Happy New Year. This is my annual reflections article, which is my chance to write with less structure and formality, share my thoughts and look back over a busy year. This is an informal, unstructured, and personal post.
Let me start by sharing a bit of my story. In January, the Nortel bankruptcy estate finally paid a debt Nortel owed since 2010. Let me provide a little bit of history. In 1994, I started a software company called DiamondWare. Over 14 years, I poured in my blood, and sweat, and grew the business. I did that without a penny of outside capital. In August 2008, I sold it to Nortel Networks. It was a cash deal, but there was an escrow and other holdbacks. Nortel filed for bankruptcy a few months later. Needless to say, bankruptcy called into question which debts they would pay, and at what discount. I am glad they settled up on this one.
The point of this is not my personal finances, but this story is archetypical of our era. Everyone (including my advisors and me!) thought Nortel was a stable company even in 2008. Nortel had been a massive company, and was once the largest company listed on the Toronto Stock Exchange. Its bankruptcy is, so far as I know, the largest in corporate history.
And what was the cause? Using short-term borrowing to fund long-term and illiquid assets. When the credit markets froze in 2008, Nortel had some big bond payments that were coming due. With no way to sell new bonds to pay the old ones, it was forced to default.
Good thing the corporate and banking world has learned this lesson, and now no one uses short-term bonds. Indeed, everyone has income to amortize their debts… </sarcasm>
There are two ways to look at the world. One is to cry. I know people who have become bitter and depressed. They seem paralyzed, and they often lash out at their friends and family. The other is to laugh. Find the irony, poke at it, and tell your friends—nothing will change unless enough people care—but don’t take it personally. Remember a lesson from Professor J.R.R. Tolkien. No one knows the future. Despair is not only a sin in traditional religion, it is also a mistake. All is not lost, not yet, not by a long shot!
In February, I began writing regularly for Forbes. They had published half a dozen of my articles previously, including my most widely read and one of my favorites on how wages have been falling since at least 1965. But now I have my own page as a regular Forbes Contributor. It is a lot of work, and takes tons of discipline to put out a quality article every week. It is also gratifying, and a great way to learn a lot about your topic and yourself. I am honored that Steve Forbes, and my editors John Tamny and Avik Roy trust me with this responsibility. Steve himself has long been a gold standard advocate, and he made it a plank in his presidential campaign.
In the spring, a major project of Monetary Metals came to the end, and not in a good way. We had drafted a patent application, raised capital, assembled a team, developed software, designed and built a website, planned a marketing campaign, and were putting together the legal docs. What was it? I can’t disclose the details as I am working on a plan B, but it was a consumer offering. I was pretty excited.. Unfortunately, the lawyers determined that we would be under a major area of regulation. Initial compliance could have cost near a million bucks, and there would be ongoing compliance costs too. There was no way for a startup to go there. Project nixed. Time and money lost. What a bummer.
Partly due to this, my business partner wanted to move on to other opportunities. I bought him out this summer, and now I am the sole proprietor of Monetary Metals. This lets me pursue my vision: offering investors a gold yield on their gold. If gold is money, then it should be possible to invest it to earn more money. Well, gold is money…
In June, I got my new 2014 911 turbo. It has better balance, more power, a stiffer frame, less overhang in front and rear, and more gears (dual clutch computer-controlled 7-speed gearbox). And WOW is it fast. Pull the skin off your face fast. 0 to 60 in 2.9s fast. It has a built-in G force meter in the dash. The car has achieved 1.09g both braking and accelerating. This is so the right car for me, I am still grinning ear to ear and this is 6 months later!
What does this have to do with economics? How does anyone pay for something like a high end sports car? I sold a business that I spent a decade and a half building. This is part added value, and part credit boom (which is how the valuation got to be as high as it did). Today, I trade markets. The volatility that makes trading possible is inherent to fiat money. Trading gains are a wealth transfer.
Hate the game, not the players.
For a long time, I have been saying silver will go down in gold terms (i.e. a rising gold to silver ratio) and likely dollar terms. When the ratio was 50, the gold bugs said another leg up was coming and the ratio would fall back to 31 (its low in spring 2011). I said nothing doing. I said it will go to 60 and maybe 70. Later I extended that, and said 70 and maybe 80. For a long time, it just didn’t seem to want to go higher but in September, the silver price broke down and the ratio spiked up. It has closed over 76 (not counting one Sunday even when it briefly hit over 80). It is 75.5 as I write this. My prediction was big, highly contrarian—I don’t know anyone else in the gold community who took this position—and right. That got a lot of people following my work. Now I am sure they are all wondering if I will call the turn when it happens. To which I can offer lots of economics, theory, model, analysis, blah blah blah. Or I can just say keep reading. 😉
This fall, translations of my articles and publication in European media accelerated. I am super excited that they went up on the site of Formiche (Italy) in Italian, onto the front page of the print edition of L’Agefi (France) in French, finews.ch (Switzerland) and goldseiten.de (Germany) in German, the blog of the Swiss National Bank in English, and Quamnet (China) in English. The Truman Factor continued to publish some of my articles in Spanish. I do not think it is pretentious to say that there is a serious worldwide movement to recognize gold as money.
On a rainy day in November, the Gold Standard Institute sponsored its first event. In New York City, Andy Bernstein spoke about capitalism and I spoke about our failing dollar. From a content and number of attendees perspective, it was a big success.
This year, I have had the opportunity to develop many great and mutually beneficial relationships. One, which started to bear fruit in December, is the Cobden Centre in the UK. Named for Richard Cobden, a noted 19th century industrialist and free trade advocate, its mission is to promote freedom, private property rights, and honest money.
Finally, over my holiday “break” I began putting keyboard to word processor (or alternatively, electrons to file) on my book. My working title is: The Dollar Cancer and the Gold Cure. More soon…
I hope you have a great year in 2015!
Can’t wait for that book to come out! A more coherent presentation of all the ideas you publish in Forbes articles, on this site, monetary-metals.com and Facebook is very welcome. I think stringing all those separate fractions of ideas together to a single, coherent picture would add a lot of value.
Just in case ou have not seen this; I found this on Januarynth, 2915:
3:06 AM (1 hour ago)
Keynesians Are In Hysterics Because Their Funny-Money Experiment
Is Coming To An End
by Nathan Lewis, 10/30/2014, 5,175 views
At the Washington Post’s “Wonkblog,” Matt O’Brien wrote a typical sort
of hysterical screed about the gold standard system – the system that
the United States used for nearly two centuries, until 1971. During
that time, the country went from a handful of rebellious subsistence
farmers, worn down by over a decade of war, hyperinflation and
unstable government, to the most successful and wealthiest country in
Think about that.
Now, let’s see what O’Brien wrote:
“When it comes to crackpot economic ideas, the gold standard is,
well, the gold standard. It’s a barbarous relic that has nothing to
recommend it today. Pegging the dollar to the price of gold, you see,
is just a doomsday device for turning recessions into depressions.”
To me, even without getting into any details, this smacks of a
certain lack of connection with any fact of reality or history.
You just don’t become the most successful country of the last two
centuries with a “crackpot” monetary system that is a “doomsday
The last twenty years of the U.S.’s gold standard era – the Bretton
Woods years when the dollar was worth 1/35th of an ounce of gold –
were times of prosperity and abundance, especially for the U.S.
middle class. The gold standard era didn’t end in 1971 because it
was producing bad results, and people decided it was time to find
something better. It ended because those responsible for maintaining
it were idiots.
I would even say that those years, the 1950s and 1960s, were the best
of the last century, 1914-2014.
If the gold standard system is so horrible, then how did that happen?
Since 1971, even by the U.S. government’s falsely sunny statistics,
the U.S. “real” median full-time male income has gone nowhere.
If today’s funny-money arrangement is so wonderful, how did that
A gold standard system is a fixed-value system. The value of the
currency, such as the dollar, is fixed at $20.67/ounce (before 1933)
or $35/oz. (after 1933). Once you have a fixed-value system, you no
longer have a panel of bureaucrats making stuff up as they go along,
to deal with unemployment, interest rates, exchange rates, asset
markets, government financing, or whatever the problems of the day
may be. Money is neutral and definite.
I call this the Classical approach. Today’s approach is what I call
Mercantilism – and that’s what both John Maynard Keynes and Murray
Rothbard called it too.
Although there are no gold-standard currencies today, the Classical
approach is, in fact, quite common. Whether thru a “common currency,”
or via a fixed-value policy with another currency or benchmark, many
governments today use a Classical fixed-value strategy. In the
process, they abandon any Mercantilist ambitions to “manage” the
economy by jiggering the currency.
Places like Spain, Italy & Slovakia, or the dollar-linked countries
like Ecuador and Hong Kong, have no domestic monetary policy. They
just have a fixed-value link.
There are now 18 countries that are part of the eurozone, another
ten small states and territories that use the euro but are not part
of the eurozone, and 27 countries that have a currency that is fixed
to the euro. That’s a total of 55 governments that use a Classical
fixed-value approach, linked to the euro.
The only difference between these “euro-standard” policies and a
“gold standard” policy is the choice of the “standard of value.”
Apparently the Classical fixed-value approach has not been sent to
the “junk heap of history” after all, but is in fact quite common.
Why do these countries use the euro instead of gold? Mostly because
everyone else does; to use a gold basis today would introduce
intolerable volatility in trade relationships. This was not a problem
in the past, because the world’s major currencies also used a gold
But, using a euro basis might prove rather problematic in the not-too-
distant future. Some countries used a German mark basis after WWI,
and a Russian ruble basis in the 1990s. It didn’t go very well.
O’Brien also makes some comments about “price stability” during the
gold standard era. The supposed “price volatility” he claims is mostly
just a benchmark phenomenon. The U.S. Consumer Price Index as we know
it only dates from 1940. The 1920-1940 period was recorded by the BLS
Wholesale Price Index (broad commodities), and the pre-1914 era is
mostly described by a straight commodities index, typically the
Warren-Pearson index which covers raw commodity prices in just one
location, New York City.
In other words, the apparent “volatility of prices” is just a matter
of looking at a raw commodities price index instead of something
similar to today’s CPI.
The use of a gold basis is actually about stability of value, not
“stability of prices.” This might seem like a subtle or even
nonsensical point, but let me make a very simple example: the
“purchasing power” of the dollar – for example, a $20 bill –
changes enormously if you go from Manhattan to Queens, or to Albany,
or to Quito, Ecuador. However, the value of the dollar didn’t change
at all. Prices are just different, depending on where you are.
Or, depending on the time. For example, the Japanese yen was worth
12,600/oz. of gold from 1950 to 1970. However, the “purchasing power”
of the yen changed dramatically during that time, because Japan
enjoyed an incredible economic expansion. The price of a rental
apartment, or a restaurant, or a taxi ride rose enormously from
1950 to 1970, but the value of the yen was unchanged. (The official
Japanese CPI rose 80% between January 1955 and January 1970.)
The Mercantilists, like O’Brien, are in hysterics because their
experiment is likely to fall apart soon, and they know it. If you
want to take a look at what a gold standard system really is, and
what it has accomplished in centuries of real-life experience, I
actually have a book about that: Gold: the Monetary Polaris. You
can download it in .pdf format for free. So, no excuses. If you are
more of a voice-and-pictures person, here’s a thirty-minute talk on
these topics, from earlier this year. Read or watch, and then tell
me what you think.
My best wishes for the whole of this New Year!