Monday, March 06, 2006

On Gold and savings

Gold consumption in Saudi Arabia and the UAE rose by 13 per cent and 10 per cent respectively last year, despite high global prices, the World Gold Council said in a report. Reuters

con·sume Listen: [ kn-sm ]
v. con·sumed, con·sum·ing, con·sumes
v. tr.

1. To take in as food; eat or drink up. See Synonyms at eat.

2. a. To expend; use up: engines that consume less fuel; a project that consumed most of my time and energy. b. To purchase (goods or services) for direct use or ownership.

3. To waste; squander. See Synonyms at waste.

4. To destroy totally; ravage: flames that consumed the house; a body consumed by cancer.

5. To absorb; engross: consumed with jealousy. See Synonyms at monopolize.

If the verb "consume" means what the dictionary says it does, and the noun "consumption" means the act of consuming as the dictionary also argues then Gold is rarely if ever consumed. Gold is saved.

Because of this long standing behavior, state guarantees of currency convertibility to Gold, as in the classical Gold standard, tends, I believe, over the long run to lead people to view money as a form of savings. By extension, if the leaders of a nation want the people in that society to save, as in the act of consuming less than they produce, make your currency convertible to Gold.

By contrast, currency convertibility to debt, as is currently the case in the US, tends, I believe,
over the long run to lead people to view money as a means of paying off debt or meeting other obligations. If the leaders of a nation want the people in that society to go into debt, as in the act of producing less than they consume, make your currency convertible to debt. Evidence suggesting this relationship can be seen in rising debt levels even since the Nixon administration closed the gold window.

If VP Cheney thinks, as this article reports, that Americans need to save more, I would suggest one short term and one long term solution.

Over the short term, he should realize that one single "body" is most to blame for the lack of savings in the nation, the government.

Moreover, the larger the corporation of government becomes, the more its policies will become the economy. If government revenue was 5% of GDP, even a very large deficit of say 40% of revenue would equate to a deficit to GDP ratio of 2%.

However, currently, government revenue is 17% of GDP. Thus the current deficit of 20% of revenue leads to a deficit to GDP ratio of 3.5-4% of GDP.

Over the long run, my read of economic history argues that currency convertibility to something that is saved, like Gold, will, over time, lead people to save more.

Last week, I wrote of the centralization of reserves that accompanied the passage of the Federal Reserve Act and the centralization of consumption that has accompanied the passage and growth of the Income Tax act. If the government was a person, I would tell him or her, you wanted centralization, thus you are now both the problem and the cure.

Physician, heal thyself!