Wednesday, July 20, 2011

Gold at $1600? Paul Krugman says it is a nefarious plot by Glenn Beck!

One of Paul Krugman's constant themes is that the U.S. economy is in a liquidity trap and the only way out is for the government to borrow and spend trillions of dollars. (In other words, if we are not prosperous, we spend as though we are, and the debt created through this scheme magically will take care of itself.)

Of course, a liquidity trap also means deflation, as the normal central bank tool of cutting interest rates to stimulate private borrowing cannot work, as interest rates are too low. Thus, the only way out is through massive government spending.

There is a problem with all of this, however, and that is the fact that not only are food and fuel prices rising, but also other commodity prices, including gold, silver and platinum. What's a Keynesian to do?

Well, since Krugman is in that Princeton group with Ben Bernanke and Alan Blinder, all of which utterly disdain gold and believe that anyone who would buy it as an inflation hedge is a "nut case," I was wondering how The Great One would handle the fact that gold prices have skyrocketed.

(As for the rising price of food and fuel, Krugman on many occasions has blamed the rise on "volatility" or demand from other countries. Since he has declared that there can be no inflation in a liquidity trap, the whole matter is settled -- by definition.)

As always, Krugman fails to disappoint. This time we see that the rise in gold prices is the result of a nefarious plot by...Glenn Beck. After quoting at length from The Street Light, which proclaims that gold prices have "nothing to do with the economy," Krugman declares:
Glenn Beck was financially intertwined with Goldline, and therefore had a financial stake in pushing fears of hyperinflation. And he had many, many viewers. So there was a direct channel through which conservative Americans were being pushed into buying gold.

Market prices almost always tell you something useful. But sometimes what they tell you is that there’s a marketing scam in progress.
Here is the problem with Krugman's analysis: if Glenn Beck and his friends are secretly buying gold in order to entice other people to buy it so that the price will go up well past its fundamentals, they are playing a dangerous game with their own money.

Remember the Hunt Brothers in the late 1970s when they tried to corner the world market on silver? In the short run, they drove the price to nearly $50 an ounce before the whole scheme collapsed. The biggest losers were the Hunts, who lost big when silver dropped to about $11 an ounce in two months (after the scheme was exposed), and then were driven into bankruptcy in 1988 after investors filed numerous lawsuits against them.

Now, I am no expert in buying gold or other commodities, but I don't think that Glenn Beck or any other investor is secretly manipulating the price of gold or anything else. Inflation is a real possibility, given the fact that the U.S. Government has been sending dollars around the globe in an attempt to paper over the financial weaknesses both of banks and central banks. Krugman's insistence that debasing the dollar is the key to prosperity does not exactly give me confidence that I should follow his investment advice and buy government bonds.


Lord Keynes said...

"This time we see that the rise in gold prices is the result of a nefarious plot by...Glenn Beck"

Except that's a caricature.

The point of the "Street Light" quotation is that there is a real possibility that a "good advertising campaign by gold producers could be enough to move the price of gold."

He then quotes the real world example: "DeBeers diamond cartel used an incredibly successful advertising campaign in the 1950s to cement the idea of the diamond as the premier gemstone, and in so doing permanently changed the value of diamonds."

JoeB said...

Well Lord Keynes...

Either way, both theories are an absurdity. Simply look at the numbers for the ownership of physical gold and the paper gold market with future contracts. While any commodity can be manipulated over the short term (given a large enough player), over the long run such players in the gold arena as Glenn Beck or a non-existent gold cartel entity could not explain the ten year upward move in the price of gold. It's a global asset traded 24/7 and the largest holders of gold are central banks or governments (who apparently do so for sentimental reasons). Gold is a hedge against financial and monetary mismanagement of governments and their respective central banks. It reflects the market's confidence in such management. Gold held as a physical asset has no counter party risk (hence no interest paid to the holders of gold) which makes it the optimum asset to hedge such risk.

Yes, there are some other prices factors such as supply and demand, the jewelry market and action on futures contracts, but what matters most is how the market utilizes investment gold (private money) to offset the risk action in fiat currency (public money).

Commentators like Krugman play a continuous game of confirmation bias and put out views contrary to those held by real players in the gold market, so as to promote and promulgate his ideological perspective and biases. His opinion on gold is just another part of that agenda. His opinion on gold is delusional.

Mike Cheel said...


"(who apparently do so for sentimental reasons)"

Sorry to inform you but you are wrong sir.

Yhey do it out of tradition. Not sentiment:

David B said...

I love it. Keynesians have stooped to conspiracy theories to explain price movements that fall outside of their model. What else is new?

Rob said...

I wonder if Krugman will do an article on the advertising scam pulled off by the NY Times for a product known as Barack Obama.

William L. Anderson said...

Yeah, yeah, yeah. The John Kenneth Galbraith argument. Advertising is fooling people into throwing their money into gold, and Glenn Beck is the puppeteer behind it all.

The DeBeers campaign did well, but don't forget that as Americans became wealthier, they were willing and able to purchase more diamond jewelry. The notion that DeBeers was able to permanently change everyone's preferences through mere advertising is a real stretch, but a stretch that I would expect from a Keynesian.

Mike Cheel said...

This post has been online now for about 9 hours now with LK being the only one trying to put up a fight which to me is very telling (you expect LK to comment).

I want to hear the rest of the regular government shills counter this one and explain how this isn't jumping the shark.

David B said...

I think we all knew Krugman was going to go this route eventually. I'm surprised he waited until $1,600 before he made his evil speculators pitch. It's a necessary step to providing the politico class with the justification for price fixing.

Daniel Hewitt said...

I want to hear the rest of the regular government shills counter this one and explain how this isn't jumping the shark.

The libertarian argument is that the current price of gold is a legitimate market outcome, while the prices of government bonds are manipulated.

I would think that the statist argument would likely be the opposite (government bond prices are legitimate market outcomes, while the price of gold is not.)

Who has more power to influence market prices, Ben Bernanke or Glenn Beck? I think the common sense answer would be Bernanke but I guess Krugman thinks it's Beck.

Anonymous said...

Well... Also my mother yesterday told me why I don't switch her savings into gold "because euro is unsafe" and "because it keeps going up".
Last time she come up with this exact argument it was in 2000 for some internet stock gone bust long ago.
So my take based on the "mother indicator" is that gold goes up because it's a bubble... As simple as that.

Twitter @borghi_claudio said...

This post is just silly - the price of gold might indicate a *fear* of inflation (or might just be a bubble), but surely to see inflation itself you look at wages, or measures of, well, core inflation. These have been low for several years; Krugman predicted this, you did not.

Anonymous said...

@rob... are you trying to put forth the position that inflation is low? That we don't have inflation? Everything costs more money and were making the same amount of money. What is that? Deflation? Go fuck a goat. Official government numbers which are a joke has us at an unacceptable level of inflation.

zackA89 said...

First off all there tends to be a lag period between money growth and actual price inflation. It does not always hit the economy all at once or even in every sector at once. Although we have seen evidence of inflation in a wide range of commodities, just because we have not seen inflation manifest itself throughout the entire economy does not mean Austrians were wrong to predict it nor wrong to warn about it in light of the Fed’s unprecedented monetary expansion.

Oh and also, gold is not in a bubble. If anything U.S treasuries are.

If gold was in a bubble you would see it rise much faster than it is, and you would also see the gold mining stocks really take off. Both of those things have not happened. The fundamentals do not suggest gold is in a bubble whatsoever. I remember people saying that at 500, 1000, 1500, and now at 1600, you people are still wrong.

Anyway, Krugman is laughably wrong about gold, among other things, as usuall. The guy is just a walking clown,grade A bafoon, and intalectually bankrupt in so many ways.

Anonymous said...

Krugman's theory is pure genius: Glenn Beck tricked the Indian government into buying 200 metric tonnes of gold from the IMF in November 2009; he fooled the Bangladeshi government into purchasing 10 tonnes from the IMF in September 2010; he has duped the Chinese government into buying record amounts of gold in the past few years.

All those foreign governments being duped by Glenn Beck! And I didn't even know that foreign bankers and Chinese citizens were fans of his show. Thanks Paul Krugman for setting me straight.

JoeB said...
Rarely should one use gold as an indicator of inflation, though it can be such an indicator at times.

Joe's Axiom:

"No one thing is caused by one thing, though there can be a dominate force."

No doubt there are times when inflation places a positive upward pressure on the price of gold, but alas, inflation is not the dominate factor, lack of confidence is such a factor, as I explained above. This is why gold (or any other asset class) fluctuates in price, be it either an up or down trend. Various factors place pressure on price at any given time. These factors vary in their influence on price, causing the price to move in waves both up and down. What matters most is the dominate factor, should one exist. At the risk of sounding repetitive, the dominate factor for gold is confidence in the central authority which issues the nation's currency.

Review the last bull market in gold (as priced in dollars), certainly there was money printing to pay for guns and butter, that said, there was also an assassination of a president, the Vietnam War, the failure of both LBJ and Nixon, Watergate, the perceived bumbling of Pres. Ford, the malaise of Carter, the Arab oil embargo, the fall of the shah, the hostage crisis and lastly the "misery factor." All the while gold rose through these events and topped out in the early Reagan years. A president who is given at least credit for restoring what in America and Americans? Answer: confidence. As that confidence waxed, the price of gold waned. Check the FEDs own numbers, Volcker's last four years showed a huge growth in the money supply and yet $gold continued to fall in price.

Now review the events taking place in the US since gold hit it's low in 1999 and especially after 911. Has there not been a significant erosion in confidence of US leadership?

Bob Roddis said...

Is this all they have?

It really is like debating your poodle.

FdaPopo said...


That must be the best 3-paragraph overview of the monetary significance of gold I have ever read.

Gold is used as a hedge in both inflationary and deflationary markets. What matters is confidence.

I have always wondered if the underlying mechanism here is that deep-down, investors recognize that in a truly free market, gold is always used as the currency of choice. Such that, if paper money becomes worthless, what will we turn to other than gold?

JoeB said...



As to answer your question, I'd suggest you read the book written by Swiss economist Peter Bernholz: "Monetary Regimes and Inflation: History, Economic and Political Relationships"

libertyvini said...

Gold is primarily a wealth preserver in an inflationary environment. It helps if you buy before panic-buying sets in, (and rewarding, in dollars anyway if you sell at the top), if your goal is wealth preservation, once you buy (again, mostly before the run-up) the price is almost an irrelevancy. An ounce of gold may vary wildly in dollar terms, but barely moves in purchasing power.

Anonymous said...

I don't recall Glenn Beck being on the scene to hawk gold in the 1970's, when it went up from $35 to $850 by 1980.

Then and now, it rose because of fiat "money," big spending and Federal Reserve policies to enable that.

Anonymous said...

The problem with the idea that gold and silver is going up because of marketing strikes me as ignorant. Ignorant of other less glamorous metals that have increased greatly in dollar price, and the fact that most people have no clue about gold or silver.

Further more the DeBeers diamond cartel can set the price. As far as I know the forces that are supposedly capable of manipulating gold prices (central banks, etc) have their interests in lower gold prices, not higher ones.

I would think that central banks would be way more powerful than people who take financial advice from Glen Beck and his advertisers.

Anonymous said...

If all it takes is advertising, as Krugman says about DeBeers, then why didn't the copious advertising of GM cars save GM?

AlexP said...

Beck has incredible reach. even China is buying like crazy, who'd have thought that Wen Jiabao is a Beck fan.
i am sure though that China is not buying from Goldline - that place is a rip off. If you call to buy they will push you into overprices numismatics at obscene markups. I f you bought from Goldline when gold was $1000 you are probably still in the red.

Major_Freedom said...

Except that's a caricature.

The point of the "Street Light" quotation is that there is a real possibility that a "good advertising campaign by gold producers could be enough to move the price of gold."

Hahahaha, OK, next time anyone makes an argument that you don't agree with, then you just didn't understand that it was a caricature only.

No, the point of Krugman's post was to blame Glenn Beck specifically.

If it was "advertising" that makes people buy things, then Krugman would have to admit that it was only nefarious advertising that made people do what he recommends.

He's undercutting his own position.

Bob Roddis said...

I would say that Keynesianism, being a complete crock of BS shrouded in doubletalk to intimidate the weak-minded, has been successful ONLY due to advertising.

David B said...

If only Krugman read Murray Rothbard, he would not be at such a loss to explain gold pricemovents in dollars:

"It should be clear then, that the demand for paper money, in contrast to gold, is potentially highly volatile. Gold and silver are always in demand, regardless of clime, century, or government in power. But public confidence in, and hence demand for, paper
money depends on the ultimate confidence—or lack thereof—of
the public in the viability of the issuing government."
Rothbard, Mystery of Banking pp. 65-66.

So what is actually happening? Is the gold price spiking upward in a volatile fashion because of Glenn Beck, or is the demand to hold paper money the volatile component? The volatility is in the dollar - a now meaningless name since a "dollar" is not it's own independent entity. The demand to hold dollars fluctuates wildly, with a long term trend downward to zero.

Anonymous said...

David B has it correct. The price of gold isn't changing, it is the value of the dollar that is changing.

Anonymous said...

Priced in USD gold is moving up, but not when priced in Swiss Francs where gold is up just 5% on the year.

Anonymous said...

Gold has been going up steadily since around 2000. Glenn Beck hasn't been a public figure for nearly that long.

boatman said...


do you think maybe the swiss frank is going up cause the euro is tanking?

Al Sledge said...

Some well thought out comments here. Also we seem to have inflation in the Nobel Prize as it too seems to be more an more worthless when presented to the likes Krugman and others of his line of thought. A common thread with him and the FED is describing inflation as price increase rather than its historical meaning of an increase in the money supply. More simply we could have zero inflation if we had government price freezes. Zero inflation but at the price of fewer, or no, goods and services. As an Austrian myself I was buying both gold and silver way before I ever heard of Glen Beck. Besides it turned off the TV and picked up books. The greatest book ever written in my opinion is Human Action. It saved my financial ass! Blame gold prices a Mises, a dead man with living ideas!

R.Mutt said...

Buying gold in inflationary times doesn't make sense, since it isn't index linked.

If things get really bad all you can do with it is throw it at the guy trying to steal your last potato. (Note to Republicans - no 'e' in this word).

The reason gold is a good investment in these circumstances is because people think it will rise in price, so it does.

Why do so many people behave irrationally? probably not much to do with Glenn Beck, although I can't find the actual quote where Krugman apparently claims this.

R.Mutt said...

On the diamond question, it seems to me to be entirely plausible that this should come down to marketing.

If you try to market water as beer, you won't get very far (Heineken excepted). Diamonds don't have any intrinsic value - it's all in the eye of the beholder. In my elementary economics course scarcity was introduced by comparing water (cheap, essential to life)with diamonds (expensive, inessential).

Diamonds would seem the perfect product for advertising.

One way to test this would be to look at diamond sales in developed countries in which De Beers do not advertise. They would still get Marilyn Monroe films but it would give an idea.