The cycling role of gold

First and foremost gold is jewellery. But what is jewellery? An item of jewellery is an easily portable consumer product and, depending on appearance and weight, denotes social status. Its chief attributes are that it is rare, it has a beautiful colour and sheen, it doesn’t corrode and it is malleable; gold is able to be easily purified, impressed, cast, melted, and otherwise able to be fashioned into objects ranging from the prosaic to those of exquisite craftsmanship.

For thousands of years, in scores of civilizations and hundreds of cultures, and long before gold became chopped into coins, the possession of gold objects denoted status. Only status. It didn’t denote wealth as we know the term today. Otherwise, gold treasures would never have been buried with its former owners, alongside, often, his or her sword, chariot, horses, copper axe-heads, wine jars and even freshly-killed slaves in more than a few cases.

The existence of untouched graves, re-discovered every now and again in modern times, means that the buried gold only had significance when in close proximity of its possessor, alive or dead, as a personal status good. Such graves — often quite shallow — were never plundered for their “wealth” by the cultures that dug them. Gold possessions were sacrosanct for generations thereafter until folk memory retained only the name and reputation of the dead person or when an invading culture killed the locals or swept them into slavery and looked with disinterest on mini-hillocks that were left undisturbed because of the apparent innocence.

It was only when gold, as small bars, became useful for trade, as in ancient Egypt, that graves started to become plundered — that is, those graves that were obviously so, such as pyramids or elaborate graveyards of the wealthy. It was only then, as a convenient barter commodity, that gold start to gained a dual value. After the Egyptian and many other civilizations, it took the genius of the ancient Greeks, almost two millennia later, to standardize trade bars into coins of equal weight with the heads of gods impressed upon them. This meant that a Greek merchant could pay, or be paid with, gold coins to match up any imbalances between bartered goods in whatever Mediterranean port he happened to be. In their time, Greek merchants were the wealthiest people on earth and cut down thousands of square miles of forest all over the Middle East and northern Africa in order to build their merchant ships and triremes.

Today, a considerable part of newly-mined gold (about 2,500 metric tons per annum) is made into status jewellery for Western and Asian countries and those Second World countries, such as Brazil and Indonesia, with large populations and briskly-growing GDPs. However, after several generations, jewellery becomes concentrated in fewer high status hands by means of the dowrie effect and primogeniture and then it’s sold to goldsmiths. (By then, of course, the ultimate possessors have far too much of it to wear comfortably!) In the West, most jewellery (gold Rolexes excepted) is scrapped out by its original owners or within a generation or two for fashion reasons, rather than becoming concentrated. Most business which tout for gold scrappage offer only about two thirds of the real price of gold at the most, but a reputable jeweller or goldsmith will offer the full current price on that day (depending on purity) minus a few per cent.

So what’s the overall situation today? It is the dual role of gold which is now more important than its physical possession in this or that place. Strangely enough, the role itself is now re-cycling to a balance similar to that which existed before the First World War. In those years there were few gold coins because banknotes and, more importantly, bank cheques were more convenient in money circulation. Most of the world’s mined gold (particularly that from the California, Victoria and Witwatersrand gold rushes of the mid-19th century) ended up as jewellery (where it was seen every day!) or, in about an equal amount, lying as bullion, in five central banks — those of England, America, Germany, France and Russia (where it was never seen for 364 days of the year except by relative handfuls of officials!).

The latter situation gives rise to asinine jibes today such as: “Gold is useless as a currency. It is dug out of the ground and then buried underground in bank vaults.” Well, this wasn’t so pre-1914. On the 365th day of the year (more exactly, for a few days every several years), gold poured out of the above banks in order to calm down panicking businesses and the rich, who, fearing disaster, went to the banks demanding their deposits. Gold was not an undisturbed reserve; it actually moved with almost the speed of cannonballs when necessary. Also, very large quantities of central bank gold were shifted internationally when big trade (such as cotton) suddenly changed from one country to another or a country at war needed to borrow from the Big Five to pay for armaments.

Since 1918, the sole prosperous victor of WWI, America, decided that the dollar should be the main world trading currency and that the US greenback, and only it, should be the only currency able to buy gold. This lasted up to, and even beyond WWII. The European and all other countries had to meekly do as they were told. In time, however, as countries such as England, Italy, Germany and France were recovering and found themselves with surplus dollars gained from exports and dollars spent abroad by Americans and businesses, plucked up their courage and began trading their surplus dollars for American gold. America didn’t like that at all. By 1970, the original tranche of US gold had declined from about 25,000 tonnes in the 1950s to 8,000. Before the European countries could each catch up and then overtake America’s stock of gold (Germany alone had more than 3,000 tonnes), President Nixon stopped the exchange in 1971 by completely severing the exchange link between the American dollar and American gold.

A lot could be said about American propaganda and manipulation against the gold price since then. Suffice it to say that, today, an additional 30 or 40 central banks are now buying gold because they don’t trust the continuously depreciating US dollar. The European Central Bank was set up twelve years ago with gold as part of its reserves. It is said that the International Monetary Fund are thinking of buying more gold as a reserve. The Bank for International Settlements (the central banks’ central bank) is considering restoring gold as a currency reserve. The retiring President of the World Bank, Robert Zoellick has said that a gold reference is necessary to stop governments printing banknotes willy nilly and leading the world into financial chaos.

Medieval gold coinage was so effective that it eased it way as the backcbone of the financial system of the industrial revolution. Without gold, and the banks that arose in order to move it around from one project to another, industrialization would never have taken place. By 1914, the gold standard was well nigh perfected and was making its way rapidly into all the trading countries of the world as the basis for their nationalistic currencies. Every possible event concerning gold today suggests that, whatever governments may say, gold is now easing its way back as the only dependable backdrop in a globalized world that desperately needs financial stability.

A pronto return of the Greek Colonels

The extent to which Greece is saturated with tax evasion was well illustrated in John Humphries’ excellent BBC Panorama programme last Monday. As well as showing the varying degrees of poverty now descending on most of the population, Humphries had a chat with a Prof Diomidis Spinellis, one of Greece’s top software engineers. Some two years ago, he was asked by the Finance Minister to devise a method to replace the self-reporting tax forms currently in use by those who work for themselves — rich businessmen but also the hundreds of thousands of professionals such as lawyers, doctors, accountants and dentists who have lovely houses, swimming pools in the garden, top marque cars, yachts in the local marina, expensive private education for their children, etc but declare no taxable income at all.

Prof Spinellis did so and delivered his report to the government minister. It would not have saved Greece’s financial predicament immediately but would have been a big step forward. Being on the young side of middle age, Spinellis was naive enough to hope that some reform would actually emerge. Nothing happened. He then realized that the government’s own taxation officials were explicitly involved. A great deal of the untaxed money was going into officials’ pockets. Any possibility of reform was being sabotaged at a high level. For his own satisfaction, Spinellis then set about devising an improvement to his proposed system that would also render it fool-proof at its collection end. He delivered this report to the government also.

A great deal happened then. The senior tax collector’s union sued him. The Panorama programme didn’t say, but, presumably, this attempt fell by the wayside because Prof Spinellis didn’t appear to be too hazed as he related it. (Perhaps Greece still has uncorrupt judges?) Anyhow, the net result was just the same — no action by the government. John Humphries asked whether anything could be done at all. “Nothing can be done to improve the present system.” Spinellis replied. “A completely new system must be brought in from the start.”

Well, since the programme must have been recorded at least two or three weeks ago, a new election has taken place since. The new government has not announced the possibility of any new tax system. Instead, it wants even more concessions from the Eurozone. German workers will no longer tolerate further subsidies into what they see as a bottomless pit. Greece’s imminent exit from the Eurozone seems almost certain now. If Spinellis’s opinion is any guide, then corruption is already so deep in what I call the 20-class that only some sort of revolution or coup d’etat that institutes a realistic taxation system could then rescue Greece from further penury.

The epigenetic propensities to simple authoritarianism, last expressed by years of acquiescence during the ‘Regime of the Colonels’ in the 1970s, will still be present in the Greek culture. Once Greece’s exit from the Eurozone takes place then I would bet that an army take-over, rather than a revolution from the streets, will be the likely — and immediate — outcome.

17 banknote warehouses

In the 17 countries of the Eurozone there are 17 warehouses stuffed with adequate numbers of brand-new bank-notes of what, at the moment, are their former currencies — lira, pesetas, guilders, francs, deutschemarks. drachmas, whatever. It cannot be imagined that any self-respecting civil service would not already have organized this within at least the last two years of heightened concern about the future of the euro. It may even be the case that some prescient treasury departments didn’t incinerate their old banknotes ten years ago and simply stillaged them in a convenient salt mine, ready for re-use if necessary.

At the same time, if statements here and there are to be believed, scores, perhaps hundreds, of transnational corporations will have already set up parallel accountancy systems which could be activated if any or all the Eurozone countries go native. Certainly all banks will have done so. Indeed, a day or two ago, investment experts at Deutsche Bank have said that the collapse of the Eurozone “is a very likely scenario”. Silvio Berlusconi, former prime minister of Italy and clown though he is, is thinking of leading his party on a return-to-lira ticket. Given that prime minister Mario Monti’s austerity measures are already causing riots in Italy then Berlusconi might well be onto a winner unless the authorities find some pretext of locking him up after a quick trial. (And, goodness knows, there’s already plenty of evidence of corruption on which his colleagues have already been found guilty.)

Oh! and by way of a postscript, we might mention that many sensible Eurozone individuals are also trying to insure themselves against a calamitous collapse of the Eurozone. Every now and again a plane load of krugerrands is flown from South Africa to Europe. Gold dispensing machines are being installed in some German hotels. The Pan Asia Gold Exchange, knowing a good market when it sees one, is intending to open depots in Europe where internet-purchasers of gold can store it or collect it.

Meanwhile, senior Eurozone politicians and bureaucrats will continue to assert that all will be well. And, because most of masses are totally bewildered by all the financial jiggery-pokery going on, and are always inclined to believe good news rather than disaster, the propagandists will be believed. Right up to the last moment.

Keith Hudson

Jumping with delight

One had only got to see Angela Merkel jumping up in her seat with every German goal (all four of them!) scored in its soccer match with Greece last night, to realize that she’s not going to allow Germans to subsidize the rest of the Eurozone in any significant quantity for much longer.

The Eurozone faces only two alternatives now. It can only be some sort of attempt at dictatorial take-over by some newly-concocted Eurozone entity in order to impose budgetary control on all member governments whatever their different socio-economic cultures, or it will be an unpeeling of the Eurozone in one way or another.

A Growth-No Growth Economy

Keith Hudson

I see no reason why we should not have an economy that is both growth and no growth. In fact, this is precisely what has been happening in the past 30 years. Even while national GDP figures have been rising in the advanced countries (mainly calculated on cost-of-living indices concocted by governments), per capita use of resources (energy particularly), incomes (in real, not inflated, money terms) and family size (now less than replenishment) has been going down. Continue reading

The impossibility of the Eurozone

In the long run, as Europhiles are constantly telling us, the Eurozone will work perfectly when they’ve found the right acronymic scheme. “In the long run,” as Keynes once said, “we are all dead.”

Beyond any dispute, we now know the precise scientific reason why the Eurozone can’t last. Because the Eurozone is in a particularly bad crisis this week it’s possible it won’t last beyond next week. The consequences of the Greek election on Sunday might be the last straw that breaks the camel’s back. Many of the large European investment funds — pensions, investment, hedge, etc — are already fleeing Eurobonds and parking their money in US Treasuries, even though the latter are, in actuality (when taking inflation into account), paying negative interest rates.

The Eurozone can’t last because the dour, disciplined northern Europeans — the Germans, Dutch, Danes, Finns, Latvians — are psychologically as different as chalk and cheese from the laid-back southern Europeans — the Italians, Greeks and Spanish. How so? They all have the same standard stock of genes, all laid out in strict order along their chromosomes (otherwise they couldn’t inter-breed). They differ somewhat in the selection and balance of minor variations within the otherwise identical genes (we can tell the difference in appearance between the typical Finn and Sicilian immediately). They will happily trade together (because both sides benefit) but they don’t like living too much cheek-by-jowl nor, more than anything else, being governed by those who have a very different culture.

If they have the same genes, northern and southern Europe differ greatly in the way their genes are selected when expressing themselves in the living cells of our bodies — in our body health and our behaviour. Which genes are selected for this or that environment? Which genes associate together on this or that occasion? How long is a particular gene allowed to express itself before re-coiling into its secure DNA helix? All these are the result of small molecules that are of a higher order than genes. These are called epigenes and have only been indisputably identified in the last decade. If genes are the ‘hardware’ of our DNA, epigenes are the ‘software’ which always controls the otherwise inert DNA. The existence and sheer complexity of epigenes have already revolutionized the pharmaceutical industry of the West and is rapidly overturning almost everything that we knew hitherto about many diseases, particularly those which attack in mid-life such as diabetes, heart conditions and many cancers.

Besides predisposing us to this or that disease (and/or helping our immune system to resist others), new epigenes are constantly rising in our body cells according to the precise environment around us. There’s no internal decision-maker which supervises the epigenes. Our epigenetic make-up is strictly according to the diets we eat, our daily temperatures, how hard we have to work (and what type of work), our social world, our rank order (via hormone levels) within our group or neighbourhood (and deference to authority), the pollution around us, the appropriate playfulness or seriousness of our culture, and so on in the thousand-and-one ways whereby personalities and cultures different from one another. In short, our psychological propensities, broadly set by our culture, and more particularly set by our parents, are as subtle and complex as our physiological propensities to this or that disease.

Moreover our epigenetic settings are passed from parent to child, 50% from one parent and 50% from the other. In our lifetime we can augment some or not use some, and then pass the same condition to our children. A particular epigenetic setting may take several generations to reach maximum intensity; it may take generations for a particular setting to die away.

If we could transplant a thousand Greeks into a housing estate and a factory in Germany, they would be psychologically and culturally German with a few generations. (And they would tend to have the same mix of mid-life diseases as indigenous Germans.) Conversely, if we were to able to transplant a thousand Germans into country cottages and olive farms in Greece, then they would be psychologically and culturally Greek within a few generations.

The bureaucrats and retired politicians who devised the European Union and Eurozone by continuing to do what they’re best at — manipulating the punters in small stages — should have read their history books first. The only way a large land mass and a large population with many different climes and cultures within it can possibly become unified under a centralized budgetary authority is either via a dictatorship or a full-scale civil war. That’s where they should have started in order to succeed. But neither another Hitler (or Napoleon or Stalin), or Civil War is possible (we hope!) because no-one would lend the money for armaments. Unfortunately, a deluge of unrepayable debt is poised to fall on us sooner or later.

Reverse engineering a century of history

Chinese schoolchildren invariably fill the highest positions in the various international maths and science tests that are held every year, way above Americans and Europeans. Yet in terms of creative thinking and discoveries in science, China is almost nowhere. Every now and again, senior Chinese officials admit that they are a seriously worried about the lack of innovative thinking among their young people.

What’s more, Chinese officialdom knows what to blame. It’s the intensive rote-learning nature of their classrooms, a product of 2,200 years of heavy authoritarianism — an unfortunate byproduct of an otherwise benign philosophy that was originally designed for relatively small kingdoms and principalities. Changing cultures, however, is not so easy and what the Chinese would like by way of a more versatile education system is probably at least a century away. Meanwhile, rich and middle-class Chinese parents are encouraged to send their children and young people abroad in the hope that, once educated in more lateral-thinking cultures, they will return to China and bring creativity back with it.

There’s little doubt that the Chinese are clever enough. On standard Western-designed IQ tests, coastal province Chinese score the same as, if not a little higher than the average European or American. So they’re just as good as any wannabe advanced nation-state has ever been at reverse engineering goods from elsewhere and then copying them. In the last 30 or 40 years since the Deng Xiaoping revolution, China has been acting no differently from several northern European countries and America in the 17th and 18th centuries when copying the new industrial techniques and consumer products of England.

One of the greatest English inventions was a financial one. This was the refinement and final establishment in the latter decades of the 19th century of a practical gold-standard financial system from Isaac Newton’s original definition of the value of a Sovereign gold coin as the same free market value as a standard weight of pure gold. So successful was this new system that, prior to World War I (1914), the Bank of England was not only by far the largest bank in the world, but the practicalities of gold standard national currencies was already spreading like wildfire to Europe, America (north and south) and Asia (Japan particularly).

What stopped the gold-standard in its evangelical tracks was World War I and the sheer scale and cost of it. If armaments had been bought only with gold-backed currencies then WWI would have been over within by mid-1915. When it became obvious that Germany would not be stopped then the Allies had no option but to start printing banknotes in huge quantities with the promise to its suppliers and those who bought bonds that, if desired, their pounds would be redeemable with gold after the war.

At the end of WWI, Germany had about four to five times the number of banknotes in its money supply as at its beginning. France, Belgium and one or two others had three to four times the number. England had three times as many, and even America, with all its vast natural resources available at lower cost, still had twice as many dollars in circulation in 1918 as is in 1914. However, all of them (starting with England), keen though they were to re-establish a gold standard and get back to normal trading, tried to put the cart before the horse. Here, national pride in their previous currencies took over. Instead of taking their punishment in a practical way by re-setting their currencies at their new depreciated values against a standard weight of gold, they tried to re-establish their currencies to pre-war levels.

It didn’t work, and we’ve had nothing but constant booms and busts ever since. And they’ve been increasingly frequent and increasingly extreme. But what if the Chinese were to reverse engineer the history of our current problem and diagnose exactly why and when it started going wrong? Their economists are surely as capable of doing this as their engineers have when copying products. Indeed, the chances are very high that they’ve done this because, for the past 10 years, they have been calling on America to jointly establish a world trading currency based on something that is both valuable in its own right and stable in quantity. China has been repeatedly snubbed. America wants to retain its dollar as the No 1 world currency.

That China is now the largest domestic gold miner and refiner in the world and, in the last two years or so, has been increasingly buying gold in the world market place as well as a few gold mines here and there around the world when allowed to (e.g. Canada and Brazil), suggests very strongly that it has a fully-designed Plan B on its drawing board awaiting only the undivided attention and agreement of both the Eurozone and America when their currencies finally come to nought.

Will it be a G7 or a G2 solution?

Yesterday, the finance ministers of the G7 (the US, UK, Germany, Japan, France, Italy, Canada) met in a hastily organized emergency session in an attempt to save the Eurozone. They gave out no agreed solution at the end. Yesterday also, President Hu and President Putin met together in Beijing. They gave out that it was about Afghanistan because they also had Iran, Mongolia, India, Pakistan and Afghanistan along, too. You can be certain, however, that by far the most important item on the agenda by a long, long chalk was a more private G2 meeting concerning the future of the Eurozone.

Just as a collapse of the Eurozone economy would produce a far deeper recession than already exists in the G7, so would it do the same for the G2. The Eurozone is China’s biggest market for its exports of consumer goods. The Eurozone is Russia’s biggest market for its exports of natural gas. (Indeed, without those exports, it is doubtful whether Russia would be able to build all the facilities it needs in order to host the 2016 Olympic Games.)

If we are realistic, the Eurozone problem is insoluble. The only point worth discussing is what to do about the pieces that will be left after its collapse. The G7 have kicked the can down the road again by saying that the Eurozone will be discussed at a G20 meeting later this month (by which time it is highly possible that both Greece and Spain will have become detached). The G2 have said nothing. So far, China has said that it will not help the Eurozone corporately until it sorts itself out. Russia cannot help. Besides, its wealth is mainly in the hands of oligarchs of varying degrees of criminality. They’re unlikely to put their hands in their pockets.

If any constructive post-mortem plan is, in fact, devised, then we’ll have to see whether it will be from the G7 or the G2. My guess is that it will be the G2 because it’s only been China and Russia that have been trying to persuade America for years to adopt a world trading currency which would have avoided all the current currency problems. Perhaps America will be persuaded this time as unemployment among its young starts to approach the proportions that already exist in most Eurozone countries.

Where are the new products?

It’s very much looking as though Romney will become the next President of America. Until recently, Obama has had a slight edge in the opinion polls but the latest devastating unemployment figures, following months of poor ones, suggest that the tipping point has now been reached. Apart from all the usual bombast that both sides will be using in the next few months, all that Romney needs to do is reinforce the fact that he is an experienced businessman and Obama isn’t. Even if the Democrats charge Romney with negative business decisions in his past career, all he needs to say is that he’s learned from his experience whereas Obama has no relevant skills he can work on.

What slightly surprises me about Romney is that so far he hasn’t mentioned one outstanding feature of Mormonism. This is that there’s no unemployment among Mormons. Like the Amish, they look after their own. Perhaps I’m only slightly surprised because if he were to draw attention to his Mormon faith, it would powerfully reinforce the opposition of evangelical Christians, a substantial part of the US electorate — over one third according to an estimate last month by The Economist. And half of those are Republicans, too! He wouldn’t get elected. He’ll continue to downplay his Mormonism.

Like the Quakers in England 200 years ago, present-day Mormons in America comprise an almost complete business infrastructure of their very own. The proportion of business people among them is so high that any born Mormon, or any sincere new convert, can be found a job. In the Great Depression of the 1930s, when they didn’t have so many business people among them, the Mormon Church would buy farms or other labour-intensive businesses to absorb their own unemployed.

If — or, more likely, when — Romney is elected, you can be certain that, due to its reputation, recruitment into the Church of the Latter Day Saints will rise enormously from the 2% it is today in the US population. But unless he were able to supply new jobs pro rata (and at a high rate also) then it’s likely that membership would stabilize at a modest level. Besides, any jobs he would be able to create would tend to be labour-intensive with low incomes — such as the half-pay wages that General Motors now pay for newly-hired workers. It’s almost certain that none of these ‘Romney-jobs’ would be taxable. In one way or another, workers and their families would be recipients of state welfare rather than helping to pay back the enormous government debt that the US is now lumbered with.

Assuming that the Eurozone doesn’t collapse in the meantime or that China and Japan manage to sustain America by continuing to buy US Bonds (now approaching negative returns) what could Romney do?

Well, I’ll tell him. All he has to do is to think up four or five brand new iconic consumer products that are unique enough and attractive enough as printed cotton shirts, bicycles, radios, cars, TVs and PCs were in the past and which incentivised economic growth continuously for the past 300 years. The new products would have to be expensive enough to attract the rich first (to start the profit ball rolling), but also mass producible so they could then can work down in cheaper stages through all the social strata. (Mobile phones can’t do the trick, of course, because they don’t carry enough economic weight in the total GDP and, besides, intensive competition will make even the most sophisticated phones [with many TV channels] trivially cheap when the huge market of the undeveloped world becomes available within a few years.)

There you are. Mr Romney! Ask your Mormon elders to think up a few consumer products that are as exciting as the mobile phone — but different! As well as signifying status, they need to offer something quite different from any item so far. (And they needn’t come up with family helicopters!) If you were able to do so, then hundreds of transnational corporations, already sitting on massive profits they don’t know what to do with, would jump at the opportunities and get the whole economic machine going again. No problem.