Editor’s Note: The US “Empire of Debt” will one day crumble under its own weight… just as all empires do.
That doesn’t mean you’re helpless. As Bill argues in today’s essay, extracted from his bookThe New Empire of Debt, which he wrote with co-author Addison Wiggin, there’s one asset you can own to protect yourself.
(Hint: It’s yellow and shiny.)
What to Do When the “Empire of Debt” Crumbles
“Dere’s dem dat’s smart… an’dere’s dem dat’s good,” said Uncle Remus. Many young people today can’t even identify Uncle Remus. Some of their elders might want to arrest you for quoting him in the original dialect. But the man was a genius.
When we were young, we were a lot smarter. But as the years go by, many of the things we thought were smart don’t seem so smart anymore. And now we realize that, no matter how smart we think we are, we are never quite smart enough.
We think stocks are going up; we think we can build a better world in Mesopotamia; we think we can tell the fellow down the street how to discipline his children or decorate his house. But what do we know?
It is easier to be smart than to be good; that’s why there are so many smart people, and so few good ones. Smart men get elected to high office. They run major corporations. They write editorials for the newspaper.
Pity the poor good man; he goes to parties and has nothing to say that is not mocking and cynical. Others talk about their smart deals, their smart ideas, their smart plans and successes. Women crowd around them; a smart man grows taller as he speaks. The good man shrinks.
The Virtuous Path
But in economics and investing it is virtue, not brainpower, that really pays off. “All the world is moral,” said Emerson. It is moral in the sense that if you are careless enough to step on a hoe, the handle will hit you in the face.
One generation takes the virtuous path. The next is likely to slip off, honoring the old virtues in speech, but not in act. The oldest generation of Americans remembers the Great Depression. They borrowed reluctantly, saved eagerly, and made the United States the greatest power on Earth.
Their children still talked their parents’ talk, but didn’t mind walking off in a different direction when the wind was at their backs. And their grandchildren? The newest generation seems to have no regard whatever for the virtues of their grandparents or the futures of their grandchildren. They disregard the wisdom of the dead, and load up the unborn with debt.
The end of the US Empire of Debt may be near or far. We don’t know. Washington will probably not be sacked anytime soon. But the imperial currency – the dollar – is in grave danger. America’s central bankers not only fail to protect it, they invite the barbarians to destroy it… slowly.
How to Protect Your Wealth
It is as if the police had gone on strike, but started holding up liquor stores and mugging pedestrians. Since the central bank won’t protect your wealth, you’ll have to do it yourself.
In the old-fashioned way – by packing heat… holding reserves of your own. Traditionally, what the central banks hold in reserve is gold.
Mr. James Surowiecki wrote a wise and moronic piece on gold in the New Yorker. His wisdom is centered on the insight that neither gold nor paper money are true wealth, but only relative measures, subject to adjustment.
“Gold or not, we’re always just winning on air,” he wrote. “You can’t be rich unless everyone agrees you’re rich.”
In other words, there is no law that guarantees gold at $450 an ounce. It might just be priced at $226 an ounce, as it was when George W. Bush took office for the first time. Since then, a man who counted his wealth in Krugerrands has become nearly 500% richer.
But gold wasn’t born yesterday, or four years ago. Mr. Surowiecki noticed that the metal has a past, just as it has a present. He turned his head around and looked back a quarter of a century. The yellow metal was not a great way to preserve wealth during that period, he notes.
As a result, he sees no difference between a paper dollar and a gold doubloon, or between a bull market in gold and a bubble in technology shares.
“In the end, our trust in gold is no different from our trust in a piece of paper with ‘one dollar’ written on it,” he believes. And when you buy gold, “you’re buying into a collective hallucination – exactly what those dot-com investors did in the late 1990s.”
Pity he didn’t bother to look back a little further. This is the moronic part. While Mr. Surowiecki looked at a bit of gold’s past, he didn’t see enough of it. Both gold and paper dollars have histories, but gold has far more. Both gold and paper dollars have a future.
But, and this is the important part, gold is likely to have more of that, too.
Editor‘s Note: Diary of a Rogue Economist readers can claim a FREE hardcover copy of The New Empire of Debt here. As Black Swan author Nassim Taleb put it, read Bill and Addison’s book “and your views of the world will never be the same again.” Get your copy here while stocks last.