Why Gold is Up in this Deflationary Environment

I've run across an excellent commentary at The Privateer, entitled "Puzzling - Gold is Going Up Again." He is responding to an August 20, 2010 article on CNN's Money.CNN.com.

As the Privateer points out, some analysts are scratching their head trying to figure out why gold is rising even as inflationary fears are subsiding. This seems counterintuitive.


[Thanks to Dhirajranka.com for the photo.]

Mr. Privateer puts his figure right on the answer to the quandary: monetary inflating. Some call it quantitative easing (QE). We could also call it Helicopter-Benning, or, as the more old-fashioned among us would say, printing money.

The U.S. central bank is finding itself between the proverbial rock and hard place. The rock: stagnation in the American economy. The hard place: The limitation of its power to do anything about it. But they can't just sit there; they have to act. They're supposed to be controlling this thing.

So the Fed Governors--at least a majority of them anyway--seem to have taken this line of conduct:

When in doubt, pull the checkbook out, and make the bogey-man pout.

Ben Bernanke, the figurehead of this majority, once swore to Milton Friedman that we would never see a deflationary episode like the Great Depression of 1929. Some astute analysts are claiming that we are indeed already seeing the deflationary episode, only it is disguised behind a wall of monetary inflating.

Mr. Privateer is one of them. Here are Mr. Privateer's words:

"Not only is 'quantitative easing' inflationary, it is the absolute last resort of the entire inflationary process. Inflation being defined as an INCREASE IN THE TOTAL STOCK OF MONEY. There are quite a few people out there in the world, and in the US too, who understand what inflation is. These same people understand that rising prices are one amongst very many RESULTS of inflation."

[Ah, a rational human being at last!]

"These same people understand that the destruction of 'wealth' measured in terms of money which has taken place over the GFC [I assume this means Global Financial Crisis] to date has more than offset the creation of new money which governments in general and the US government in particular have been desperately resorting to."

"There is not the slightest chance that there will emerge any GENUINE way out of the GFC until such time as the gargantuan malinvestments propelled by the credit money boom which has now collapsed are liquidated on a market. Every day that this is delayed makes the situation worse. Every new 'Dollar' created by governments and their banking system makes the situation worse. Every new Dollar created in this manner is inflation, pure and simple. The fact that prices are rising or falling has nothing to do with it. Inflation is an increase in the stock of money."

My heart pitter-pattered as I read this. One could hear my sighs of genuine relief at not finding myself alone in this cold world.

The author is correct. I would just add that the nation's "regime confusion" is also contributing to the stagnation. (Robert Higgs calls it "regime uncertainty.")

The question is: what do we do?

Here is the Privateer's response:

"The [CNN] article concludes with the assertion that once the GFC is 'over', there will be no reason to own Gold. The problem is that the GFC will not end - or even properly begin - until money can no longer be 'created' out of thin air. Today, while the Europeans are making some moves towards reducing their deficit spending and while Asia is losing its appetite for US Treasury paper, there is no sign of that happening."

Couldn't have said it better myself.

Politico-Economics and Religio-Politics: An Invitation to a Debate

The current debate about the building of a mosque near Ground Zero inspired the following philosophical thoughts:

Economics used to be called Political Economy in its early days. Political science and economics parted ways, at least on the intellectual playing field, probably for reasons of academic specification. Scientists were attempting to differentiate certain phenomena from others, just as biologists need to separate veins from arteries so they can describe and understand the differences.

Such an effort by scientists does not mean, however, that politics and economics ever separated. They are still a unit, a functioning whole, a body with both veins and arteries that could not survive without both elements working together. Politics affects economics, and economics affects politics, inevitably and forever, on a constant basis, and in innumerable intermingled ways.


[Thanks to Wikipedia for the photo of Chang and Eng Bunker.]

So the attempted separation of economics from politics is only cosmetic, and in fact may have done more harm than good. No matter how hard we try to dissect things politico-economical, we cannot undo their intimate interaction. In fact, efforts to do so have led many a researcher down fascinating but futile paths. Unity between the two is part and parcel of the human societal condition.

The same can be said of certain religions and politics, up to a point. By this I mean that religion and politics have been bedfellows for millennia, mingling indistinguishably. But in the 17th century, leaders of Western society realized that, for social order to progress, two distinguishable provinces of action must be defined and kept separate through legislation: the religious and the political. Hence the notion of separation of church and state came about in 1648 through the Peace of Westphalia, a series of treaties and peace agreements credited with having ended the Christian wars of religion that plagued Europe for so long.

The separation of politics from religion was not, and is not, cosmetic; it is a fundamental tool, a sine qua non of our modern Western Civilization. The Peace of Westphalia was a recognition by Christians that, if society was to advance beyond the stage of constant bloody wars of religion, people would have to agree to disagree about divine or moral subjects, but at the same time agree to fully agree on certain inalienable rights belonging to each human by his very existence; and on the need for these rights to be protected by a political policing process that is divorced from notions of deity and morality.

The ancestors of our Founding Fathers, therefore, lived through the years in the mid-1600s when people came together to make these various agreements that constituted the Peace of Westphalia. These agreements collectively represent one of the most important evolutionary events of Western society. Our Founding Fathers, particularly Thomas Jefferson, most likely were inspired by these peace agreements (and by John Locke) when they adhered to the notion of the separation of church and state. (Observe, for whatever it's worth, that it is not separation of "religion and state," but of "church and state.")

Those who defend the Muslim community's right to construct a mosque near Ground Zero cite the First Amendment:

"Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; ..."

But certain faiths lend themselves more easily than others to the principle of separation of church and state. According to some thinkers, the problem does not lie in the site for construction of the building; it lies rather with the introduction of the Muslim faith into the United States, and into other states of the Western World where separation of church and state is a fundamental corner stone.

Perhaps those who drafted the First Amendment did not think to take into account the existence of (and therefore did not make an exception in the First Amendment for) religions of the world that still believe in the commingling of church and state, such as the Muslim faith, which contains an element of politics in its Sharia law.

I do not condemn the Muslim faith per se, and maybe most Muslims do believe in separation of church and state. In fact, I have no idea about this and know very few Muslims. But whatever they believe:

I advance the notion that the writers of the Constitution did not have to take such religions into account or make any exceptions, because proper analysis of the Constitution provides the best protection against any harm that might arise from allowing the Muslim religion into America, Sharia law or not.

Let's think this through. Here are the questions we should ask ourselves:

QUESTIONS

- Is the Muslim faith a "religion" referred to in the First Amendment of the Constitution? Probably.

- Should a Muslim mosque be allowed to be built near Ground Zero? Legally speaking, yes. Furthermore, a government representative cannot properly come out against it. According to my interpretation of the Constitution, there is no question that Muslims have a right to exercise their religion on that block of New York City. However:

- Can private citizens, including Christian church groups, try to convince the mosque organizers to move elsewhere, out of sympathy for the families of victims and for members of the public who are still sensitive on the subject of 9/11, or for whatever reason? Yes.

- Should the mosque organizers build the mosque near Ground Zero? No, especially if they are sensitive people and they don't want to stir a huge amount of enmity against their religion among Americans of other religious beliefs--certainly a counterproductive move for any group that wants to "reach out." I will go so far as to state that if they persist in the plan, they are snubbing their nose at our sensitivities and inciting future friction.

- Did our Founding Fathers intend to have these United States self-destruct by allowing political systems to exist, inside the borders of the United States, that do not hold to the notion of separation of church and state? No.

- Therefore should we forbid any Muslims who don't believe in this notion from living in the United States? No.

- Then should we ask them to sign a document stating they understand and support the notions of separation of church and state, equality of men and women, freedom of speech, and other such notions? New Muslim U.S. citizens already do: they swear to uphold and defend the Constitution of the United States, "so help me God." All of these notions are implied by the Constitution and spelled out in its Amendments. (See below* for a reprint of the oath all new citizens are required to take at the swearing-in ceremony.)

Having Said That:

- Should we watch them very carefully from the inside (perhaps even in secret) to see what they're up to? Yes.

- Are churches required to be open to the public? No, I don't think so.

- Can we prevent people from assembling within the United States and plotting against the Constitution of the United States? No. In fact, freedom of assembly and freedom of speech are two more founding principles of the country. We should welcome open nonviolent debate.

- Does a government have a right to suppress meetings to overthrow the government? No, not without a judgment or court order based on proof that the meeting attendees have specific plans to commit violent acts.

- Does a government have a right to protect its people by infiltrating private meetings and recording evidence, under authority of an official warrant, where persons are suspected of plotting to overthrow the government by force? Yes, subject to later confirmation in a court of law.


This same debate probably existed during the McCarthy Era about Communism, a quasi-religious political system that calls for the violent overthrow, by revolution, of any opposing government power structure. The ACLU has defended American Communists on the basis of the Bill of Rights.

Did the writers of the Constitution intend this country to allow the existence of a Communist Party within its borders? Probably. But my feeling (and perhaps that of the Founding Fathers) about Communism and other revolutionary philosophies is that everyone can believe any fool thing they want as long as they don't point a gun in my face. If they point a gun in my face, they should expect a response in kind, both from me and from the U.S. military that was established for the very purpose of protecting my rights to life, liberty, my property, and the pursuit of happiness.

Unfortunately, the less violent American "Communists" of the 1950s were probably relatively harmless Socialists who happened to have a flair for the dramatic. After all, weren't most of them involved with Hollywood? What really happened is they got themselves into a very bad misunderstanding enflamed by the mass hysteria of the day. And such flaming hysteria always attracts ugly moths like McCarthy.

We don't need more McCarthys. We do need citizens to understand the Constitution and the notion of separation of church and state. We also need openness among religions, and, without getting paranoid, we must have the wherewithal to protect ourselves in case of attack from within.

Having said all of this, there is one caveat: The American people must be very wary that its political representatives stick to the original Constitution. Any growth of centralized governmental power detracts from the Constitution's original strength and weakens our liberties. For example, any government agent's sanctioning of the mosque construction site is contrary to the Constitution. Bloomberg and Obama should have refrained from making any pronouncements on the subject because of their official occupation as unbiased representatives of the American people. Addressing the notion of Constitutionality is one thing; addressing the Muslim faith or the site near Ground Zero is quite another.


________________


* Oath of all new citizens:

"I hereby declare, on oath, that I absolutely and entirely renounce and abjure all allegiance and fidelity to any foreign prince, potentate, state, or sovereignty, of whom or which I have heretofore been a subject or citizen; that I will support and defend the Constitution and laws of the United States of America against all enemies, foreign and domestic; that I will bear true faith and allegiance to the same; that I will bear arms on behalf of the United States when required by the law; that I will perform noncombatant service in the Armed Forces of the United States when required by the law; that I will perform work of national importance under civilian direction when required by the law; and that I take this obligation freely, without any mental reservation or purpose of evasion, so help me God."