In testimony before Congress in 1912, J.P. Morgan,
the leading financier of his day, declared: “Money is gold, nothing else.” A
century later a diametrically opposing view was taken by Wall Street legend
Warren Buffett who proclaimed that gold “has no utility” and that “anyone
watching from Mars would be scratching their head” trying to figure out why
people value it.
How is it
possible that one hundred years ago money was nothing but gold, but gold now
has no utility? Has gold really changed? Or is it just people’s perceptions
that have changed, and gold has the same utility as before but its attributes
are being ignored or have been forgotten?
These questions
and many more are answered inThe Money
Bubble: What To Do Before It Pops, a new book I have written with
John Rubino. We explain what money really is; why there is a bubble; and
importantly, what to do before it pops.
A bubble arises when conventional wisdom
contradicts economic reality. For example, during the dot-com bubble there was
a widespread but erroneous belief that profits didn’t matter – only market
share did. The housing bubble grew on the pervasive though obviously incorrect
belief that house prices never declined. Conventional wisdom now believes that
national currencies are money, rather than what they really are – a
money-substitute circulating in place of money.
It is a basic principle of civilized society that goods/services pay for
goods/services. All commerce arises from barter, where useful and valuable
products are exchanged for other products that are also useful and valuable. It
is how we humans advance and raise our standard of living.
If I ‘pay’ for a
product by promising to deliver my product tomorrow, the transaction is not
extinguished. The merchant has taken on “payment risk” by accepting a “money
substitute” instead of “money” itself. The merchant has this risk until he
takes the money-substitute and exchanges it for some good or service useful and
valuable to him, assuming of course he can do so before any ruinous event arises
that erodes or destroys the purchasing power of the money-substitute.
Thus, credit
cannot possibly complete a transaction. The use of credit by means of any
money-substitute simply defers payment to a future date, and the merchant’s
acceptance of this postponement means he is taking on someone’s promise – and
that always involves risk. This risk is the loss of purchasing power that
results from inflation, bank failures and capital controls. It is the risk of
broken promises.
As the J.P.
Morgan quote above makes clear, money is simply the most liquid tangible asset
in the economy. Whenever credit in the form of some money-substitute is
accepted by a merchant in exchange for the product he is selling, he is not
being “paid” in the real meaning of that word.
So for example,
if I paid for the merchant’s product with a gold coin, the transaction is
immediately extinguished. An asset is exchanged for another asset. I get
the product and the merchant gets the coin; he has no lingering risk, which
contrasts with a transaction when any national currency is used because all of
them represent credit. Every national currency in circulation is a liability on
some bank’s balance sheet, and liabilities of course are not assets. National
currencies are nothing but promises to be exchanged for goods/services, and
promises always come with risk because they can be – and often are – broken.
The above
observations mean that gold is at the center of all commerce because it is the
most liquid tangible asset in the global economy. Gold is the world’s money,
with silver a useful gold substitute that can also serve as money.
So what was true
100 years ago is still true today. Money is gold, but in recent decades fewer
and fewer people now recognize this fundamental principle.
As a result,
growing misconceptions about money have created the Money Bubble, which has
evolved into the biggest bubble of our time. Given today’s unprecedented
expansion of credit and blind-faith acceptance of money-substitutes throughout
the world, the Money Bubble when compared to the different bubbles that have
wreaked havoc in recent years will be the most disruptive of all when it pops –
as John and I explain in our new book.
Click here to
buyThe
Money Bubble: What To Do Before It Pops.
http://goldmoney.com/index.html
Published
by GoldMoney
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