Paper Promises: A Review

Wednesday, 24 October 2012
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Published in From The CEO

It should be clear to even the most casual observer of international affairs that ours is a world plagued by debt.  The 2008 financial crisis was brought on by too easy access to mortgages that people couldn’t afford.  The economic crises in Spain and Greece occurred largely over debts these nations could not afford to pay back.  And guess which nation is the largest debtor nation in the world?  You guessed right:  The United States – to the tune of more than $16 Trillion.Let’s just repeat that, and, this time, express this debt as a pure number, one onerous digit after the other.  Here it is:  $16,000,000,000,000.Staggering, isn’t it?

Let’s forget for the moment about how we’re going to pay back that debt.  And let’s put it out of our minds temporarily that our two biggest creditors happen to be China and Japan.  Let’s just try to wrap our minds around the overall problem of being a debtor and what that means to an individual or a nation.  To help you do that, I’d like to recommend an eye-opening new book called Paper Promises -- Debt, Money and The New World Orderwritten by Philip Coggan and published by Public Affairs Books in New York.  The author is a current columnist for The Economist and a former columnist for The Financial Times.

Fiscal-Cliff

You’ll come away from the book appreciating the magnitude of world debt and its consequences.  And one thing’s for sure:  once you won’t read it, you won’t want to be caught without any gold and silver in your portfolio.  The relationship of debt to precious metals is acutely summarized by Coggan: 

“… this whole book is about debt.  But the key fact is that debt and money are two sides, not of the same coin, but of the same bank note.  That would not be true of a currency consisting entirely of precious metal.  Such metals have one defining characteristic:  they are no one else’s liability.  But as we have seen, there is not enough precious metals to go round….As soon as goldsmiths and banks started storing gold and issuing receipts (bank notes), money and debt became interchangeable.  Early bank notes were proof that the bank owed the holder money; they were thus a claim on the creditworthiness of the bank.  Modern bank notes are a claim on the creditworthiness of the government.”

While Coggan writes to clarify more than to shock, you can’t help feeling financially vulnerable once you’re just a couple of chapters into his book.  In fact, as early as page 4, the author admonishes us “On the monetary side, a government that expands the money supply at a rate in excess of economic growth will eventually erode the real value of taxpayer’s wealth via inflation.”  To our thinking, here at The Investor’s Corner, regardless of the current rate of inflation (around 2%), that statement is tantamount to an alert for each of us to buy gold, since the growing inflationary effects of QE3 lie shortly ahead.

Coggan points out in Paper Promises that Quantitative Easing is by no means a new tactic unleashed by our own Federal Reserve or by other contemporary governments in Europe or Asia.  He delves deeply into previous attempts. For instance, the economist and mathematician, John Law, after having fled his native Scotland for killing a man in a duel, became the monetary advisor to the government of France in the early Eighteenth Century.  Law became the first economist to recommend quantitative easing when he persuaded the country’s regent to create a bank to issue paper money as a way out of the immense debts facing France.

Once you learn how the scheme failed, and learn from Coggan’s book how other schemes of quantitative easing failed, you’ll come to be less forgiving of our current venture into paper money.  This venture – QE3 – offers a much greater cause for anxiety than any doubts you might have about the price of gold when you wake up tomorrow morning.

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Trevor Gerszt

Trevor Gerszt has been passionate about gold since childhood. Growing up in South Africa, the world’s second largest gold producer, Gerszt spent his youth collecting gold coins. Surrounded by a family of experienced coin collectors, he gained valuable insight about the precious metal.

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