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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