Follow Fisher's Golden Rule
The Fed's fiat money is worth less and less. For real money, turn to gold.
It was as soothing as mother’s milk. Chairman Bernanke assured the National Association of Homebuilders at the International Builders’ Show in Orlando, Florida, on Friday, February 10: “We need to continue to develop and implement policies that will help the housing sector get back on its feet.” Of course, the “we” intoned by Helicopter Ben, in his most professorial mien, means the U.S. Federal Reserve. The “policies” the Fed needs to “develop” and “implement” are nothing other than the Fed continuing its modern alchemy of turning thin air into money by reprising its policies of “quantitative easing” and “balance-sheet expansion.” Mere mortals (i.e., the 99.9 percent of Americans who do not work for the Fed) know these policies by another name: “debt monetization."
We do not need the Fed to develop and implement any more of its ameliorative policies. We do not need any more money printing. Instead, U.S. monetary policy should follow the example of Bernanke’s intellectual opponent within the Federal Reserve System, Dallas Federal Reserve Bank president Richard Fisher. As was disclosed in the Fed’s February release of six hundred-plus pages of 2011 financial disclosures for its chairman, other Fed governors and the Fed’s twelve regional presidents, Richard Fisher owns more than $1 million in gold.
Why would Fisher, an executive-level Federal Reserve official and a 2011 voting member of the Fed’s monetary policy-setting body, the FOMC, have invested such a substantial portion of his personal net worth in gold? After all, gold earns no interest and pays no dividends. The reason is simple. Contrary to the fiat money digitized into existence by the Fed to help finance a major portion of America’s growing budget deficit (and exploding national debt), gold is real money.
Gold cannot be created by a central bank. Although it can be “stamped” at the mint, gold cannot be minted into existence by the Treasury Department. Gold has to be found, clawed out of the earth’s crust and refined. Those endeavors require extraordinary technical skills and physical work. Such efforts currently cost $1,600 per ounce on average, according to World Gold Council reports.
Gold is so rare that all of the gold in existence could fit into a cube 82 feet on a side. Another way to envision this volume of gold is to look at the Washington Monument and lop off the top two thirds. The remaining third would be equivalent to the volume of all of the gold in the world. Think about that the next time you look at a simple gold wedding band or a pair of gold earrings. Then realize that there are over 7 billion ring fingers in the world, not to mention 14 billion ears. If you divide all of the gold in the world (about 145,000 metric tons) by the number of people in the world, there is less than two-thirds of a troy ounce per person.
Dallas Fed president Fisher knows that as each new dollar is commanded into existence through “fiat,” each extant dollar is worth less. Fisher, like any rational person, does not want the value of what he already has earned through his lifetime of work to be stolen from him for the convenience of the state. So he holds that value in real money—namely, gold, an asset that over time nearly perfectly maintains its real-world purchasing power.
Any person who was sentient in August of 1971 knows that the dollar has lost the vast majority of its purchasing power over the forty-one years since the U.S. unilaterally terminated the Bretton Woods agreement that had governed the international monetary system since the end of World War II. Indeed, according to the CPI Inflation Calculator maintained by the U.S. Bureau of Labor Statistics (found here), $559.67 are required in 2012 to purchase what $100 could buy in 1971. Sadly, that 82 percent official decline in the dollar’s purchasing power understates the real loss. According to ShadowStats, a website maintained by economist John Williams, the number of 2012 nominal dollars necessary to purchase what $100 could buy in 1971 exceeds $1,500. That is an inflation factor of more than fifteen times, and an aggregate inflation rate (i.e., over forty-one years) exceeding 1,400 percent.
What accounts for the dramatic difference between the official inflation rate and the actual inflation rate? In a word, politics. While Mr. Williams employs the BLS’s 1980 CPI methodology to calculate inflation today and over time, the BLS now employs, as it has for over twenty years, a modified version of its original inflation model. That modification, undertaken at the behest of politicians who needed to reduce the automatic, inflation-triggered Social Security and Medicare Cost of Living Adjustments (COLAs), understates inflation by substituting, at the BLS’s discretion, items in the “monthly market basket” of goods and services. (The ShadowStats inflation calculator can be found here.)
Not surprisingly, the nominal value of gold is up by nearly the same percentage as the ShadowStats inflation rate since the end of Bretton Woods. At the beginning of 1974, as gold ownership was in the process of being legalized in the United States (after being illegal since FDR’s gold confiscation in 1933 pursuant to Executive Order 6102), the gold price was just under $100 per troy ounce. According to daily precious-metal market statistics archived by Kitco, Inc., the average price of gold in 2011 was $1,572 per ounce. Today, it is over $1,700.
Jay Zawatsky is the CEO of havePower, LLC (a natural gas infrastructure developer) and a professor of business in the dual degree MBA program of the University of Maryland University College.
Image: Agnico-Eagle Mines Limited