Most of my friends think that I’m pretty good with money and it primarily has to do with my daily obsession with the economy and my study as a Finance major at Northeastern University Business School. I was asked last week by four different people to write my thoughts on the economy, most specifically the price of gold and what I think will happen, so here is what I have to say.
First of all, too much of America, including its citizens and government, in my opinion, think carrying a large amount of debt is acceptable and normal. I think this primarily has to do with the belief that printing money has no real consequences and that borrowing money is the right way to get rich. Nothing could be clearer about this than what happened in the housing market. We all know that the housing boom was primarily caused by a willingness of banks to loan money to people who could not afford the loans. The banks figured they didn’t have to worry because the price of real estate “always goes up,” thus, the loans didn’t really need to be secured by the borrower. What the banks didn’t foresee, amazingly, was that this very act of lending ridiculous amounts of money to just about anybody, was the primary cause of real estate going up.
In my opinion, this line of economic thinking has been applied to the dollar ever since the first politician figured out he could get elected by telling people that he would cut taxes while simultaneously increasing government jobs and services. These men and women would win, get into office, and then realize that if taxes weren’t going to bring in the money to pay for social programs, we would have to borrow the money to pay for it and just have the Federal Reserve print more money.
In the last 10 years, this money printing, like mortgage lending, has gotten wildly out of control, and a fundamental principal of economics has been ignored. If dollars are scarce, they are worth more. If they fall from the sky off the presses of the Federal Reserve, they are worth less. The Federal Reserve has been called upon to print money to pay for massive financial bailouts, wars, and a too-massive stimulus programs. This has been hailed as good, but the elephant in the room is that doing all of this has decreased the value of the dollar as a currency. Thankfully however, other currencies are suffering from similar problems and as such, the dollar and other currencies are all fighting the battle of massive, massive debt that continues to grow and America is front and center.
And so we come to gold, which is, in itself, a currency; it is money and nothing more, and you simply cannot create more gold out of thin air. You have to mine it and search for it like any other commodity. The reason that gold has gone up in price has very little to do with a mania for gold, and very much to do with the fundamentals that drive the price of gold up, which is inflation and a flight to a “safe” currency.
Do I think gold is a bubble at current levels? No, I do not. If gold were a bubble, you would already own it, and so would your neighbor, and your other neighbor would be borrowing money from a bank in order to buy it. So do I think gold will go up? Yes, without a doubt, absolutely.
Until we as a nation begin to think differently about our money and about debt, and act on it, gold will become more and more attractive to the average investor as it is now much easier to acquire ownership of it. Just like how a man out of work could get a loan to buy a house he couldn’t afford (and how the banks knew he wouldn’t be able to afford it), our nation is now getting loans from the rest of the world that we can’t afford (and other nations know we can’t afford) in order to keep our economy going. In my opinion, this behavior is by far the most dangerous threat to our country. I cannot believe that more people aren’t taking it seriously.
Hopefully, we can get a grip on things before they get out of control, though it’s not unreasonable to say that things aren’t already out of control. But until America is willing to take the pain of really dealing with our debt, instead of borrowing and printing more in order to not have to deal with it, I’m convinced that we will see a third stimulus by the Federal Reserve, the debt ceiling raised, and a continuous long term increase in the price of gold and other commodities until the climate changes on how we view our own currency, or until there is a currency crisis and we are forced to accept that we can’t sustain this economic path.
I also want to make a point that this has absolutely nothing to do with the Republican point of view on the Democrat point of view. How you look at this has nothing to do with what reality is. [/expand]