease they call it "quantitative easing" so as to give it an air of financial wizardry and respectability. The incredible thing is that the great investment houses of the world are flocking to buy this toilet paper in exchange for a paltry amount of interest ranging from 0% to just over 3%.

In the case of these three nations they are not printing to keep pace with inflation but rather to keep pace with the destruction of illusory wealth, hoping somehow that people will flock back to the stock and real estate markets so as to reflate the previous bubbles.

Messrs Geithner and Bernanke know that their approach is both condemned and damned by history. So what are they up to? In my view they are either doing their best to save the butts of the big banks or perhaps they are hoping that "a little bit of printing" will set off another confidence chain reaction.

The little people in the meantime are not playing according to the script. Personal consumption has been shrinking in all continents as people attempt to pay off debt and to bolster their savings. In other words they are giving back the "paper" in return for lower debt.

The next step will come when people realise that even the paper they are saving is doomed to rot as it accumulates a ridiculously low amount of interest which is also subject to tax. Now here comes the critical question. Will they decide to take another gamble by investing in stocks or will they put their sweat into precious metals and wait for the chaos to abate?

The answer at the moment appears to be their return to the stock markets as people are led to believe that a bottom has been reached and blue skies are ahead. The low interest rates are further pushing them to take another gamble. The real answer has already been supplied by history repeatedly as no paper currency has proven to be a store of value in the long run.

Consider just this one example. If someone in 1929 had buried $1,000,000 of US currency along with $1,000,000 of gold, who would you say is better off today?

Let me answer you with three quick facts:

  • A million dollars of currency would still be worth a million dollars.
  • A million dollars of gold in 1929 was the equivalent of 50,000 oz of gold at the then price of $20 per oz. Today that gold is worth $45,000,000 at $900 per oz. Even if the $1,000,000 in currency was invested at a tax free compound rate of 4% per annum in a savings account it would still only be worth just over $23,000,000.
  • Even if 300 oz of gold were sold each year over the last 80 years to pay for living expenses, the remaining gold would still be worth more than the $23,000,000 in the savings account.

So who was it that said that gold pays no interest?

So who is going to be left with egg on their face when the dust of history settles on the current economic landscape?

So what are you going to tell your kids when they ask you about gold 10 or 20 years from today?

I repeat my earlier conviction that the Geithner/Bernanke plan is to save the collective butts of the big banks and to preserve their power and monopoly, even though they know that there are enough good smaller banks which could easily take on the mantle of breathing life back into the economy without breaking the back of the budget and the little people of the USA.

For every one crooked Wall Street operative there are at least 10 decent bankers who understand that banking is not rocket science. The decent bankers know that it is about paying out 5% interest to depositors and lending no more than 75% of valuation at 7% to borrowers. Their real job is to check the ability of the borrower to service the loan and to check the value of the collateral. No CDS, MBS or any other acronym is necessary.

When the governments of the world realise that currency should be backed by gold and silver, only then will people be happy to hold paper currency as a store of value. Until then, keep collecting toilet paper at your own risk. Even worse, entrust your toilet paper to Wall Street.

Minting of gold in the U.S. stopped in 1933, during the Great Depression.