Economic Money And The Rearing Of The Ugly Head Of Price Inflation

Posted 17 Mar 2012

The central banks of the world are engaged in financial repression and bloating their balance sheets through quantitative easing. This deranged monetary policy is resulting in negative effects of inflation on the economy, like pink slime, and showing just how poorly famed investors like Warren Buffett have performed by destroying billions of dollars of shareholder value.

This has resulted in a manipulated boom that is starting to manifest itself. The result will be that price inflation will begin rearing its ugly head in a nasty way.




Individuals acting in their own self interest determine what goods and services are available in the market. Before consumption and savings must come production. Billions of lifetimes of savings has resulted in a tremendous accumulation of capital that has been allocated to generate productive capacity which has allowed humanity's standard of living to be lifted from the swamp to the stars.

But no matter how complicated a good the space shuttle is, and it is a highly complex good, it pales in comparison to the most complex of all goods humanity has produced: money.

The Federal Reserve is interfering with the pricing of money and by consequence all other prices in the economy. The State can do this because it is such a large economic actor but it is still constrained by economic law. As Ludwig Von Mises wrote in 1912:

As a buyer or seller the state has to conform to the conditions of the market. If it wishes to alter any of the exchange ratios established in the market, it can only do this through the market's own mechanism. As a rule it will be able to act more effectively than anyone else, thanks to the resources at its command ...

The fact that the law regards money only as a means of cancelling outstanding obligations has important consequences for the legal definition of money. What the law understands by money is in fact not the common medium of exchange but the legal medium of payment. It does not come within the scope of the legislator or jurist to define the economic concept of money. [emphasis added]

The Information Age is resulting in tremendous advances in monetary evolution with things like BitCoin which is much more efficient at transferring value than fiat currency, fractional reserve banking or credit cards. These increasingly useful monetary goods will enervate demand for sterile assets like FRN$s, Euros and Yen.


In the 2011 Berkshire Hathaway letter to shareholders Warren Buffett opined on page 18:

Gold, however, has two significant shortcomings, being neither of much use nor procreative. ... Meanwhile, if you own one ounce of gold for an eternity, you will still own one ounce at its end. ...

Beyond the staggering valuation given the existing stock of gold, current prices make today's annual production of gold command about $160 billion. ... The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond. ... I'm confident, however, that the $9.6 trillion current valuation of pile A will compound over the century at a rate far inferior to that achieved by pile B (all 400 million acres of U.S. cropland, 16 Exxon Mobils and $1T).

The annual production of gold around $160 billion pales in comparison to the increase in worldwide debt in the last decade from $80 trillion to $200 trillion.


Buffett is correct that gold is a sterile asset that does not produce anything. In fact, it is even worse than sterile in that it has a negative interest rate due to storage and insurance costs. Fortunately that interest rate is less costly than alternatives.

In a 3 Feb 2012 interview on King World News James Turk explained gold's role as a sterile asset:

Gold doesn’t really create wealth, it’s just a sterile asset.  It doesn’t have a cash flow and it doesn’t have a balance sheet or a P/E ratio.  When the gold price is rising, what you are doing is taking wealth that’s already been created and is in the hands of people who own a fiat currency and it’s taking the wealth away from the people who own that fiat currency and putting it into the hands of people who own gold.

 So you have this wealth transfer taking place.  My expectation is that this wealth transfer is going to be one of the most phenomenal ones in monetary history.  And to be part of it you have to own physical gold and silver, this is what you need to do to take advantage of it.




As James Grant said in the interview at 7:39:

We went back and looked at the performance of gold and the humblest of things, a cup of sugar, and a share of common Coca Cola since 1996. ...
It's humiliating, its humiliating to people who own common.

Warren Buffett should be really embarrassed. As the charts show he should have retired around the time he hit his peak in 1999 and bought a cube of gold to fondle as its non-response would be better than the loss of shareholder value in Berkshire.

To put some figures to it on 4 Jan 1999 it took 226.4 ounces of gold to buy one share of BRK-A with the gold fix at $287.15 and BRK-A at $65,000 per share. Today it takes a mere 73.7 ounces of gold to buy one share of BRK-A with the gold fix at $1,658 and BRK-A at $122,190; a 67% loss.

Before Warren Buffett denigrates gold again he should either put up or shut up because the charts show just how much shareholder wealth he is destroying. Perhaps Buffett should take a look at Anthony Weiner's scoreboard since they both perform about the same.

But perhaps I should give Buffett thanks because the loss of wealth from his scoreboard has showed up on mine!


The Federal Reserve's attempt to interfere with the pricing mechanism of money and currency is doomed to fail. Their suppressive manipulation of the precious metals markets in an attempt to maintain their fiat currency monopolies will only result in the transfer of physical bullion and a weakening of the central bank balance sheets.

Monetary evolution is in full advance in the Information Age which is causing a loss of demand for little colored coupons. The State must conform to the dictates of the market with regard to monetary goods.

The performance of bonds, equities and real estate have all been greatly overstated as a result of this financial repression. The greatest wealth transfer in the history of the world is ongoing. One consequence over the near term will be some nasty price inflation of 5-15% which will lower standards of living due to a destruction in productive capacity of the economy. Beware of the Pink Slime which has been substituted into the CPI!

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