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Willem Buiter Apparently Does Not Like Gold, and Why

Jesse debates Willem H. Buiter on the subject of Gold. Willem H. Buiter is a Professor of European Political Economy, London School of Economics and Political Science, former chief economist of the EBRD, former member of the MPC, and adviser to international organisations, governments, central banks and private institutions. He writes the FT’s Maverecon blog. – Ilene

Willem Buiter Apparently Does Not Like Gold, and Why

goldCourtesy of Jesse’s Café Américain

Dr. Willem Buiter of the London School of Economics, and advisor to the Bank of England, has written a somewhat astonishing broadsheet attacking of all things, gold.

I have enjoyed his writing in the past. And although he does tend to cultivate and relish the aura of eccentric maverick, it is generally appealing, and his writing has been pertinent and reasoned, if unconventional. That is what makes this latest piece so unusual. It is a diatribe, more emotional than factual, with gaping holes in theoretical underpinnings and historical example.

I suspect that commodities such as oil and gold are giving many western economists with official ties to government monetary committees a stomach ache these days. Perhaps this is just another manifestation of statists and financial engineers facing the music, as illustrated by the second piece of news from Mr. Buiter on the US dollar, from earlier this year.

Here are relevant excerpts from his essay, with my own reactions in italics.

Financial Times
Gold – a six thousand year-old bubble

By Willem Buiter
November 8, 2009 6:02pm

"Gold is unlike any other commodity. It is costly to extract from the earth and to refine to a reasonable degree of purity. It is costly to store."

This is inherent to its rarity. It is desirable because it is scarce and useful, and this requires greater protection against theft or accident. Euro notes are far more costly to store than the paper and ink which is used to make them, at least for now.

"It has no remaining uses as a producer good – equivalent or superior alternatives exist for all its industrial uses."

This is an absolute howler to anyone who cares to look into industrial metallurgy. Gold is one of the most malleable and ductile of metals, with excellent conductive properties, slightly less than silver but better than copper, and it is remarkably resistant to oxidation. It does not tarnish. It is widely used in electronic and medical applications for example. What limits its use is that it is scarce, it is expensive, and that there are other competing uses, not that superior solutions have been discovered based on their fundamental merits.

"It may have some value as a consumer good – somewhat surprisingly people like to attach it to their earlobes or nostrils or to hang it around their necks. I have always considered it a rather vulgar metal, made for the Saturday Night Fever crowd, all shiny and in-your-face, as opposed to the much classier silver, but de gustibus…"

Silver is indeed an attractive metal, and had been used for jewelry and coinage throughout history for its unique characteristics. Silver was the metal of the common man, and gold was the metal of kings because of its greater beauty and scarcity.

The garishness and lower class status of gold is of course reflected throughout history, in the funereal artifacts of the Pharoahs, the Ark of the Covenant, the mask of Agamemnon and the adornments of Helen of Troy, the exquisite beauty of the Emperors of China, and the treasure of the Aztecs. Perhaps Willem is merely used to the cheap ‘bling’ being sold in market stalls, and should occasionally shop on High Street for better goods.

"Because to a reasonable first approximation gold has no intrinsic value as a consumption good or a producer good, it is an example of what I call a fiat (physical) commodity. You will be familiar with fiat currency. Unlike what Wikipedia says on the subject, the essence of fiat money is not that it is money declared by a government to be legal tender.

It need not derive its value from the government demanding it in payment of taxes or insisting it should be accepted within the national jurisdiction in settlement of debt. Instead the defining property of fiat money is that it has no intrinsic value and derives any value it has only from the shared belief by a sufficient number of economic actors that it has that value.

The “let it be done” literal meaning of the Latin ‘fiat’ should be taken in the third sense given by the Online Dictionary: 1. official sanction; authoritative permission; 2. an arbitrary order or decree; 3. Chiefly literary any command, decision, or act of will that brings something about."

This is where Willem’s tortured reasoning reaches a crescendo of nonsense. Firstly, we have already shown that gold has many industrial and decorative uses contrary to his misstatements, and has been valued throughout recorded history in its own right in diverse societies and cultures. By his definition anything that is priced in the market is fiat. It is a broadening of the definition so as to make it useless, or a narrowing of the definition to a few ‘essentials’ so again to make it useless.

The definition of fiat with regard to any instrument of the state is perfectly well known, despite his attempt to distort it. The ruling authority makes a decree, and let it be done. Willem begins to confuse a fiat currency with barter, or custom. What is customary is not ‘fiat’ but a popular convention for fundamental reasons. Or it is done by law, and it is ‘fiat.’ That is the difference between a decision of the marketplace and a regulation from a ruling authority. No wonder European banking is in such a mess, if this is their conception of value.

The best way to explain this perhaps is by example. Let us imagine that tomorrow young Tim of the US Treasury announces that the US government will no accept Federal Reserve notes in payment of legal debts, public or private, and that further the US was issuing a new currency called the amero for which Federal Reserve notes would be redeemed at 100 to 1, that is 100 FRNs for one amero.

What would the market price of FRNs do in response to this? Is this outlandish? No it is remarkably common in the history of paper currencies. I witnessed this personally while in Moscow during the collapse of the Russian rouble for example.

That, Willem, is what is meant by fiat, the contingency of value upon some official source. Governments can effect the price of any commodity negatively, by force of law, but their value is not contingent on government backing per se, except in instance of subsidies, but based on the utilitarian decision of the marketplace.

I don’t want to argue with a 6000-year old bubble. It may well be good for another 6000 years. Its value may go from $1,100 per fine ounce to $1,500 or $5,000 for all I know. But I would not invest more than a sliver of my wealth into something without intrinsic value, something whose positive value is based on nothing more than a set of self-confirming beliefs.

It is fortunate indeed that Willem does not wish to argue this point, because his proposition on this score smacks of petulant buffoonery. In the words of financier Bernarnd Baruch, "Gold has worked down from Alexander’s time… When something holds good for two thousand years I do not believe it can be so because of prejudice or mistaken theory." And he is right, unless you are looking at history very selectively.
There are also historical benchmarks for the value of gold, that being one ounce of gold for a man’s suit of clothing that holds remarkably well. How then could anyone say that gold is in ‘a six thousand year bubble?’

But why such an odd, almost hysterical essay now, with such an outlandish title unsupported by any data?

It is probably simply the rankling irritation that all statists and financial engineers feel when confronted by something that resists their control and manipulation. Or it may be related to some unfortunate decisions made by the Bank of England, or the Bundesbank, to enter into trades with the people’s gold on the well-intentioned advice of their economists, a decision which is now coming back to haunt them, causing them to peer into an abyss of public anger.

Who can say. But there is a time of uncertainly in stores of wealth and currency coming. Below is a new article by a European economist named Buiter, who is predicting that the US dollar will collapse. That is because the US dollar is contingent on the actions of the Obama Administration, the Congress, and the Federal Reserve.

And gold is not, unless the US begins to emulate Herr Hitler. "Gold is not necessary. I have no interest in gold. We will build a solid state, without an ounce of gold behind it. Anyone who sells above the set prices, let him be marched off to a concentration camp. That’s the bastion of money."

And Willem, if you do not understand that, the principle of the contingency of fiat money, you understand nothing of economics. But I think you do understand it. Perhaps you are merely grumpy today, having eaten a bad sausage, with a bad case of dyspepsia. It does happen, but not to eminent Financial Times columnists and distinguished professors. It seems as though he just doesn’t like what it is doing, rising in price, and the real story may lie in why he and the brotherhood of western central bankers do not.

Financial Times
Willem Buiter warns of massive dollar collapse
By Edmund Conway
5:34PM GMT 05 Jan 2009

Americans must prepare themselves for a massive collapse in the dollar as investors around the world dump their US assets, a former Bank of England policymaker has warned.

"…Writing on his blog , Prof Buiter said: "There will, before long (my best guess is between two and five years from now) be a global dumping of US dollar assets, including US government assets. Old habits die hard. The US dollar and US Treasury bills and bonds are still viewed as a safe haven by many. But learning takes place."

He said that the dollar had been kept elevated in recent years by what some called dark matter" or "American alpha" – an assumption that the US could earn more on its overseas investments than foreign investors could make on their American assets. (I think it is related to a subsidy, a kind of droit de seigneur, granted to the dollar by the central banks as their reserve currency in lieu of a gold standard. And that is the regime that is collapsing with the overhang characteristic of a Ponzi scheme. – Jesse) However, this notion had been gradually dismantled in recent years, before being dealt a fatal blow by the current financial crisis, he said.

"The past eight years of imperial overstretch, hubris and domestic and international abuse of power on the part of the Bush administration has left the US materially weakened financially, economically, politically and morally," he said. "Even the most hard-nosed, Guantanamo Bay-indifferent potential foreign investor in the US must recognise that its financial system has collapsed."

He said investors would, rightly, suspect that the US would have to generate major inflation to whittle away its debt and this dollar collapse means that the US has less leeway for major spending plans than politicians realise…"


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