Tuesday, October 16, 2012

Debt Instruments versus Gold and Silver

"The world will soon wake up to the reality that everyone is broke and can collect nothing from the bankrupt, who are owed unlimited amounts by the insolvent, who are attempting to make late payments on a bank holiday in the wrong country, with an unacceptable currency, against defaulted collateral, of which nobody is sure who holds title." - Anonymous

The concept behind fiat money (or paper money) is this. When someone out there gives you a paper note for your hard work, of say $10 denomination, then you expect to be able to turn around and purchase a value of goods and services for that same denomination. The note is a contract of value.

Say I'm an accountant. I study hard, pay for a technical qualification in accounting and then use that skill to help a small business to be more efficient. The market has decided that my skills are worth, say, $80 per hour for a start up accountant or around $450 per hour for all the experience you will ever need. The SME owner pays that amount willingly as he/she gets that value back in increased business. If not, then I guess the market will speak and I will be forced to stop being an accountant and look for another job.

The dollars exchanged measure value and hard work. In a just world, this should never be devalued. My purchasing power should remain the same.

But value is a very difficult 'thing' to measure and get right. And it is easily distorted.

What is the easiest way to distort this measure of value. Money printing. Essentially this means that you are attempting to print hard work and value through a printing press (or these days a  stroke of a keyboard). Want $40 billion a month, easy, just type 40000000000 and hit ENTER.

When money (credit) is issued like this, there is a corresponding debt (debit) on the other side. It is the law of physics really. Positives have a negative. Energy emitted in one form gets translated to another, which has an equaling effect.

The unjust and insidious nature of this money printing 'transaction' is that is devalues your labour and hard work previously performed. The balancing energy on the other side of printing is truly negative for you. Someone has to pay. It's you.

Anyway, if a Bank issues new money (and they can legally issue about 90% of new money based on your deposit; the Fed? well they can issue unlimited amounts), then this is credit. The loan they issue on the other side is debt for you.

Look at it this way. The paper in your hand, that says $1 or 1 rupee or 5 euros, is a debt instrument which is owed to someone else. When that person on the 'other side' of your paper money wants their money back, you have to pay up or default.

Look on your note and see who owns it? Your Central Bank.

I recall in 1967 my father heading off to the bank to exchange his NZ pounds for NZ dollars. Why, because the next day his pounds would be worthless and if he didn't exchange them, his life's work would too be worthless. The bank had the power to change the value and type of debt instrument overnight. It had the power to cancel the value of the pieces of paper in my Dad's wallet.

Try doing that with gold or silver?

Gold and silver are out there in a box on their own. Once you own them in physical form, you are the owner and there is no creditor on the 'other side'. What makes gold perfect in this sense, is that it is also money. It is the ultimate medium of exchange. Sure, a government could try and confiscate it, but good luck with that. Potential hiding places for physical PMs are unlimited.

Gold in New Zealand dollars: $2132.82 per oz
Previous all-time high: $2311.02 per oz (15 Nov, 2011)

Silver in New Zealand dollars: $40.14 per oz
Previous all-time high: $59.19 per oz (30 Apr, 2011)
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