A remarkable piece of news came out of London last week. Harrods, one of Europe’s best-known department stores, has begun selling gold bullion.
This unprecedented move by the famous retailer reflects the rapidly growing appetite for investment-grade gold, which has been enjoying a bull run even as the world is bogged down in a global recession. Used as a hedge against currency weakness, especially the dollar, gold has been trading at record highs. Many analysts think this is no temporary spike, but a long-term surge that will continue as the word monetary system is pulled down by the mismanaged and collapsing dollar. (To be sure, there are those who question whether gold is a sound investment, even in inflationary times.)
Swiss-based financial newsletter Daily Bell puts it bluntly:
“We are in a bull market cycle for money metals because fiat money is all but dead, including most importantly the American dollar.”
Simone Wapler, the editor of MoneyWeek agrees:
“Gold is being re-monetized. All the world’s paper monies are losing value – and credibility. There’s a race to the bottom as they try to devalue their currencies.”
Until quite recently, money was backed by gold. That changed after World War II, when Western powers set up a monetary system with the dollar at its center. The dollar was partially backed by the metal until 1971 when President Richard Nixon took it off the gold standard altogether. At that point, the dollar became pure paper money.
But there was a major problem with the change. Politicians will always print more money than they should. How else to pay for the promises that got them elected? This excessive printing is known as currency debasement and it ultimately leads to inflation.
The latest and most glaring example is presented by Barack Obama. Obama opened the money spigot in truly unprecedented fashion. In the last six months alone, the tsunami of dollars that has been rolling out of Washington knocked down 10 percent of the dollar’s value. As the U.S. currency is becoming increasingly debased, the world is looking for an alternative store of value. Hence gold’s amazing bull run.
Meanwhile, Americans have been increasing their personal savings. Dann Adams, president of Equifax’s U.S. Consumer Information System, observes:
“American consumers are making the most fundamental change in the way they handle their finances we have seen in a decade. They are conserving cash and reducing debt across the board.”
This is not in itself a bad thing. In the last couple of decades, many Americans have been spending beyond their means and, as a result, the US had the lowest savings rate among the developed nations. Putting some money aside in order to build up personal balance sheet is the sound thing to do.
But this healthy behavioral shift poses a major problem for our economy. The chief reason is that the U.S. economy is structurally unsound: We produce too little and consume too much. Thin on manufacturing, 70 percent of the American economy is driven by consumer spending. Consequently, when people reduce their consumption, the economy will inevitably slow down. This brings on a paradoxical outcome: By doing what’s right, people harm the overall economy. As one critic has pointedly observed, we Americans have been consuming things we did not make and did not need with the money we did not have.
There is much truth in this remark. From the federal government down, we have been borrowing with abandon to satiate our spending urges. Huge federal deficits, trade deficits and personal deficits have become a standard feature of American life. Living on credit for years on end, we have become the world’s largest debtor.
What the economy needs is a fundamental restructuring. The U.S. could start manufacturing again. Increasing personal savings is the first step in this direction even though it will bring pain in the short term. Writing in The Christian Science Monitor, Laurent Belsie explains:
“The long-term effects, however, are beneficial because American businesses would have a bigger pool of savings to borrow from when they expand — and their interest payments would go to American creditors instead of foreign ones.”
In other words, increased savings will enable American businesses and manufacturers to borrow from Americans – through banks at interest – in order to expand their production.
Rebalancing the American economy toward more manufacturing would not be an easy process under the best of circumstances. As it is, it may not get underway any time soon even if the American people continue with their new savings regimen. The reason for this is the long-term laws and policies of our government, which have turned increasingly anti-business under the Obama administration.
The obstacles that the government places before those who want to open and run manufacturing facilities in the United States are immense. Heavy taxes, intrusive regulations and onerous labor requirements are only some of the issues entrepreneurs have to deal with. And if Obama’s cap-and-trade legislation should pass, it would deal a deadly blow to any hopes of American manufacturing renaissance. Under this legislation, all users of energy deriving from fossil fuels would be severely penalized. As it happens, most forms of manufacturing are heavy on energy usage. Rather than pay the increased costs, entrepreneurs will move their outfits overseas..
With consumption down and a shrinking manufacturing base to tax, one cannot but wonder how Obama plans to raise revenue for all his expensive programs. Borrowing is becoming an increasingly shaky proposition, as investors have been growing increasingly doubtful of the ability of the US government to repay its vast obligations. The president appears to be aware of this. Speaking about America’s exploding deficits, he touched on this issue in an interview with 60 Minutes:
“If we don’t get a handle on this, and also start looking at our long-term deficit projections, at a certain point people will stop buying those Treasury Bills.”
The president is right. It is just too bad that he has not yet done anything about it. So far, his only course of action has been to spend and borrow even more.
There is every indication, however, that the point is fast approaching when investors will not be willing to lend us anymore. With the dollar falling fast, it’s no wonder that some consider gold a safer investment. If they are right, Harrods’ new bullion gold unit could make a handsome profit indeed.