Gold: Always Believe In Your Soul

Investment analyst James Grant of Grant's Interest Rate Observer sings a song in the Wall Street Journal of the once (and future?) money, good ol' gold–it's good as gold! Some of the things he thinks we ought not forget, as he offers some sympathy for the devil paper dollar:

To give modernity its due, the dollar has cut a swath in the world. There's no greater success story in the long history of money than the common greenback. Of no intrinsic value, collateralized by nothing, it passes from hand to trusting hand the world over. More than half of the $923 billion's worth of currency in circulation is in the possession of foreigners.

But we ought not let the thrall in which it has held the world in most of our adult lives blind us:

Mr. Bernanke fails to appreciate the tenuousness of the situation—fails to understand that the pure paper dollar is a contrivance only 38 years old, brand new, really, and that the experiment may yet come to naught. Indeed, history and mathematics agree that it will certainly come to naught. Paper currencies are wasting assets. In time, they lose all their value. Persistent inflation at even seemingly trifling amounts adds up over the course of half a century.

What is more likely to keep its value? That colden, golden metal:

On the matter of comparative monetary policies, the most expressive market is the one that the Fed isn't overtly manipulating. Though Treasury yields might as well be frozen, the gold price is soaring (it lost altitude on Friday). Why has it taken flight? Not on account of an inflation problem. Gold is appreciating in terms of all paper currencies—or, alternatively, paper currencies are depreciating in terms of gold—because the world is losing faith in the tenets of modern central banking. Correctly, the dollar's vast non-American constituency understands that it counts for nothing in the councils of the Fed and the Treasury. If 0% interest rates suit the U.S. economy, 0% will be the rate imposed. Then, too, gold is hard to find and costly to produce. You can materialize dollars with the tap of a computer key.

But he's careful not to place too much credence in the magic of gold qua gold's value these days–its dizzy price capering could just be the Fed's latest interest-rate engineered bubble expanding:

The trouble with 0% interest rates is that they instigate speculation in almost every asset that moves (and when such an immense market as that in Treasury securities isn't allowed to move, the suppressed volatility finds different outlets). By practicing price, or interest-rate, control, the Bank of Bernanke fosters a kind of alternative financial reality. Let the buyer beware—of just about everything.

The whole, very long, piece is worth reading. It's framed with a call for the possible life imprisonment of Ben Bernanke and his cronies, always delightful. In between it suggests that the market turn toward huge banks and investment firms going public has been a disaster, and gives, probably inadvertently, some intellectual ammunition for the types who, though they rarely put it this way, seem to think that booms are worth busts–that is, that the groovy unrestricted freedoms of a disciplineless paper money for the United States have ginned up so much paper prosperity (paper that, recall, those who have it can still turn into the true joys of life) that it would be party-pooperish to return to the tighter discipline of gold, even if we suffer little economic spills along the paper trail.

Grant participated in a Reason magazine roundtable, with Ron Paul and Milton Friedman among others, on what we might expect from Bernanke back in November 2006. He didn't expect much good, and he got it!