Category Archives: Current Events

Reflections Over 2014

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, (Switzerland) and (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!

Chinese GDP Surpasses USA (*when Measurement Adjusted)

A story has been echoing around the financial news for a few weeks. One article about it, It’s official: America is now No. 2 by Brett Arends at MarketWatch, came to my attention. Arends asserts that the Chinese economy is now larger than the economy in the US. Here’s what he said.

“We’re no longer No. 1. Today, we’re No. 2. Yes, it’s official. The Chinese economy just overtook the United States economy to become the largest in the world.”

With GDP data from the IMF, we can easily see that the US economy is bigger than China’s. The IMF estimates 2014 GDP at $10.4T for China and $17.4T for the USA. So how does Arends claim the contrary? He uses different data that IMF adjusts. By this methodology, the Chinese economy is “really” $17.6T.


Although Chinese GDP is lower when measured in yuan and converted to dollars, Arends and others claim that this isn’t right. Goods and services are cheaper in China. So they don’t think we should convert yuan to dollars using the market exchange rate. They use a concept called Purchasing Power Parity (PPP). PPP is used to determine a different exchange rate for the yuan than the market rate. This is how they arrive at a “real” Chinese GDP of $17.6T.

We have long been trained to accept purchasing power as the means of adjusting the dollar from historical periods. For example, JP Morgan was worth $68M at his death in 1913. To calculate what that’s worth in today’s dollars, most people would refer to the Consumer Price Index. They use CPI to adjust the $68M figure from 1913 to a $1.6B modern value. As I wrote on Forbes, that approach is wrong. They should use gold which, unlike the dollar, is the same in 1913 as in 2014. Morgan was worth 3.4M ounces of gold, which is $4.1B today.

Adjusting the Chinese economy by PPP is simply applying the consumer price idea to a whole economy. If we use prices to adjust dollar figures from historical periods in the US, why not use them to adjust foreign but contemporary dollar amounts? If we can use consumer prices to measure the net worth of a man who died in 1913, then it seems like we can use them to measure the economic output of China also.

The approach is fatally flawed, because the value of a currency isn’t derived from prices. As an analogy, suppose you are using a steel meter stick to measure a rubber band. When you stretch the rubber band, it gets longer. This is not equivalent to saying that the meter stick gets shorter. You do not measure meter sticks by how many rubber bands fit end to end. Measurement is one-way.

Money is the meter stick of economic value (though this principle is clouded in paper currencies, because they are falling). Prices rise or fall for non-monetary reasons. Prices may be cheaper in China for a variety of reasons, such as lower wages. Money measures these changes, not the other way around.

By the same principle, prices may be higher in New York than in Phoenix. Does anyone dare to say that these are different dollars? Should we adjust New York dollar downwards towards the Phoenix dollar, based on PPP? How about the Scottsdale dollar (Scottsdale is a ritzy suburb) vs. the south Phoenix dollar?

Standards of living certainly vary based on local prices, but that is a separate issue. The dollar is the same in New York as it is in Phoenix. We say that the dollar is fungible—a dollar is a dollar is a dollar, and each is accepted in trade the same as any other.

Arends uses the Starbucks venti Frapuccino as an example, which he says is cheaper in Beijing than in Minneapolis. A cup of coffee produced in China cannot be sent to Minneapolis where it will fetch a higher price. However, money is unlike coffee. It can go from Beijing to Minneapolis instantly. That’s why there is one price for the yuan globally, but a different price for coffee on every street corner. Bulk commodities are of course more transportable than cups of coffee, but even they cost time and money to transport.

It’s an essential property of money that it is quick and cheap to send it somewhere. Money will always move from where it has less value to where it is valued more highly. The result is that money’s value is consistent everywhere.

This consistency allows us to convert the yuan to dollars, to compare Chinese GDP to American GDP. This is perfectly valid (well, if you accept that GDP itself is valid), because the comparison is instantaneous. We do not have to worry about the falling value of either currency that occurs over longer periods of time. We could use gold to compare the Chinese economy to the American, but it’s not necessary in this.

The price of Frapuccino in China may be important to caffeine addicts who travel to Beijing, but it cannot be used to adjust a currency or a country’s GDP.

Chinese GDP is a lot smaller than American GDP. Will that change? Maybe, but it’s not the job of economists to embed such speculative assumptions into the data.