Tuesday, March 07, 2006
The World's Wealth
The greatest and most secure store of value the world has ever known, the king of commerce, is without question gold. Some countries still back their currency by it. But it's ironic that we've chosen a commodity that serves almost no essential function. There are plentiful substitutes for nearly everything we use gold for.
We look to gold as a store of value and to back up paper currency because it's historically had the longest run as a currency itself, being coined for thousands of years. But there's nothing more intrinsic about gold than paper currency. The historical intrinsic value of gold was derived by its natural rarity and difficulty of acquiring it. A grain of sand, for example, makes for horrible store of value and means of commerce because it is so plentiful and readily acquirable by anyone. Gold was traditionally hard to get at. When it hasn't been, we've had gold rushes, as hordes of people have flocked to find it.
Gold has long had a value as a decorative commodity, but so has silver, copper, and various gem stones, none of which have come close to gold in terms of stature. Historically, the premium for gold has been due to its early global acceptance in trade made possible via minting. It's mostly coincident that gold became the king of coinage though. If it had not reached that status, gold would just be another metal. As for its use as a commodity copper and steel are the kings of metals.
Gold is found in nuggets or panned placer flakes, which are pure gold, or in hard rock / ore, which has to be processed to separate the gold from the quartz and other useless material. Either way, it originates out of the hard rock. Flacks or flecks of gold come are released from the disturbed ore over time by erosion, etc… and washed down into streams. Nuggets are created when flakes of gold are mashed together in a stream.
The value of finding gold has historically been related to its demand for coinage. As a metal it would otherwise probably be less valuable than copper and steel because it's not plentiful enough to use as a construction material. Without coinage a chunk of gold bearing ore would probably have just been another pretty rock perhaps maintaining value based on its unique color and a resistance to tarnishing. Rocks don’t get much prettier than a the geode and quartz can make for a pretty gemstone, but neither have ever reached the level of appeal of gold and diamonds, but that doesn't mean there's a logical or practical explanation.
So what's holding gold up now? Uncertainty? Seriously, there's less economic uncertainty now than there's ever been in the world. I believe the fundamental reason is wealth. The world has never been wealthier than it is today. There's never been a time more full up with frivolity. That's not a bad thing. It's because we're meeting our basic needs more readily than ever before. Machines are doing more of the work of producing our essentials than ever before.
Imagine a world in which machines built our homes entirely, machines planted and harvested crops following flags in a field with no farmer aboard, no one ran the machines that manufactured our clothes. We would then concentrate all our effort on building more machines to make more things for us, most of which we didn't need, but only wanted. We've sort of reached that point. The percentage of people working to supply our basic needs of staying sheltered, clothed, and fed is the smallest ever.
I saw a documentary recently about Chinese workers in a factory that made Mardi Gras beads. The basic premise was the horrible conditions the workers toiled in to produce a product that was thrown away so frivolously by American partygoers who had no idea what some worker on the other side of the world went through to make them. The producers showed footage of the Chinese workers to partiers at Mardi Gras who invariably felt bad and disgusted by it. But the very important point that was not emphasized was that the Chinese workers responded to the American's reaction by saying please don't stop buying our beads because basically making beads is a heck of a lot better than working the fields.
But the only reason Americans can buy beads that someone else worked very hard to make only to discard them, as readily as the paper fast food comes in, is because our basic needs are being met so cheaply. And they are being met so cheaply, not so much because of the near slave labor meeting them, but because of productivity. The Chinese workers wouldn't even be available to work in factories if they were otherwise preoccupied with their own subsistence, as all cultures were at one time.
Consequently, the world is the wealthiest it has ever been and therefore the most frivolous and most able to focus on securing its accomplishments. In historic times of frivolity gold was always demanded in frivolous excess. So I suspect today's demand for gold has more to do with frivolous excess than security, or the insuring security that only wealth can obtain, as opposed to the premonition of global financial collapse.
Speaking of historic times of relative wealth such as the Greek and Roman empires, perma-bears like to point to the collapse of these great civilizations to predict the demise of our own. But what they don't understand that fundamental economics that made those societies wealthy is very different from what makes societies wealthy today. The difference was that they acquired their wealth by stealing it from other societies. They made modest productive progress in agriculture via irrigation and terracing, which freed more people from the basic necessity of working solely at subsistence.
What did they do with their free time and manpower? They didn't use it to become even more productive, rather they used it to build armies, which in turn were sent out to pillage and basically tax the less efficient societies that surrounded them. They took until there was nothing left to take. They cannibalized their own subsistence by killing the people they were stealing from. They killed the goose that laid the golden eggs.
And that's the key difference. Our wealth is sustainable because, while we do use our leisure to watch Sponge Bob cartoons and play video games, we also use a lot of it to devise ways to be even more productive. The Greeks and Romans merely devised ways to rape, pillage, and plunder. When they wanted more grain they went out and took someone else's. The farmer fought back and was murdered and the next year that dead person didn't grow any grain to take. Today we don't go into another country and take what they have, instead we go there and build a factory and employ them. It's basically the equivalent as if in ancient cities Rome had gone into another city and built irrigation canals for them so they could produce enough grain such that Rome could have its share and the farmer would be better off too. Individual unsustainable societies have failed throughout history, but productivity, progress, and civilization have hardly wavered in their upward trajectory. Ok, there were the dark ages.
posted at 5:23 PM
