US Income Rises?

Yesterday the NY Times ran an article headlined, "Average U.S. Income Showed First Rise Over 2000".

The big claim is that after peaking in 2000, incomes fell, bottoming in 2003, and have now climbed back to make new highs in 2006.

The author examines IRS data showing average Adjusted Gross Income and Wages and Salaries as reported on US tax returns. The numbers quoted are a bit confusing – some are adjusted to 2006 dollars, some are totals and some are averages. But one thing is clear to me: stated in gold, Adjusted Gross Incomes in 2006 are down about 50% from their 2000 levels, about where they were in 1995. Wages and Salaries, stated in gold, are also down about 50% from their peak in 2000.

I'm not sure how useful this data is, as Adjusted Gross Income is merely a number used for calculating taxes, and is subject to all kinds of exclusions, deductions, and so on, that relate solely to the complexities of the tax code. I prefer to watch the Per Capita Disposable Income, a number reported monthly that shows on average, the money available after taxes for consumption, investing and saving. This number also fell about 50% from 2000 to 2006, and has continued to fall since then. It is currently about where it was in the late 1980s.

People do have more dollars to spend… but those dollars are worth much less. Don't be fooled! Make sure your income and net worth are rising when measured in gold.

AGI and Wages in gold grams

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Wages and Sins

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Recently I was in Vancouver, BC for the Agora Financial Symposium, which carried the tagline "A View from the Peak". There were many peaks discussed and analyzed: oil, food, water and debt, to name a few. The price of gold and silver got a lot of discussion, and forecasts abounded. Discussions and opinions were not limited to the speakers, of course – the hallways, restaurants and sidewalks were filled with animated discourse, colorful scenarios and useful information. As you can guess, I loved every minute of it!

Even though I missed only a few of the general sessions, I can't wait to get my hands on the recordings to go through them again for profitable ideas, and to clarify in my own mind the arguments, pro and con, on issues that will be key to my investment decisions in the coming months.

One of those "out in the hallway" discussions got me to thinking about wages, valued in gold… and I put together a chart of wages (average hourly earnings of US production workers, as tabulated by the BLS in series CES0500000008, to be precise) to see what they've been doing.

I was shocked to see that since January 1964, a total of 534 months, there have been only 36 months in which wages were lower than they are today – mainly in the period from 1979-1981. The most recent period when they were this low was early in 1988, 20 years ago. Since then they have seen a high of 1.75 grams/hour in April of 2001, before falling back to their current level of 0.6 grams/hour in July of 2008.

I thought it would be fun to take a look at how things have changed over that 20 year period in terms of gold prices, many of which can be found in the charts section of this web site. Here is a summary:

1) Although wages are about the same, per capita disposable income is up 9%. I suspect this is due to many factors, including lower tax rates, changes in government "benefits", more dual earner households and smaller families. It could also be influenced by the proportion of "production" jobs in the economy. In any event, this is a modest increase for 20 years!

2) First class postage is down 6%, one of the few things I could find that was down!

3) Stocks were a mixed bag. The Dow Jones Industrials are around 400 now, up from about 125 in 1988 – a rise of 220%, even after their spectacular fall from the 1999 high of 1,400. What a roller-coaster ride! On the other hand, Japanese stocks as measured by the Nikkei 225 Index were much stronger in 1988, and have fallen from 12 to 4.5 – a drop of 63%. I plan to do a more detailed comparison of these markets in a future post.

4) Home prices, as measured by the Case-Shiller CSXR Index, are up about 33%, even after falling more than 50% over the last three years.

5) Commodities are up strongly: silver up 29%, gasoline up 89%, copper up 98%, crude oil up 275%, and wheat up a whopping 347%.

1988 vs 2008

Item Units 1988 2008 Change
Wages mg/hour 600 600  
Disp. Income g/year 1,100 1,200 Up 9%
Nikkei 225 g 12 4.5 Down 63%
Postage mg 16 15 Down 6%
Silver mg/oz 465 600 Up 29%
CSXR index, Jan/2000=100 45 60 Up 33%
Gasoline mg/gal 75 142 Up 89%
Copper mg/lb 65 129 Up 98%
DJIA g 125 400 Up 220%
Crude Oil g/bbl 1,200 4,500 Up 275%
Wheat mg/bushel 170 760 Up 347%
         
US Govt Debt Billions of USD 2,600 9,400 Up 262%
  tonnes of gold 204,000 308,376 Up 51%
Debt/GDP   41% 66% Up 61%


Income and wages were much higher, compared to costs, 5 to 10 years ago. I suspect this encouraged people to take on a lot of debt in the form of mortgages, auto leases and loans, and consumer and credit card debt. Now that income is imploding and costs are rising, this debt is unsustainable, and we are seeing the effects of this in the current "credit crisis". Of course, fractional reserve banking, derivatives of all kinds, and a Fed that is willing to bail out insolvent banks and GSEs have further magnified the problem, and are continuing to defer its ultimate solution.

The US government's own debt is also a huge and growing problem. While in 1988 it was a "mere" 2.6 trillion USD, today it is over 9.4 trillion USD, up 262%. If this debt had to be settled in gold, that would require 308,376 tonnes of gold today, up from 204,000 back in 1988. It's a good thing that this debt is denominated in US Dollars that can be created out of nothing with the press of a few computer keys! There are only 8,133 tonnes of gold in the US reserves (even this figure is disputed, as it has not been physically audited for decades.) And to put the size of this debt in perspective, all the gold ever mined, since the beginning of time, is estimated at about 150,000 tonnes – that's less than half of the current US Federal debt.

But these figures, as grotesque and gargantuan as they are, are just the officially acknowledged tip of the iceberg. They don't include off-budget borrowing, consumer borrowing, or the real elephants in the room, the ones no one in polite society wants to talk about – the "unfunded liabilities" and future entitlements of social security, medicare, and related programs. While current taxes are generating enough cash to cover these at the moment, due to changing demographics they are growing at a rate that cannot be met simply by new tax increases. Unless changes are made, their costs will overwhelm even the ability of our printing presses to pay for them!

How did we get to this point? What can we do about it?

At the Vancouver Symposium there was a showing of a new documentary film called I.O.U.S.A. that addresses many of these points via fascinating interviews with Pete Peterson, Warren Buffett, former Comptroller General of the United States David Walker, and other luminaries. It's a wonderful film, well made, very thought-provoking, and highly recommended.

Most people have little grasp of what is happening with their money. Most have no idea what is heading down the tracks toward them financially. If you have family and friends in this situation, I urge you to take them to see this movie. It is fun, fast paced and informative. They may be shocked, but they won't be bored!

There will be a special "one day only" premier showing of the film all over the USA on Thursday, August 21st. I'm going, along with many of my friends who weren't able to see it in Vancouver. You can get details, watch a trailer and check out the special offer Agora Financial is making to those who pre-purchase tickets, as well.

I hope you will join me!

Filed under adjusted gross income, Food, gross incomes, home currency, monetary universe, money gold, nz dollars, profitable ideas, Wheat by  #

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Gold, Inflation and Interest Rates continued – Episode 5

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The first part of this interview covered Paul van Eeden's background and laid out his views on gold, inflation and interest rates. In this final segment, we'll discuss what to do about this situation – how to translate this view of the world into investment action.

Paul has been working hard on a more accurate model for the money supply that will give investors a clearer picture of what's coming in terms of inflation and interest rates. The best way to get access to this information is to subscribe to his newsletter – something I strongly recommend.

As I write this, there are still a few seats left for the 2008 Agora Financial Investment Symposium, to be held in Vancouver, BC from July 22 to 25. Paul and I will be there along with the legendary Jim Rogers, Rick Rule, Bill Bonner, Doug Casey and a boatload of other excellent speakers. If you will be attending, be sure to drop me an email or leave a message on the Priced In Gold Hotline at 888-868-5656, and we'll see what we can work out for a get-together. Keep an eye out for my pith helmet!

Audio MP3

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Gold, Inflation and Interest Rates – Episode 4

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Last year, in July of 2007, I attended the Agora Financial investment Symposium in Vancouver, BC. There were a lot of excellent speakers and sessions covering all aspects of investment, with quite a bit of emphasis on natural resources and a strong international flavor. One of the speakers who impressed me the most was Paul van Edeen. On my return home I subscribed to his newsletter – which has since become one of my favorites.

Last month I had an opportunity to interview Paul on the phone, and I picked up some great investment ideas and tidbits of investing wisdom that I am excited to pass along to you.

Because of it's length, I'm breaking the interview up into two podcasts. The first will cover Paul's background and lay out his views on gold, inflation and interest rates. In the second, we'll discuss what to do about this situation – how to translate this view of the world into profitable investment action.

I heartily recommend Paul's newsletter, and would love to see you at the upcoming 2008 Agora Financial Investment Symposium, to be held in Vancouver, BC from July 22 to 25. Paul and I will be there along with the legendary Jim Rogers, Rick Rule, Bill Bonner and a boatload of other excellent speakers. If you will be attending, be sure to drop me an email or leave a message on the Priced In Gold Hotline at 888-868-5656, and we'll see what we can work out for a get-together. Just watch for my pith helmet!

Audio MP3

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Is the Dollar Doomed?

I recently came across a presentation made on May 20th to the US Senate Committee on Homeland Security and Governmental Affairs by Dr. Benn Steil, a Senior Fellow and Director of International Economics at the Council on Foreign Relations in New York, entitled "Financial Speculation in Commodity Markets" (pdf). Dr. Steil also gave a speech the week before at the New York Hard Assets Investment Conference entitled "Is the Dollar Doomed?" (text and audio).

One of my favorite quotes from his Senate presentation:

“Whereas the prices of oil and wheat measured in dollars have soared over the course of this decade, they have, on the other hand, been remarkably stable when measured in terms of gold — gold having been the foundation of the world’s monetary system until 1971. It is, therefore, reasonable to conclude not that we are a experiencing a commodities bubble, but, rather, the end of what might usefully be termed a ‘currency bubble.’”

And from the Hard Asset talk, this wonderful idea:

So how could gold make a revival as a sort of international money? Well, we don't actually need a government run gold standard anymore. There are already private gold banks. They've been growing for some time. Their growth has roughly charted the decline of the dollar. People buy digital shares in gold. Gold is held in vaults by these banks, and you buy digital claims on them, just like when you buy a stock today you don't have a physical certificate. You have a digital representation of that stock.

If we all owned digital shares in gold, and we were able to move money from our accounts between us, and we were able to walk around with smart cards carrying representations of this digital gold, we'd be able to travel around the world, and to transact with one another. Think about it. You would go into a café in Sao Paolo, and you would order your cappuccino, and you would pay with a smart card that would debit your account for some flake of gold. And since people have always had confidence in gold as a long-term store of value, there's no reason why it couldn't play that role.

Dr. Steil also comments on why gold is a better monetary choice than a basket of currencies or commodities:

The problem with a basket is I think it's too abstract for people to connect with as a long-term standard of value. In other words, a basket is probably going to have to be run by some sort of institution, and people will probably over time lose faith in the institution.

The reason why I suggest that digital gold may have more attraction for people is because a system based on one commodity with unique monetary properties like gold does not have to be run by an institution. You can have a competitive market developing around gold as an international monetary standard. So that's the reason I think gold would probably make a better money than a commodity basket that would have to be managed by some large institution.

He points out that while the US Dollar may not be doomed in the immediate future, the dilemma described in 1960 by economist Robert Triffin remains unsolved today: if a national currency operates as the international currency, this currency must be supplied to the world by running either large balance of payment deficits, or large current account deficits. But when we do that, people eventually lose confidence in this currency because it can be printed without limit.

So far the US has pushed its deficits higher than many economists of the 1980s thought possible – past 3%, then 5% and recently 7%. But at some point, people will say "enough is enough. We don't trust your management of the dollar any more." And as Dr. Steil says, "that's a very dangerous situation to be in."

These are quite remarkable discussions of the US Dollar, gold, Federal Reserve policy and the future of money. I strongly recommend that you read through them, study the included charts and think about the implications for your investments.

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Postal Rates

Reader Michael Chmura posed an interesting question today:

The USPS seems to be raising prices frequently. We have another one cent postage increase coming 5/12/08. Can you post a chart for US Postage priced-in-gold?

I was intrigued, and generated just such a chart of US Postage rates in USD cents and milligrams of Gold.

Until the late 1950s, the dollar was fairly stable, and so were postage rates, with the exception of the Great War and blip at the beginning of the Great Depression, where rates were raised, but quickly offset by a devaluation of the dollar. Rates rose rapidly into the early 1970s, peaking at about 62 mg. When the Dollar was uncoupled from gold and rapidly devalued, the rate collapsed to it's all-time low around 7 mg. Between 1980 and 2001, both the postage rate and the value of the USD were climbing steadily, putting postage in gold back into it's historical average region around 30-40 mg.

Since 2001, the value of the USD has fallen dramatically while postage rates have risen only slightly, resulting in some of the lowest real postage rates in US history. Today the rate is about 13 mg; after the rate hike to USD 42 cents on May 12th, the rate in gold will be around 15 mg – still only half the historical average.

What does this mean to us? Well, consider the new "Forever Stamps". Buying them today will save you 1 cent in postage after May 12th, and maybe more if the USPS raises rates again in the future. Such rate increases are pretty much a certainty, but are limited by the recently passed Postal Accountability and Enhancement Act to the rate of inflation as measured by the government's Consumer Price Index. The CPI is notorious for understating the true price level consumers really pay for the things they need, like food, fuel and energy.

Think of it this way… if there had been a "Forever Stamp" available for purchase in 2001 for USD 34 cents, a roll of 100 stamps would have cost 34 USD, or 4.1 grams of gold. Today that roll would be worth 41 USD… but you could buy a new roll of stamps today for only 1.3 grams of gold – about 1/3 the price in 2001!

The "Forever Stamp" would have been a great deal in 1980, but unless you foresee a strong US Dollar in the future, I suggest that you forget the "Forever Stamp" and stick with the "Forever Metal" – GOLD.

Thanks for the excellent question, Michael!

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Site Updates

I've updated many charts to 4-April-2008, and added the Euro to the CAD vs. USD chart. It is worth noting that although the USD has fallen against the EUR and CAD, all three currencies have been losing value. They are just losing at different rates.

Another reminder not to be fooled by the apparent appreciation caused by currency expansion – price all your investments in gold!

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Quick Price Checks

Ever wonder how a stock or an index like the Dow Jones Industrials is doing at the moment, priced in gold? Is it up or down from yesterday? How much?

To do this the "old school" way, you would collect four numbers: the price of gold and the price of the security at the previous trading day's close, and their current prices, all in the same currency. Calculate the previous closing price of the currency unit (USD, GBP, JPY, EUR, etc.) by dividing 31.1035 by the gold price, giving the value of the currency unit in gold grams. Do the same with the current price of gold. Then multiply the prior closing price of the security by the prior closing value of the currency to get the previous gold price of the security. Multiply the current price of the security by the current value of the currency to get the current gold price of the security. Now subtract the security's prior close from its current price to get the gain or loss in gold grams. Divide this value by the gold price of the security for the previous day to see the percentage gain or loss.

Simple, right? Well, it actually isn't too bad once you've created a spreadsheet with the formulas in it… But what if you just want to peek at the prices, and don't have a laptop with Excel handy?

Any financial web site can give you a list of stocks with percentage changes… even from a cell phone browser. For example, the iPhone has a built-in widget that can do just this. You can use this to give an almost instant "reading" on a security's gold price action.

The proper formula for calculating percentage change in the gold price from percentage change in the currency price of gold (Pg) and percentage change of the currency price of a security (Ps) is:

( (Ps+1) / (Pg+1) ) – 1

For example, if gold is up 1.5% in USD and the Dow is up 2.0% in USD, then 1.02/1.015 = 1.004926, and the Dow is up 0.4926% when priced in gold.

But what if even that is too much work – or you don't have a calculator handy?

You can get a close approximation by just subtracting the gold change from the security change.

It is no accident that this figure is really close to what you get by dividing the percentages… for small values of Pg and Ps this will create only a tiny error. Even if the Dow were to fall 10% while gold rose 10%, the true gold price of the Dow would fall by (0.9 / 1.1) = 0.8182 – 1 = -0.1818, or an 18.2% drop. The "back of the envelope" method would suggest a 20% fall = pretty close for such a large percentage swing.

How to get the gold price? Tracking a gold ETF (such as GLD) is one easy way. It moves in lock step with gold by design. Let's take a look at my iPhone for some real world examples:


iPhone screen

We can see right off that the Dow Industrials (^DJI) and Countrywide (CFC) are doing a lot worse than their USD prices would suggest – in addition to being worth fewer dollars, the value of those dollars has fallen as well! Tesoro (TES) and Silver Wheaton (SLW) are rising faster than the dollar is depreciating, so they are up in gold value, though not as much as their USD prices would make you think. And although BHP Billiton shares are worth more US dollars today than they were yesterday, the fall in value of the USD has more than wiped out the stock's apparent gain. Here are the actual numbers, by proper calculation and by the "back of the envelope" estimation method:

Symbol   Actual     Estimate
^DJI -2.01% -2.03%
CFC -5.07% -5.13%
TSO +1.67% +1.69%
SLW +1.85% +1.87%
BHP -0.02% -0.02%

You can see that the values are very close.

You can also use this trick over any time period, as long as the percentage changes are both measured over the same time period. For instance, a news article may state that crude oil is up 14.2% for the year so far. Later in the article it may mention that gold has risen 13.2% YTD. This immediately tells you the true rise in oil prices is around 1% (if you do the full calculation, the actual change is about 0.88%).

So the next time you need a quick check on the gold value of a stock, commodity, currency or index, just subtract the percentage change of gold from the percentage change in your security of interest. You'll have good estimate of the change priced in gold.

Let me know if you have questions about this by leaving a comment, dropping me an email, or by calling the toll-free hotline at 888-868-5656.

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Bailout Pricetag

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In the post of March 11th, Big Day on Wall Street, I restated a Financial Times news story in gold terms but neglected to translate the Fed's bailout price of $200bn… When I went to make the correction, I was stunned!

On March 11th, 200 billion USD had a value of 6,413 tonnes of gold.

That's a LOT of gold! In fact, the total US Gold Reserve is 8,133 tonnes… so the announced bailout will cost about 80% of the total US gold reserve. In fact, the US Bullion Depository in Fort Knox only holds 4,570 tonnes of gold, with the rest in other vaults, primarily the Federal Reserve Bank of New York's underground vault in Manhattan.

Will Fort Knox be emptied to pay for this massive boondoggle? Of course not!

US Dollars are accounting entries with no intrinsic value whatsoever. The Fed will work all kinds of hocus-pocus – creating them out of thin air and using them to buy the bad loans and other non-performing assets of the banks that are in trouble, restoring their balance sheets to "robust health".

But you can be sure of one thing: in the long run, issuing 200 billion more dollars won't increase the purchasing power of the ones in your bank account!

In the short run, however, the USD could rise quite a bit – maybe 25% – and still be in a bear market. I suggest that you take advantage of any updrafts in the USD (bear market rallies like the one we saw late last week) to build your cash position by selling high-risk high-volatility dollars, and buying gold.

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Unsound Money

You might have noticed that my previous post on Silver and Stocks didn't once mention the US Dollar. Why? Because it's irrelevant. It may go up, it may go down. Most likely down, but so what? I try not to hold any more of it than necessary, unless I have reason to believe it's in an extended uptrend and decide to speculate.

Unlike stocks and commodities such as silver, individual fiat currencies do not have cycles that repeat over time – they are introduced, invariably debased at varying rates, occasionally supported for short periods, and eventually replaced as they leave the world stage worthless. This is the pattern that repeats, over and over through the centuries. The details are driven by the exigencies of war and politics. There is nothing new or different about the current US Dollar, Canadian Dollar, Euro or Yen.

Rome, France under John Law, Argentina, and the Weimar Republic in Germany are often cited as examples of failed fiat money systems. Of course the US had its own Continental Dollar (which created the saying "as worthless as a Continental") as well as Lincoln's "greenbacks" and the currency of the Confederacy.

Now, you might say that these are just banana republics and ancient history. Not so! Rome was the biggest economic powerhouse the world had ever seen, and it took over 700 years for its money to go from "good as gold" to worthless. Ever heard the phrase "as rich as an Argentine"? And France and Germany were counted among the world's most powerful economies; Germany, after several failed monetary regimes, is once more the mainstay of Europe.

"Yeah, but that was in the old days. It's all different now…", I can hear someone muttering. I don't think so – as I am writing this, Zimbabwe's Dollar is going through the same fate. Once a shining example of prosperity for the rest of Africa, it took about 13 ZWD to buy one gram of gold in 1980. Today it takes more than 225,000,000 ZWD to buy one gold gram, and inflation in Zimbabwe has been estimated at over 100,000% per year and rising.

My advice? Keep on hand what you need for your day-to-day transactions and to repay your fiat currency debts. Anything more than that is a wild speculation… too risky for my taste! And please don't be fooled by FDIC insurance on your bank accounts – they only promise to give you back your dollars. There is no guarantee that those dollars will buy as much as they did when you deposited them. Your FDIC insured account with a healthy $100,000 balance was worth 3,718 grams of gold on Dec 31, 2007. Today it is worth 3,089 grams. Think about that: a 17% loss in less than 3 months, in a fully insured cash account. And you can't even deduct the loss for tax purposes!

The point of all this? Forget the incredible shrinking dollar. Don't wait for some monetary messiah to return the world to sound money – take control of your own future, right now! Track your investment performance in real terms and always make your investment decisions by pricing them in gold. Say "BUY!" to things that are growing in gold value, and say "SELL!" to those that aren't. It's as simple as that.

Your financial future depends on it, and I'm here to help.

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