There is nothing intrinsic to gold that explains its seemingly unstoppable rise in price. It is certainly beautiful, even transporting in strong light, and primitive races worshipped it as an earthly reflection of the higher worlds. But as an investment it is strictly in the non-performing class, until you sell it.
Monetary assets always seek a home. Liquidity may have short-term advantages and provides some modest return pending purchase of a proper investment target, but with interest rates forecast to fall below inflation, returns on cash holdings are worse than zero. When liquid assets give no yield, gold is bound to be preferred. Its current rise therefore has nothing to do with the metal itself – it is rather a barometer of a general aversion for anything denominated in sterling, dollars or euros.
uncontrolled government debt creation has debased currencies and eroded purchasing power
The markets merely reflect investment preferences. People are not stupid. They know that uncontrolled government debt creation has debased currencies and eroded purchasing power. They know how much it costs to maintain a decent standard of living. They don’t need to check it against a faked index from the statistical office.
This applies throughout Europe. In France in 1998 I could buy a decent 3-course meal for 60 francs, the equivalent of 9 euros on conversion in the following year at 6.6 francs to the euro. Now, 13 years later, the same meal, in the same restaurant, will cost you 30 euros. Calculate for yourself the debasement factor that has afflicted the entire eurozone since the inception of that ill-fated currency.
The QE conjuring trick
No wonder that prospective entrants are thinking long and hard before joining. The Poles will seek repayment guarantees before agreeing to contribute to bailout funds. They may well decide that the zloti (literally “golden”) is preferable to the euro. After all, better the devil you know.
The quantitative easing trick is just smoke and mirrors anyway: the central bank merely acts as agent of the Treasury when it comes to new bond issues. For practical purposes they are inseparable. The money is conjured up without the need for any real revenue inflows from taxation.
All of which highlights the central truth: to the extent that central bank money-creation finds no productive outlet in the private sector, price-inflation will spiral out of control and borrowing costs become unsustainable. Look at Greece, Spain and Italy where 10-year bonds must carry 6% to 10% coupons just to get off the ground.
Rating agencies know that public debt can be cancelled out only by (i) tax increases; (ii) public sector cuts; and (iii) added-value creation in the private sector. Higher taxes are the opposite of what is needed in a recession and would damage attempts to stimulate business.
As for waste elimination, political talk is rarely matched by effective action. The notion that it is the role of the state to “protect” its citizens lies at the very core of today’s political philosophy of interference. It has engendered a dependency culture that cannot be afforded and, despite stated intentions, is hard to shift. Purposeless mechanisms have become institutionalised, headed by vastly overpaid public employees of staggering arrogance, whose record is a catalogue of failure.
There are cuts alright, but they fall in the wrong place, hitting front-line services while leaving back-office support structures intact. The prime minister says that all he seeks is for next year’s spending to be pegged at its 2007 level. There was no need to close 500 libraries then, so why now?
This 12-year mania has witnessed a job-creation epidemic – jobs that are useless, yet protected. Did we ever need diversity officers? Climate change officers? Media managers? Waste-awareness officers? Equality officers? Salaries are eye-watering: the top-20 council high earners are all on more than £200,000. Yet essential services for disabled adults and children, citizens’ advice, libraries and teen-age recreation centres are being axed.
Maybe we need a real waste-awareness officer.