If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II: The Case for $2,500 Gold in 2012

In a recent New York Times editorial, Christina Romer, former chair of the Obama’s Council of Economic Advisors, essentially dismissed the view that manufacturing was a crucial component to any economy. Readers will recall my most recent essay on the boom in US exports, The Price of Growth, in which I also highlighted the skepticism of the economics establishment toward exports.

Subsequent to that essay, Annie Lowrey, the new reporter covering economic policy at the New York Times, wrote a fine overview piece that essentially echoed my own view: The US has a new industrial policy to bring back manufacturing and boost exports. The two are obviously inter-related. And it’s revealing how many mid-career professionals in America are completely oblivious to the newest thinking on the subject. Indeed, we are learning more about the crucial dynamic mentioned briefly in Part I, which is that a relationship between design and manufacturing requires a close physical proximity to flourish.

Here is Alexis Madrigal on the subject as early as 2010, in an Atlantic piece, Key Question: Can the US Innovate Without Manufacturing?

An audience member asked a simple question with deep implications: if manufacturing continues to move offshore, can the United States continue to innovate? The premise behind the question, as Splinter explained, is that manufacturing isn’t just where ideas are put into practice, but a key part of the innovation ecosystem. (He should know: he once ran Intel’s top chip fab.) It’s possible, the question suggested, that the factory itself is a site of innovation because the people closest to the work of building things know how to make them better. That view is a challenge to the simplified idea that research, product development, and manufacturing are discrete steps.

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Between you and me, I think I’ve shown that the US is only at the very start of a long road back to recovery, which will not only establish a New Normal, but will have to include exports, manufacturing, and an economy with less surplus capital. The same holds true for the other two major players in the OECD puzzle, Japan and Europe.

So what does this mean for the financial markets, and in particular, gold?

If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II: Surviving a Currency Crisis

The Biggest Risk

The biggest risk here is not a sudden collapse of the currency that would catch everyone off guard some Tuesday afternoon in a matter of minutes. The biggest risk is in not believing that the collapse is underway. Most people are going to lose most of their wealth simply because they could not mentally and/or emotionally grasp what was actually happening.

Consider that in Greece the banks are under a tremendous run, losing up to 25% of total deposits. Sounds extreme, but let’s look at it another way: Just what are the 75% of remaining depositors thinking? How could they leave their money in a Greek bank for another minute? What are they thinking? Probably that somehow things will get better, or some other rationalization that supports their decision to hunker down and hope.

In reading When Money Dies, a historical account of the events leading up to and through the Weimar hyperinflation in Germany, one sees anecdote after anecdote of families and individuals impoverished by their own disbelief and inaction. Most just sat numbly by waiting for the currency to come back, or buying government bonds because they were asked to as a matter of patriotism, or just trusting that the government would figure something out, hoping that things would soon turn around. 

In Argentina, the same dynamic occurred. We’ve heard in detail on this site from Fernando “FerFAL” Aguirre how those who lost most were the ones who hesitated to acknowledge the reality of what was happening until it was too late.