Sell Dollars, Buy Gold

Today, we have some advice. It is no different from the advice we have given many times before, but today we give it with special urgency.

We have been reading reports of “Dark Matter” in the world economy. We ignore them; Dark Matter seems to us to be just another goofball effort to disguise the facts, like coming into the office without shaving so the boss will think you’ve been at work all night. That is what happens when people get desperate; they invent fantastic stories and far-fetched explanations.

“Dark Matter” comes from the hypothesis of astronomer Kristian Birkeland, who, in 1913, noticed that there seemed to be a gravitational pull exerted by objects he couldn’t detect. He called it “dark matter.” Now, the expression is being used to label various intangible assets — Yankee ingenuity, American brands, management skills — that are said to bring the U.S. investment income from overseas, even while the assets held by Americans overseas, compared to those held in the U.S. by foreigners, continue to go down.

In other words, while the net international investment position of the United States slipped to $2.5 trillion, for a while at least, the income derived from its foreign investments was greater than the money it was paying out to foreigners. It didn’t seem to make sense. Investment income should have turned negative, too. Economists scanned the heavens to try to make sense of it, but they couldn’t see anything that would readily explain this investment inflow. Even in the areas where the United States might have had a big and growing intangible advantage — technology, for example — the evidence showed the opposite. The United States was number one in broadband access in 2000; now it is 16th. In 2000, the United States made 40% of world’s telecom equipment, now it makes only 21%. And, the United States has fewer people with cellular phones — in percentage terms — than 41 other countries.

Nevertheless, in 2004, in the accounts of international investment income, the United States registered a $30.4 billion surplus. The Wall Street Journal, among others, pounced on “Dark Matter” as the explanation; we were making money on things of intangible value that didn’t show up on list of externally held assets.

Since this is so, deduced the Wall Street Journal, when you take dark matter into account, “America is a net creditor, not a net debtor.”

Gosh and golly! But, now cometh the tally for 2005, and all that dark matter has suddenly gone dark! Gone is the massive gravitational pull of $30.4 billion surplus — in its place is a paltry little refrigerator magnet of $1.6 billion.

Willem Buiter, a monetary astronomer at Goldman Sachs, comments:

“I expect that in the years to come, the paradox of the US being both a net debtor and a recipient of positive net foreign investment income, will be resolved by net foreign investment income turning negative.

“With the US trade gap in October 2005 widening to a new record US$68.9bn, the US current account deficit is unsustainable. Its correction will require a large depreciation of the real effective US Dollar exchange rate, on reasonable estimates by no less than 30%, and quite possibly by more.”

The Asian Development Bank warned readers last week to “prepare for a collapse of the dollar.”

Yesterday, the dollar fell. We suspect that more is coming. Sell the dollar; buy gold.

u2022 Everything decays, degenerates, grows old and dies. History grinds us all down.

We wish it weren’t so — suppose you could stay young forever, dear reader? But what kind of world would that be? We don’t know, but we’d be willing to give it a try.

A democracy…an economy…an institution…a bull market — everything crumbles, breaks up, and goes away.

Think of it as a tree. In its sapling years, it is young, fresh, and supple. Then it matures. As it grows old, a lot of things begin to take advantage of it. Moss grows on the north side, balls of mistletoe lodge in its branches. Worms and bugs eat away at its insides, and squirrels, birds, mice, and snakes burrow into its cracks and crevices.

As a democracy ages, likewise, a burgeoning world of parasites comes to depend on it. The leeches get bids, jobs, checks, subsidies, power, housing, drugs, status, free parking, no-bid contracts, and wars to order. This gives more and more people an interest in preserving the old thing…resisting change…propping up its withering limbs. But, like an old tree shading the ground around it, the longer it stays up — the longer new saplings are prevented from growing.

That is what is happing in the United States and in France. On both sides of the Atlantic people know they have major problems. Decadent governments have made promises that can’t be kept. In France, the young resist any change to their cushy employment laws. In the United States, the old resist any change to their cushy retirement benefits.

Democracy is supposed to make change easy, but history didn’t stop when democracy was invented. Instead, as time goes by, more and more parasites find ways to take advantage of the old institutions — eating away at the heartwood, nesting in the little nooks, sapping the strength of the society through subsidies, sinecures, and swindles. Finally, what can the thing do but come crashing down?

u2022 Speaking of Empire of Debt, a dear reader asks a very good question:

“I found reading Empire of Debt fascinating! I had not considered the United States of America in that light, even though I was aware of some of the alarming statistics quoted. You have significantly added to my knowledge of history and raised my concerns considerably — I thank you!

“I have one question, which has haunted me throughout the book and I fear your cutting, sarcastic response will not satisfy me. So, please — would you consider my question seriously?

“Accepting your theory of ‘it’s not my business’ and ‘why get involved, it’s not our fight’ — do not leading countries (empires or not) have some responsibility to mankind in a general sense? You said frequently throughout the book that we don’t know the outcome and invariably America’s (imperial) interference may have made the situation worse. Was it really wrong to stop Hitler? Was it really wrong to try and contain the tyranny and bloodshed that Iraq, under Saddam Hussein, was displaying?”

Here is our non-cutting, non-sarcastic, and probably nonetheless unsatisfying reply.

We read in the paper about a do-gooder who is apparently actually doing good — Jimmy Carter. According to the press reports, Carter’s efforts are eliminating a nasty worm that lives in drinking water and then becomes a parasite in the body, from many parts of Africa. Bravo for him. If he didn’t rob anyone to do it, more power to him.

But there’s a big difference between trying to exterminate a harmful worm and trying to build a democracy in Mesopotamia. One is an example of an ambitious, but sensible, effort to do good; the other is an arrogant, vain and foolhardy effort to remake the world, in one’s own image, of course.

The gods do not smile on such efforts. They didn’t smile on Napoleon when he invaded Spain and Russia. They didn’t smile on Hitler when he invaded Russia. They didn’t smile on Japan when it bombed Pearl Harbor. The lesson: If you are going to try to do good, you are best advised to be careful and modest about it. Don’t attack anybody. Don’t steal anyone’s money. Say ‘please’ and ‘thank you.’ Remember that you are a fool, too — along with everyone else.

Try to stop Hitler? No one tried to stop Hitler in World War II. Hitler attacked, forcing them to fight back. Should they have “tried to stop him?” We cannot know, neither the future, nor what the present would be like if the past was different.

u2022 “It was pleasant to wake up in Florence,” wrote E.M. Forster of his room with a view, “to open the eyes upon a bright bare room, with a floor of red tiles which look clean though they are not; with a painted ceiling whereon pink griffins and blue amorini sport in a forest of yellow violins and bassoons.”

Bill Bonner [send him mail] is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century and Empire of Debt: The Rise Of An Epic Financial Crisis.