Gold, Glenn, and Gullibility

It is trivial to say that Paul Krugman is in rare form. He is always in rare form. His last column, however, is rarer than most. In it, he claims that the price of gold is due to…Glenn Beck. It is simply inconceivable to him that gold is anything except a “barbaric relic,” a phrase coined by John Maynard Keynes. Frustrated beyond his limits that the economy is not doing what it is supposed to do, he is blaming Republicans and everyone who has ever stood next to one for everything from gold prices to gout. Gold prices for him are just one more example of a nefarious conservative plot. Is he right?

I have never listened to Glenn Beck, nor am I likely to. Shouting Heads on TV do little except annoy me, and I found many years ago that I emerged from 60 minutes of ranting no smarter than when I started. Please understand that today’s blog is not a defense of Glenn Beck, but an examination of gold’s role in our lives.

Gold passed $1600 an ounce recently. Contrary to what you may believe, this is not a record. For a brief time in the 1970’s, inflation-adjusted gold was actually quite a bit higher, due to Nixon’s taking us finally and completely off the gold standard. Nonetheless, the climbing price of gold today is significant for a number of reasons.

(First, let me make a strong disclaimer. I am not a financial advisor. Not even close. I love thinking and writing about economic, political, and philosophical issues. I make plenty of mistakes in my quest for financial independence and will tell you about some of them as soon as I stop crying. So don’t take my word at face value, for heaven’s sake.)

Historically, gold has served as a very workable standard for exchange. Even so, it is subject to bubbles when it is traded as a commodity–as it is now. It is entirely possible that the price of gold will get bid up rapidly and then come crashing down, similar to the housing bubble. It is possible that gold will stay where it is for a long time. Or it may, as I believe, continue to gain in value as measured by the dollar. That is an important statement because I believe that what we are seeing is not an increase in the purchasing power of gold as much as we are seeing a decrease in the purchasing power of the dollar.

People who reflexively purchase gold without developing a strategy are courting disaster. I sometimes think people are so desperate that they will grasp on to any strategy that promises to save them from ruin without having to think too much. Glenn Beck is no more qualified to render financial advice than the Man In the Moon or me. Follow him, or me, at your own peril.

So I may not have all the answers, but I ask a hell of a question. Let me share a few for you to ponder.

Why is gold going up? Krugman says it is a scam led by the likes of Glenn Beck, who have ties to the sellers of gold. Ron Paul says it is because our paper money is a fiction and that fiction is about to collide with reality. What do you think and why?

US debt as a percentage of GDP crossed 100% after the crisis of 2008, something not seen since WWII. Does this matter? Keynesians like Krugman think not. They think we are in a “liquidity trap” wherein the money is there, but no one wants to spend it. The solution for them is to print more money. Economists from the Austrian School say that this is a precursor to an economic debacle, probably hyper-inflation. Which explanation sounds more logical?

Gold has served as a standard of value for over 6000 years. Is this relevant to our current situation? One side claims not. Krugman and other statists believe that government should dictate what is used as money so that it has control of the money supply. Manipulating the money supply allows them to save us from booms and busts. The other side claims that booms and busts are exacerbated, not buffered, by fiat money. Which side does history favor?

You don’t have to become an econ-nerd to examine these questions intelligently. In fact, you’ll probably do a better job than most “intellectuals.” You should examine these questions because your future depends on it. We look for easy answers to hard questions and usually find them. The only problem is that they are wrong. Learning to tell the difference between solid waste and a once-popular floor wax is going to affect your current well-being and your retirement. Do yourself a favor and start your education now.

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About Terry Noel

I am an Associate Professor of Management and Quantitative Methods at Illinois State University. My specialty is entrepreneurship.
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3 Responses to Gold, Glenn, and Gullibility

  1. Kirk says:

    The poster boy for the denigration of the Nobel Prize continues to demonstrate just how much the prize has been denigrated.

    Like

  2. Jason Calley says:

    Hey Terry,

    You say “US debt as a percentage of GDP crossed 100% after the crisis of 2008, something not seen since WWII.”

    Actually, it is a bit worse than that. A large part of the GDP these days is essentially imaginary. Perhaps as much as $5 trillion of it is from various financial papers being traded back and forth, papers that do nothing to actually measure tangible wealth. It is like the old joke. “Two economists are shipwrecked on an island. After six months, they still have no hut, no raft and no reliable source of food, but they have both become millionaires by selling a hat back and forth between themselves.”

    A more realistic present estimate of debt vs GDP would be 150% or higher.

    Like

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