Hard Assets Continue to Thrive in Today’s Economy

Back around 2005 when housing was booming, far from a sign of economic vitality, the proverbial “rush to the real” signaled a growing economic downturn. Thanks to a dollar in freefall as evidenced by a spike in the price of gold (NYSE:GLD), always limited capital was migrating toward the hard, unproductive assets least vulnerable to currency devaluation.

To put it simply, the real recession was the housing boom.

Since the dollar’s lurches in either direction tend to set the tone for global currencies, our monetary error was something shared by everyone as a run on paper currencies around the world fostered a global misallocation of capital into land, rare stamps, art, gold and other unproductive assets. The alleged worldwide boom characterized by a rush to the tangible was a classic “money illusion” that flashed economic hardship due to the world’s innovators suffering capital deficits in concert with sinks of hard wealth receiving capital in abundance.

The above surely looms large at present, because it’s not unfair to suggest that we’re experiencing yet again the severe capital misallocations that forced a distorted correction in 2008. To see why, look at the gold price.

Though it traded in the then nosebleed range of $800/ounce back in 2008, gold has since nearly doubled to $1500/ounce. Its spike to previously unseen levels is a signal that all the chatter about whether there will be a downturn is well too late. Gold at these levels IS the downturn, and an eventual “recession” that hopefully includes a revived dollar to undo all the misallocations occurring at present will be the cure.

Indeed, much as the weak dollar drove a recessionary rush into the real not long ago, so is the same occurring once again. This, not the inevitable correction, is the true recession, and that’s why the gold price (nothing more than a proxy for the dollar’s actual strength or weakness) is so useful as an economic signal.

Gold’s rise is the dollar’s decline, and it confirms as it always has that today’s and tomorrow’s innovators will suffer a capital deficit relative to the kind of investment they’d receive were the dollar strong and stable. Evidence of this recessionary malinvestment abounds, but one obvious example of it concerns farmland prices.

As Forbes editor-in-chief Steve Forbes recently noted in one of his essential Fact & Comment pieces, farmland prices were up 12% last year, and have doubled over the past decade. During this time, agricultural lending has risen 98%.

Think about the above for a moment. As Americans we’re lucky enough to live in the most economically evolved country in the world when it comes to our labors, yet prices and investment in a sector that largely impoverished developing country countries usually spend a lot of time on are skyrocketing.

Adam Smith centuries ago warned of the economic hardship experienced within regions of stationary economic activity, but what about the ones moving backwards, in our case to an agrarian period characterized by low living standards and work of unrelenting drudgery? This isn’t to say that all investment in the U.S. is moving “back to the land”, but the idea that much at all would is an economic signal that should concern us all. The weak dollar is the big driver here, and it’s authoring our partial lurch to a more depressed past.

Looking at oil (NYSE:USO) and the gasoline that it is ultimately refined into, the prices of both are high because the dollar is cheap.  Keynesians will doubtless note how expensive gasoline will depress consumption, but the greater, more “recessionary” negative of $4 gas is how the cost of one of life’s essentials will depress savings, and with that, the growth capital that funds entrepreneurialism.  Devaluation is surely cruel to the consumer, but it’s devastating to the entrepreneur, not to mention the individuals who might like to work for the entrepreneur.

So while the always faulty GDP number has yet to register a downturn, fret not because we’re in the middle of one. Inflation, meaning a decline in the unit of account, always coincides with reduced savings, and then a misallocation of available savings into unproductive, tangible assets least vulnerable to the currency devaluation.

In short, $1,500 gold IS the downturn, precisely because of what it tells us about the direction of limited capital. As for “recession”, though painful, that’s what we’ll hopefully celebrate sooner rather than later as investors reorient capital away from land, art, rare stamps and faulty lenders/investors who’ve bought into the money illusion that is today’s economic pain.

Double dip? It’s already here.

John Tamny is a senior economic advisor to Toreador Research & Trading, a senior economist with H.C. Wainwright Economics, and editor of RealClearMarkets and Forbes.

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