Zombification & Gold

From Bloomberg:

Japanese Finance Minister Jun Azumi will be rewarding investors who buy more than 10 million yen ($129,000) in reconstruction bonds with gold in the government’s latest attempt to bolster demand for the debt.

Individual investors who hold the bonds for three years will be eligible for a gold commemorative coin valued at 10,000 yen, the Finance Ministry said in Tokyo today. At 15.6 grams, (0.55 ounces), it would be worth about $948 based on prices for the precious metal. Only a limited number of coins will be issued, the Finance Ministry said in a statement.

Azumi, whose hometown was devastated by the March 11 disaster, said today he bought 1 million yen of the debt to support rebuilding efforts from the March 11 earthquake and tsunami. Offering gold bolsters the value of the return on the debt, which will be at 0.05 percent for the first three years.

Japan — the prototypical case of zombification — has kicked the can all the way to the end of the road. How easy is it for an investor or an institution to accept a near-zero bond yield when they could buy a piece of gold that has averaged a 17% yield this decade? Not easy at all. That is why — if governments want to kick the can and avoid liquidation at all costs  — governments will have to find a way to limit gold yields. I outlined a fairly outlandish (but undoubtedly Keynesian) method a couple of months ago — a new stimulus package to mine gold. Of course, there is a more devastating alternative with a historical precedent, which is confiscation, but whatever they do they need to address the fact that a form of economic activity that produces nothing — buying gold —  is far more attractive than investing in stocks or bonds or (any fiat-denominated instruments).

Now I don’t expect America to get to the stage Japan is at — America is at its core a free-spirited, libertarian nation, and years of austerity, unemployment and zero growth will foment revolution. Japan, by contrast, is a very conservative, and conformistic nation. Jobless Japanese kids — unlike their British and American contemporaries — do not seem to riot. So I never expect the American or British Treasuries to get to the stage where they sweeten the deal on their crummy debt by throwing in gold coins.

But the lesson here is all the same — without some kind of miracle, bailing out zombie institutions and financial systems kills creative destruction (the heart of capitalism), which kills growth, and makes gold an extremely attractive investment. That’s because it doesn’t lose any intrinsic value, while stocks and bonds are blighted by systemic dereliction, monetary mismanagement, and weak demand.

Frankly, I’d rather live in an economy where gold is not such an attractive investment, where stocks and bonds trade on fundamentals rather than the latest interventionist hyperbole from Benny at the Fed, where products and firms succeed and fail based on their inherent characteristics, rather than on whether the Euro will fail or not. But until capitalism is restored, until firms are free to succeed and fail on their own merits, gold — the true symbol of capitalism in a perverted system of corporatism — will keep going up and up.

Zombie Economics

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8 thoughts on “Zombification & Gold

  1. Pingback: New Independent Research: Gold Is Crucial Diversification – Hedge Against Monetary and Systemic Risk » A Taoistmonk's Life

  2. Pingback: Zombification & Gold « azizonomics | My Gold Fix

  3. Pingback: Zombification & Gold « azizonomics | Algesr

  4. Maybe the entire way of framing things (in economics) needs to be changed:

    http://dailyreckoning.com/the-developed-world-shifts-from-more-to-better/

    Or John N. Gray: “the project of promoting maximal economic growth is, perhaps, the most vulgar ideal ever put forth before suffering humankind.”

    An example: I’d rather be a Japanese living in their non-growth (but not hollow) economy of the last 20 years (enjoying the highest standards of living & lifespan) than living in the super-growing India.

    • PS: To clarify, maybe once the Japanese reached the limits of the current technology, growing as it is viewed in standard economics did not even make any sense – on the contrary, maybe thinking in the same growth-oriented framework was actually harmful.

      • I disagree with you about Japan, Andrei. They have massive social problems — specifically growing unemployment, high youth unemployment and a rigid non-meritocratic social structure. Bonds and CDs receive crummy returns, as they have the highest total net debt in the world. They have had to rig markets (specifically, Japanese banks are legally obliged to invest in government debt) to keep up the pretence. Recently, they even had to promise to give away gold coins to those who bought large amounts of debt. Specifically, I think they need to commit to intergenerational wealth transfers — older people need to stop investing in bonds and start giving their kids and nieces and nephews entrepreneurial loans. But in a society where stock prices are lower than they were 20 years ago, who the heck will commit to that?

        Japan’s saving grace is its conservatism, and its lack of civil disorder. This has meant that their society can zombify without the unrest we will see in Western nations under similar conditions. Eventually, they will have to erase the debt and start over, just like we will in the West. But they have been masters of kicking the can down to the end of the pier.

      • Yes, they have problems. But what I wanted to say is that perhaps they have brought those problems onto themselves by applying the wrong economic tools and by having the wrong economic framework (i.e. obsession for growth – they didn’t get growth, perhaps it was even impossible as defined by the “standard” framework in economics, and instead they now have that massive debt/gdp ratio). But even after their debt blows up, I think they’ll still be better off than many other countries with much smaller debt/gdp ratios.

  5. “But what I wanted to say is that perhaps they have brought those problems onto themselves”

    Actually, this is what you were saying. So I guess my contribution was to point out the damaging obsession for growth instead of looking at what’s going on and choosing what to do next based on those observations (this is probably nothing else than the “Austrian” way).

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