Before I get to my charts below, I need to provide a little bit of context. If you follow fintwit at all, you might be seeing Joe Weisenthal pop up more and more in your feed. Joe is a financial writer/personality for Bloomberg. Judging from his recent body of work, Joe is a pro-Fed policy guy who loves to discredit Gold and “poke” advocates of precious metals. In light of bond yields getting wrecked and $14 TRILLION in negative yielding debt globally, like any good Fed-loving soldier, Joe has been doing his part to suggest this is all fine and any ideas that go against the fiat dogma of our time are just silly. He’s been dropping some bangers in his quest to go full on troll in recent weeks.
Negative rates aren’t natural. Lend me two hammers today and I’ll give you back one hammer tomorrow; are we even? A five year old knows this is absurd.
It was funny watching this one get blown up because banks actually ARE trying to get your fifty bucks. More accounts = more fees, overdraft, minimum balance, service fees, etc…
I wonder how millennials living paycheck to paycheck feel about that question. Monetary policy at the Fed has created massive inflation in at least 3 areas: Equities, Student Loans, and HOUSING. Millennials have been hit in two of these areas. While they’ve been big victims of the higher education bubble, they’ve also been completely priced out of the housing market as a result of cheap liquidity driving up prices. So, yes, actually, that massive balance sheet at the Fed has hurt a lot of people in a meaningful sense.
Sven took issue with that one:
In all seriousness, Joe’s takes are clown show city. And every time his silliness pops up in my feed I have to remind myself that he’s just playing a character. That he’s not actually this stupid – nobody could possibly think negative interest rates are a good thing. Don’t engage trolls, they just want attention, that’s kind of the rule to keep your social media sanity. Yesterday though, I couldn’t help it.
I decided to test the theory that Joe is just playing a character by asking for a choice in what should have been an obvious scenario. I wasn’t disappointed:
Without skipping a beat, Joe picked his God, Fed paper. And 9 of his minions liked it. The answer should be obvious. You pick number 3. Gold preserves wealth. Fiat dollars do not. Gold-backed dollars will get debased over time, making it better than pure fiat, but still flawed. The decay of fiat over time is THE reason why everyone is chasing growth in a ponzi-market that is already at high valuations. Because of monetary policy from the Federal Reserve, you can’t just park your dollars in a savings account and collect interest the way you could 40 years ago. But what if you really COULD be paid in Gold ounces by your employer the same way you get paid in dollars? How would your wealth be different?
Let’s pretend I was born in 1952. After graduating college, I entered the workforce in 1974 and retired at 64 in 2016. Let’s say I made exactly the Median Personal Income from 1974 through 2016 and add up all of my income earned over the life of that entire career. What would my total income be in current/non-adjusted dollars? In 1974, I’d have started earning $5,335. When I retired, that income was $31,099. Adding up the annual earnings for every single year, I made $752,070. Not too bad. What if instead of federal reserve notes, I was paid the median family income equivalent in Gold ounces every year? In 1974, I would have started at 33.4 ounces of gold ($160/oz). My final year in the workforce, I earned just over 24.8 ounces of gold ($1,252/oz). Adding up all of the ounces of gold I earned in my career, I made 1,662.9 ounces of gold. At a 2016 price of $1,252, my total earnings turned out to be just under $2.1 Million. I almost triple my earnings compared to dollars. By the way, the dates here aren’t arbitrarily chosen, this is the data sample that the Fed provides. You can check for yourself HERE. It is interesting that pre-Nixon shock data isn’t provided. Those gold ounce payouts before 1971 would have been… robust.
Obviously, this is not a realistic comparison because it doesn’t account for 2 key variables:
1) the average person needs to spend most of what they earn to survive
2) dollar deposits can grow via interest accrual in a way that Gold can not
So, let’s account for both of those variables with a little experiment. Let’s take all of the same FRED Median Personal Income data, but now let’s say that I’m saving 10% of my income annually. I’m parking it in an interest-bearing savings account, and my bank is paying me the annual average of M2 Owned.
The story is clear. In our little experiment, since the banks stopped paying interest, savings measured in Gold payments have doubled in the last 10 years and Gold is far and away out-performing USD with interest. And this is just Gold at the 2016 price. Right now, Gold is about 20% higher than it was then. The line graph above is an example of the beauty of compounding interest – it actually gave the dollar the edge in the 90’s with such high interest rates in the decades prior. For good measure, let’s look at this same data but for someone who entered the workforce after 2000.
In the time period above, interest rates on savings haven’t sniffed 4% – they’ve actually been well below 1% for a great amount of this sample. And not surprisingly, savings in the dollar have lagged Gold the entire time. And what do we think is on the horizon? Are we expecting higher rates to suddenly start rewarding savers? If the rest of the fiat-world is any indication, higher rates aren’t coming anytime soon:
So, if you follow Joe, appreciate him for what he is. He’s not an expert who is helping the financially inquisitive to grasp why negative returns on bond yields should be considered normal; he’s a caricature of a Keynesian economist drunk on stimulus who happens to contribute to Bloomberg. Basically, he’s The Onion.
Got Gold yet? BTFD.