Doomsday Scenario for U.S. Economy?

[TenBobNote]

Don’t get me wrong. I do not advocate a gold standard. Never have, never will. But you simply must understand that **just because the world is no longer functioning on a gold standard — doesn’t mean you cannot — or should not measure values in terms of gold. **

As a matter of fact, you should. Measuring values in terms of an asset that represents the real value of money is the only real way to measure anything today. That’s even truer these days than ever before because paper currencies are so fickle and volatile in nature.

So now, let’s take a look at our country’s GDP in terms of the amount of gold it can buy.

And let’s do a simple comparison of 1932, the depths of the Great Depression … with 1971, just before the gold standard was abolished … the year 2000, the peak of the tech bubble … the year 2007, the real estate peak … and the latest GDP data.

Let’s see what’s really happening — in terms of how much gold the country’s GDP can purchase at those different points in time.

Here’s the summary, and a chart to go along with it …

In 1932, our country’s GDP was worth 2.8 billion ounces of gold.

In 1971, it was worth 27.74 billion ounces of gold. Put another way, our country’s GDP was almost ten times what it was in 1932.

In 2000, our country’s GDP would purchase 34.54 billion ounces of gold.

At year-end 2007, it was worth only 16.87 billion ounces of gold.

As of March 31, 2010, our country’s GDP would purchase a mere 13.08 billion ounces of gold.

That’s a 22.47% decline in three years, since the peak of the housing bubble … and a whopping 62.13% decline since the end of the year 2000.

If that’s not a contraction, if that’s not a depression in real terms,
I don’t know what is.

Of course, almost everyone will argue with me about the above analysis, their main objection being: I’m just viewing the economy in terms of gold, and that the contraction I speak of is merely because the price of gold has gone through the roof.

But I ask you the following questions, and I’ll let you answer them …

If gold isn’t real money, then what is? Paper money?

If so, then why does paper money — in almost all cases — buy you less than it did a couple of years ago … five years ago … ten years ago … fifty years ago?

Why does a barrel of oil cost nearly eight times more than it did just ten years ago, when in gold terms, the price of oil is the same?

For the economy’s current GDP to equal the same gold purchasing power it had in the year 2000 — 34.54 billion ounces of gold — the price of gold would have to plummet by more than 64.5%.

It appears that you are very defensive of not advocating for a gold standard, if so, why??

If we had never went off of the gold standard the government would have never been allowed to print so much fiat money. We would not be in the financial mess we are in now. Having the fed creates a very big moral hazard and thus every time a politician is tempted to borrow more money from the fed a missallocation of tax payer dollar takes place and to top it off, his money is worth less.

 

[tjm190]

“That’s a 22.47% decline in three years, since the peak of the housing bubble … and a whopping 62.13% decline since the end of the year 2000”

Are we to take into account the fact that the value of gold skyrocketed during that time?

We calculate an inflation rate and use that to determine the value of real GDP- against the 1982 dollar because that is a constant value, rather than gold.
Using the value of gold is just a way to make things look worse then they are- I could calculate the GDP in AIG shares and we would have entered a period of prosperity unparalleled in human history 2 years ago.

 

[TenBobNote]

“That’s a 22.47% decline in three years, since the peak of the housing bubble … and a whopping 62.13% decline since the end of the year 2000”

Are we to take into account the fact that the value of gold skyrocketed during that time?

We calculate an inflation rate and use that to determine the value of real GDP- against the 1982 dollar because that is a constant value, rather than gold.
Using the value of gold is just a way to make things look worse then they are- I could calculate the GDP in AIG shares and we would have entered a period of prosperity unparalleled in human history 2 years ago.

What in an inflated 1982 dollar is constant? The dollar decreases, gold does not skyrocket, the dollar falls.

Gold is real money it has real value as a currency because people value it for its divisibility, its scarcity, and its durability.

 

[CPA2]

What in an inflated 1982 dollar is constant? The dollar decreases, gold does not skyrocket, the dollar falls.

Gold is real money it has real value as a currency because people value it for its divisibility, its scarcity, and its durability.

“Remember the Golden Rule!!! He who has the gold, makes the rules.”

My favorite accounting assumption is the monetary unit assumption. All accounting information is disclosed in dollars. However, a dollar is not a valid measuring tool because a dollar is changing in size. We do not have that problem with inches, pounds or ounces of gold. Even a little inflation adds up. In 1946 the average income was $2,500, a new car costs $1,125 and a new house cost $5,600. What happened to penny candy? What happens to the monetary unit when inflation is 180% or 800%? Some accountants came up with the idea of a unit of purchasing power in the 1970s, a period of 20% inflation. However, the idea was quickly abandoned when the media called it “pooh-pooh” accounting.

How does one compare a financial statement from the 1950’s with a financial statement today? I asked myself that question the other day. I was looking over some financial data from my father’s company. The reports were from the early 1950’s. Did the family company do better in 2000 than in 1950? The numbers were bigger in 2000 than 1950. What does that mean? The monetary unit for both financial statements was U.S. dollars. However, I felt like I was comparing New Zealand dollars with United States dollars. I was comparing apples and oranges. How sad.

Inflation hit double digits in the 1970’s. Accountants went into a tizzy. History may repeat itself. Accountants may again try to define a unit of purchasing power someday. Of course, the ideal unit of purchasing power already exists. It is gold. Gold has that psychological quality of confidence. Gold is a store of value. A grain of gold in Egypt in 1000 B.C. is the same grain of gold today. Gold is the ideal monetary unit. It is reliable. An ounce of gold is an ounce of gold. Contracts have been, and can be, written in ounces of gold. Even the SEC recognizes this point.

Con 5 (accounting concepts) mentions ounces of gold and purchasing power! “Also, preparation and use of financial statements is simpler with nominal units than with other units of measure, such as…units of a commodity (for example, ounces of gold). However, as rates of change in general purchasing power increase, financial statements expressed in nominal units of money become progressively less useful and less comparable.” CON 5 says it succinctly!

 

[GratefulFred]

Thanks, CPA2 for a long list of measures over the years. They help define the problem. We need to understand the marco economy and keep it in mind when we vote. But, I think, the Ds and Rs have both done their bit to make it worse over the decades. Politicians tend to take the short term view - to please their backers and to get reelected. We’ve seen the Wall Street rip off. We’ve seen business move jobs over seas.

Many Americans LOVE getting benefits they think they are not paying for. We think we are working hard; we want the ‘good life’, we deserve a break today in some form of free government services. We want to retire as early as we can with the best life style. Utopia is our base line. Can the government do better than that for us?

Many Americans have chosen to live beyond their means. Others have, for a number of reasons, chosen to live a bare existence on welfare. That group of Americans who still live within their means are worried the first two groups will pull them down.

Lost in the macro economic discussion is what should the individual American and Ameircan family do to portect themselves? In a word BUDGET. Food, clothing, shelter, transportation, medical, insurances, personal care, education, entertainment, taxes, savings and retirement savings are the major categories.

What are the percentages of income for each at say $30K, $50K, $100K, $150K annual income? The only way I know to move into the higher income levels is to get a better education, so that category is very important. But education does take effort.

But even the educated have to learn to live within their means - live as debt free as possible.

 

[tjm190]

What in an inflated 1982 dollar is constant? The dollar decreases, gold does not skyrocket, the dollar falls.

Gold is real money it has real value as a currency because people value it for its divisibility, its scarcity, and its durability.

A 1982 dollar is constant because inflation changes things over time, not in an instant. 1982 gold, 1982 copper, and 1982 socks, are all constant too.

Gold does not sky rocket? Are you kidding me? We calculate inflation to see how fast the dollar is rising or falling- gold’s growth has vastly outpaced it. Gold’s price is determined by market forces- its value can move up and down independent of the dollar.

Gold is no more real money than dollars, yen, silver, or human teeth- it has value because people think it does and for no other reason, just like everything else.

 

[CPA2]

Gold is no more real money than dollars, yen, silver, or human teeth- it has value because people think it does and for no other reason, just like everything else.

Try telling that to the people in Greece who are trading in their euros for gold. I do not think that the rest of the world would agree with you. Every fiat currency in the world has become worthless. It is only a matter of time before the dollar becomes worthless too. Gold, unlike fiat money such as the dollar, **has intrinsic value **and gold will never become worthless.

The quantity of gold is very stable. There are very few commercial applications for gold. The jewelry industry just recycles gold. Most of the gold mined throughout history is still in existence. We are still using gold that Sir Francis Drake plundered from the Spanish.

Most of the ancient coins contained about 130 grains of gold. It did not matter what country minted the coins. The coins all had the same purchasing power. By the way, the world may have a gold Islamic currency, the dinar.

IF GOLD IS NOT REAL MONEY, THEN I DO NOT KNOW WHAT IS REAL MONEY!

 

[CPA2]

It appears that you are very defensive of not advocating for a gold standard, if so, why??

If we had never went off of the gold standard the government would have never been allowed to print so much fiat money. We would not be in the financial mess we are in now. Having the fed creates a very big moral hazard and thus every time a politician is tempted to borrow more money from the fed a missallocation of tax payer dollar takes place and to top it off, his money is worth less.

You hit the nail on the head! I like that “big moral hazard” part. If we were on the gold standard, we would not have an international debt crisis. However, you can create your own gold standard. Check out Faith and Finances and look for GOLD.

 

[Sailor_Kenshin]

Sounds like a scheme.

If the economy collapses (and that seems imminent) and when the government decides to rob you of the rest of your money, you will have nowhere to hide, and nothing will be safe.

 

[CPA2]

How so? Serious question. Buying land?

Land is a real asset and it always will have value; however, land is not money. Additionally, the government monoply money that you have continues to fall in value at an ever increasing rate. It will not be too long before we need a new currency, along with some new political promises to go along with the new (international?) government money.

 

[CPA2]

Sounds like a scheme.

If the economy collapses (and that seems imminent) and when the government decides to rob you of the rest of your money, you will have nowhere to hide, and nothing will be safe.

It is Satan’s scheme. However, Satan only wins battles. God wins the war.

 

[CPA2]

It appears that you are very defensive of not advocating for a gold standard, if so, why??

QUOTE]

Debt is too high for us, and the world, to have an orderly transition back to the gold standard. However, I can see a new international currency partially backed by gold to help win back the confidence of the masses.

 

[CPA2]

But even the educated have to learn to live within their means - live as debt free as possible.

This is an article that I wrote in 2004:

Debt is a huge time bomb. The United States is the greatest debtor nation in the history of mankind. The government admitted to a $500 billion deficit for 2004. However, the 2004 deficit did swell to $1 trillion. The government does not count the billions that they borrow from the Social Security Fund, or increased funding for the war in Iraq. Additionally, the average credit card debt in America is at a record $8,500. Household mortgage debt is also at an all time high. Households must spend a record 18.3% of their after-tax income just to service their mortgage debt. By any standard, we are in the middle of the greatest debt bubble of all time.

Alan Greenspan, head of the Federal Reserve in 2004, insisted on lowering interest rates during the 1990s to encourage spending. However, debt did weigh heavily on the minds of individuals during the 1920s, before the Great Depression. Our ancestors took on much less debt than people easily accept today. Most people in the 1920s paid off debt as soon as possible. However, many people in the 1920s borrowed money to speculate in the stock market. My grandparents told stories about the horrors of debt when times got tough. We Americans may repeat the hard economic times of the 1930s, and fall into the same trap of not saving for a rainy day.

People today have a false sense of security. They think that “big brother” is always protecting them and preventing them from suffering through another depression. We are becoming overconfident. We forget to save for that rainy day that could bankrupt us overnight because of a disaster, sickness or unemployment. Many people see no reason to save for the future.

People develop a false sense of security. They believe that their jobs will always be there. However, many companies are experiencing falling profits. Even Coca-Cola and Wendy are suffering declines in earnings. Ailing companies are laying off workers by the thousands. About 10 million Americans are now without jobs. These Americans are struggling to keep a roof over their heads. The mortgage delinquency rate is the highest in 30 years. Additionally, the foreclosure rate on home mortgages is the worst in 52 years.

Many individuals experienced a false sense of job security when they were working for one of the largest companies in the world, Enron. They lost not only their jobs, but they also lost their retirement funds that they had invested in the company. Having debt in a time of extreme need is dangerous for one’s financial health and stability.

Debt can have a great impact for individuals, companies and even countries. Cash reserves and investments allow for stability during difficult times. Debt can multiply investment gains in good times and, like a double-edge sword, multiply investment losses in bad economic times. Debt is like a Swiss-made watch; it keeps on ticking, even during bad times.

We hear that the bad times are behind us and bad economic times will never happen again during our lifetime. Many say that history will not repeat itself. The stock market crash of 1929 and the ten year depression will never happen again. Uncle Sam, or “big brother,” will always be watching over us. However, the Federal government is impotent to end the bankruptcy crisis or to save the stock market.

What assurance do we have that we will not end up like Russia? Our money could one day become worthless. President Nixon removed the backing of gold from the U.S. dollar. All we have now is our confidence in the dollar and our trust in the economy.

The current budget deficit is devastating the dollar and boosting the price of gold. Gold was $250 an ounce a few years ago and it is now trading around $1,200 per ounce. It does not look like there will be an end to the dollar’s woes or the rising price of gold. When our economy hits rock bottom, will we repeat history and transition into a depression?

Debt can be cruel and unforgiving. Economic times can change like the weather. Bad times can appear on the horizon with little or no warning. Being self-reliant and saving regularly can save one from financial disaster. Look at the financial destruction that occurred in Florida because of hurricanes Frances and Charley. Thousands of people had extensive damage to their homes and have no insurance. Many of these people are typical Americans with $8,500 of credit card debt plus 30-year mortgages on their homes. Being prepared at all times and understanding the economic forces that lay ahead will help one’s chances of survival. Learning from our history ensures that we will not make the same mistakes. Too much debt can be deadly.

 

[Monte_RCMS]

The people in Washington who are making U.S. economic policy are basically the Woodstock Generation.

Good intentions are all you need. That and some really great music.

We got rid of the dirty, messy “smokestack” industries.

We got rid of the dirty, messy energy industry.

We got rid of the unlimited liability financial industry partnerships which always said “no” to anything really cool [in the name of discipline which is pretty mean and nasty] and now no one has any liability for anything … except the filthy rich doctors who we can sue whenever we get the feeling that we can sue them. And with the government now providing financing for all housing and all education and now legally able to control any and all businesses, no one has to worry about anything.

We are almost totally rid of the curse of private ownership of anything; with all the restrictions and rules and regulations and taxes, who would want to own any kind of property?

We have removed science and, especially, math from the school curriculums. Yuck stuff. Even Tim Geithner, the Treasury Secretary, says we don’t need math. And with the primary missions of NASA eliminated, we don’t much need science any more, either.

We are very close to eliminating trans-fats, high cholesterol, and smoking. Everyone’s meals will be provided for them at school and at work according to the government directed dietary program. Soon, we will have mandatory weight restrictions and mandatory exercise programs. No more driving cars to work. So with better diet and more exercise, we can expect people to be healthier so they won’t need as much medical care. And by taking after the Netherlands, we will soon have involuntary euthanasia, per direction of the Secretary of Health & Human Services.

Conservatives are evil; and we have pretty much removed the political power from their few remaining strongholds out in the country and rural areas.

All we need to do now is to get free weed for everyone; and thanks to George Soros, we are almost there now.

So, what’s the problem?

 

[CPA2]

I watched gold go from $35 per ounce in December 1970 to $150 an ounce in 1975 and to $200 an ounce without ever looking back! Gold dropped back to a low of $103 when Carter started selling U.S. gold in a vain attempt to make war on gold. When Carter stopped selling gold, gold took off to $500 an ounce.

I was there in January 1980. Gold spiked from $500 an ounce to $800 an ounce in a matter of a couple of days. Gold then went into a 25 year bear market and financial assets, especially stocks, went into a 25 year bull market.

Why? President Reagan was elected and he put Volker in charge of the Federal Reserve. Volker tamed inflation in the U.S.

Let us not fight the last war. This is not the 1970s. There is a debt crisis going on. The Euro is toast and the dollar is next. The world financial status is far worse than it was in the 1970s.

Gold has gone up 400% from its lows of $250 an ounce. Gold has gone up even higher in terms of the Euro. Gold has to more than double again to reach $2,300, its inflation adjusted price of $800 in 1980. We are nowhere near a blow off in the price of gold like we were in January 1980.

President Reagan and Fed Chairman Volker are no longer around. The socialists are in power and they are destroying the dollar. Anything is possible. The price of gold just reflects the very dangerous world situation.

Fasten you seat belts. We are in for a wild ride!

 

[Monte_RCMS]

We have detailed sales records of who has bought gold and we can easily confiscate it.

Not to worry.

 

[Black_Rose]

This is an article that I wrote in 2004:
…

The current budget deficit is devastating the dollar and boosting the price of gold. Gold was $250 an ounce a few years ago and it is now trading around $1,200 per ounce. It does not look like there will be an end to the dollar’s woes or the rising price of gold. When our economy hits rock bottom, will we repeat history and transition into a depression?

That didn’t happen in 2004.

 

[CPA2]

We have detailed sales records of who has bought gold and we can easily confiscate it.

Not to worry.

Socialist governments make war on gold and God because both limit governments’ power. I want a gold crown with the finest jewels in eternity. No government will steal that gold crown!

 

[viveret]

Doomsday for this economy will come in one of two forms:

Bread is 50 dollars a loaf and few people can afford it.
Bread is 3 cents a loaf and few people can afford it.

The second is more likely than the first. That’s not inflation. That’s deflation, and it’s far harder to manage.

 

[tjm190]

Try telling that to the people in Greece who are trading in their euros for gold. I do not think that the rest of the world would agree with you. Every fiat currency in the world has become worthless. It is only a matter of time before the dollar becomes worthless too. Gold, unlike fiat money such as the dollar, **has intrinsic value **and gold will never become worthless.

Rule one of economics- ** NOTHING** has intrinsic value. Everything is worth what its purchaser will pay for it. Gold is not stable- the price has been increasing far beyond the rate of inflation of all currencies because people are buying it en masse, because pseudo economists are telling people they should. Gold is valuable because it is A. Pretty B. Malleable. People liked the way it looked, it was easy to use, scarce enough to not be everywhere but not so scarce as to be nearly unobtainable.

The quantity of gold is very stable. There are very few commercial applications for gold. The jewelry industry just recycles gold. Most of the gold mined throughout history is still in existence. We are still using gold that Sir Francis Drake plundered from the Spanish.

That disparity a policy decision, not an intrinsic property of gold- world governments could just print money at the rate of replacement if they so chose.

The coins all had the same purchasing power.

Evidence? Who’s to say a gold-rich area wouldn’t have assigned a lower value to gold than a gold-poor area.

IF GOLD IS NOT REAL MONEY, THEN I DO NOT KNOW WHAT IS REAL MONEY!

That’s the secret- money is whatever people agree it is- in effect, nothing is ‘real’ money.