Insider

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

Part II – The Transition to a Post-Friction Economy

In Part I, we pursued the idea that much of the US economy is, in essence, unproductive friction that is overcome with vast borrowing — itself a form of friction — and the importing of fossil fuels. We also noted that the Central State/cartel “capitalism” partnership has greatly expanded the unproductive, uncompetitive “friction” segments of the economy and has limited consumer “choice” to purposely-selected menus designed to appear like a “free market” while benefiting State fiefdoms and private-sector cartels.

Entrenched Interests Keep Our Markets From Being Free

Looking at the sources and costs of friction gives us some insight into issues that are often seen as political — for example, the costs and benefits of borrowing trillions of dollars into existence every year and the costs/benefits of State regulation. Once we recognize how rising systemic friction will eventually freeze the system, then we also recognize that the path we’re on is unsustainable, and the political “rightness” or “wrongness” of increasing debt to fund the forces of friction becomes irrelevant.

The same can be said of State regulation. Given that one of the purposes of government is to protect the nation’s “commons” — air, water, public lands, and other shared resources — then some regulation is necessary to limit exploitation and predation of the commons by either private parties or the State itself. 

But we have confused productive regulation with regulation that achieves little beyond diverting funds to unproductive segments of the economy. There are hundreds, if not thousands of examples in every sector from criminal justice to farm subsidies to health care.

How about the enormous expense of the “war on drugs” and the resulting prison complex and criminal justice system? Are the benefits being reaped — marginal, or even counterproductive, in many analyses — worth the expense? Those employed in these systems naturally feel the benefits far exceed the costs. But self-interest is simply not an accurate measure of friction; ultimately, only a free market of free citizens can make that assessment.

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

Part II – What to Expect for Gold in 2012

As I covered in Part I of this report, Dr. Krugman uses Hotelling rather creatively to explain the strength of gold from an investor’s point of view. I actually think Krugman is also applying a kind of traditional, discounting method of valuation. In essence, he is arguing that because interest rates are so low, the penalty normally associated with holding a non-income-producing asset, like gold or even cash, has evaporated. Indeed, this is the deflationist view, that cash is king because its purchasing power is increasing while the price of goods and services is falling. However, for those of us who prefer gold to cash, we are asking that gold provide additional services by offering protection against instability in the system and maintaining purchasing power more completely over all prices produced by economists and governments, not just price indexes.

But what about gold from the producer’s point of view? Remember, Hotelling says there’s a declining incentive for producers to extract and market their natural resources if the price appreciation taking place in situ (in the ground) is greater than the capital they could earn after having turned those resources into cash. Let’s take a look at more than a century of global gold production, updated with the latest data from the USGS.