Thursday, November 19, 2009

Wiederaenders: Should we buy gold?

Gosh, what a mess. I hardly know where to begin.

First, as some of you know, for 22 years I've earned a major portion of my income from work for Nihon Keizai Shimbun, Japan's business paper of record, equivalent to The Wall Street Journal. Japan's economy lives and dies on international currency exchange rates, so to stay current I read a lot about this stuff. I won't claim expert status, but I know more about it that your average Courier editor.

Next, two points of fact.

Tim asserts that "China is ... purposely deflating its currency." This is plain nonsense. In point of simple fact the yuan has been rising steadily against the dollar for many years, albeit more slowly than it would naturally because the Chinese government has been buying dollars like crazy. The purpose of this has indeed been to protect export values, yes. But deflation? No way. US and international pressure is what's causing the Chinese to slowly relent on their currency, and this is positive progress from our perspective. Everyone manipulates their currencies, that's the primary purpose of central banks. This stuff goes on everywhere all the time.

Tim goes on: "the world economy’s recession led Russia and China to call for a One World Currency – other than the U.S. dollar – earlier this year." Tim's conflating two different discussions. One -- which hit the news not this year but over four years ago, while the economy was still hot and oil was becoming stupidly expensive -- was not about a scary "One World Currency," as Fox News would have it, but rather the idea of denominating more international trade in one or more currencies in addition to the dollar, which would help hedge the risk of loss of value of the dollar. Our currency has been vastly overvalued for decades, in small part because of its hegemony in international trade in vital commodities like oil, but more because other countries (especially China) buy dollars to reduce their own currency values to support exports to us. The other, going back to October last year, involves China and Russia agreeing to oil trade between them denominated in rubles and yuan rather than the dollar, which is perfectly reasonable and beside the point.

It helps to understand that currency has no intrinsic value. It's like atomic structure -- it seems solid, but if you look really closely, there's almost nothing there. Currency is just a medium of exchange, and its value is always relative. Domestically we judge value by purchasing power -- how many burgers or gallons of gas it will buy. Internationally it's set relative to other currencies. These two factors rarely track together. So, with no intrinsic value, the idea that the dollar "should" have a high value is just wrong. The value you want depends on whether you're buying or selling.

Tim says, "Within the past week we have seen reports of the U.S. dollar’s value dropping." He's behind the curve by a couple of years. Against the yen, for example, the dollar has fallen by about 20% since June of '07.

That matters to me because I earn yen and spend dollars. But changes in the international value of the dollar mean almost nothing to you if you earn dollars and spend dollars. Think -- has the dollar's 'loss' of 20% of its relative value raised prices here by 20%? Of course not. It does affect the cost of imported goods, materials and resources somewhat, but bear in mind that exchange rate is only one factor in prices. No manufacturer wants to cut his own throat by allowing his prices to rise above norms in the world's largest consumer market, so exporters to the US are mostly eating the exchange losses. (What about oil!? I hear you cry. It's generally denominated in dollars, so no change!)

If anyone's been purposely deflating a currency recently, it's been the US, and that's generally a good thing. Since what goes up must eventually come down, artificial inflation of the dollar to improve international buying power caused international investors to gradually lose confidence in it, and the return to natural balance is restoring the soundness of the currency. It's also giving a little boost to what's left of our manufacturing base by making US goods cheaper internationally and foreign goods more expensive for us.

Now we get to the real nutty stuff. Tim says darkly, "Could the U.S. dollar fully collapse? I suppose so," imagining that the dollar could lose value to the point where it becomes useless, like Confederate scrip or the Iraqi dinar as the bombs were falling. Tim may suppose it, but the idea is plainly preposterous short of an asteroid strike. The US economy is huge and it has a strong (sometimes too strong) central bank. There is no risk of real military threat to us. Most important, the entire world is holding our bonds, which means both that our currency is the one they prefer when theirs seem shaky, and they have a closely vested interest in maintaining the value of that currency. Where people agree that something has value, for whatever reason, it has value.

Sure, go buy gold if you like, and make the gold dealers richer (both when you buy it and when you sell it later). But bear in mind that gold has volatile relative value just as currency does, so it carries exactly the same risks.

If you really want to maintain the value of what you own, on the other hand, invest in your community, vote against warmongers (the single most reliable cause of lost value is war), vote against oil interests, and help make sure everyone is healthy and the kids are well educated.


Mia said...

Can we give you cookies too? Very informative.

Steven Ayres said...

I love cookies, thanks!

dagnygromer said...

Steven, I disagree with you here. The dollar, yen, yuan, euro, etc. are merely fiat currencies. They are accepted in exchanges because their respective issuing governments have declared them to be "money". Throughout human history, every - yes every - fiat or paper currency has collapsed. The current ones have not yet collapsed. Is it different this time?
How many of your readers understand that the US Fed can create any number of dollars at no cost?
Gold has been real money since the concept of money ("the most tradable commodity") has existed. It will outlast all the fiat frauds.

Steven Ayres said...

Dagny, try this: go buy some gold, then take it down to the Dinner Bell and try to buy a sandwich with it. Do you think gold is still "money" in this situation?

Yes, gold has always had value in society, but that value is no different in quality from the value of a greenback, in that it only exists because people agree it exists. Value per se does not make it a medium for exchange (money), any more than my car or your dog or a can of paint can be a useful medium for exchange. You need money for that.

Yes, any government can create as much of its currency as it likes, but not without economic cost. This has historically been the main cause of hyperinflation and currency collapse as governments have struggled under extreme circumstances. Central bankers understand this danger intimately, and guarding against it is central to their function.

"Is it different this time?" Currency collapse requires circumstances that make the currency untenable. The only realistic factors of that sort on the horizon for the US would be failure to deal rationally with climate change and falling oil production. We still have a lot of time on those.

Could the dollar lose its value at some time in the indefinite future? Given catastrophic circumstances, sure. But it's not happening now and there's no reason to imagine that it will happen in the foreseeable future, the subject of Tim's column.

I'd just like to add that gold at $1K/ounce sounds to me like buying at the top of the market, unless you're hoping for the sort of speculative bubble that's just popped in real estate.

Tim Wiederaenders said...

I have to hand it to you Steven -- your responses have been very informative and point us in the right direction on this topic. The reason why I still am smiling is you have fulfilled the purpose of my blog entry; bring up a topic enough so that the ensuing discussion educates them. Do I have a lot to learn about gold? Of course. As I have always believed, "journalists know a little about everything, and everything about nothing." You have proven that. Kudos.

Steven Ayres said...

I appreciate that, Tim, but I have to wonder what responsibility you feel to your readers about this. It's one thing to toss around controversial opinions to stir things up, it's quite another to present them as facts.

Rightly or wrongly, people rely on journalists to check and present facts. If we're not just willing but determined to check our own understanding of the facts before we leap to print, our product isn't fit to line a birdcage and we've failed our public trust.

Our media have too long been allowed to blur the lines between opinion and fact, and our public discourse is in shambles as a direct result. This is not good for anyone except those who would profit from chaos.

How about it, Tim? Are you ready to use an actual blog technique on your pseudoblog, do an update and correct your facts?

Tim Wiederaenders said...

I have no problem updating facts; I answer bloggers' questions and I have posted corrections many times before. I have no problem humbling myself, admitting wrong/fault, or reaching out for help. This one about gold is so complex I might refer them to you. Yet, it's puzzling to me that you won't do the same. I have emailed you multiple times about "the other side of the story" with no success. What's good for the goose ... Think about it.

Steven Ayres said...

I'm not talking about giving "the other side of the story," Tim, I'm talking about facts. I fear you may be confusing these concepts.

China is not "deflating its currency." No one is advocating a "One World Currency." You stated both as facts, no qualification.

If I've got a fact wrong, call me on it, and back it up. Everyone in new-media land gets to be accountable.

birther t. bagur said...

Wiederanders is not interested in informing people or fact finding. The letters to the editor section of his paper has been rife with straight up lies recently. I think the most egregious one was where Jim Crutchfield stated that the D.C. editor of Barron's claims that only $16 billion of stimulus money was used to create jobs (see here:, when in reality a FOX Business TV personality made this claim and the Barron's editor openly disputed the numbers the FOX employee was throwing out.
There are ample examples of Weideranders or that head editor guy commenting directly below letters to editor, and more absurdly, below online comments in order to "fact-check" them. Funny thing is, it is only left-leaning letters and comments that are subjected to this scrutiny.
I would applaud such action by the way if it wasn't applied asymmetrically to give cover to the general teabag sentiments of the Courier's Bircher owners down in Yuma.
I know from experience that the Courier doesn't run every letter, and this fact makes the Courier's penchant for printing letters full of lies and incorrect information particularly damning.

Steven Ayres said...

BTB: can you point me to examples of Tim or other editors replying in comments, particularly fact-checking? I haven't seen that.

Anonymous said...

I've said it before that Ben is the culprit, not Tim or Yuma owners.

birther t. bagur said...

Steven, I can't find the particular example. I think it happened around 11/17-11/20 in either the letters or an editorial. I wouldn't be surprised if it was later removed when I started advertising it. You can, however, see them fact-checking a LTE here:
It makes all the lies they print without the slightest scrutiny that more glaring.