Monday, June 28, 2010

Coined Liberty

In the last chapter of The Dollar Meltdown, Charles Goyette makes a fascinating observation about what has been depicted on American coins over the years:

America's earliest coins portrayed Liberty. Not rulers and politicians. Just Liberty. A symbolic representation of the country's highest ideal. In the beginning Americans had an affair of the heart with Liberty. She was their muse and they were aflame in their love for her. They talked about her everywhere, in their churches and taverns and town squares. But she hasn't appeared on our circulation coinage for more than sixty years, not since the beautiful "Walking Liberty" half-dollar. It represented Liberty striding gracefully into the rising sun of the future, arm extended in peace and carrying a bounty of riches. It was a beautiful representation, well chosen, because abundance accompanies Liberty wherever she goes. Our devotion to her would be no less if it were not true, but it is one of her secrets: Liberty creates prosperity.

Today's coinage, looking each year more like subway tokens, celebrates the state. Just as words replace deeds and paper substitutes for gold, politicians have displaced ideals. The American state, which was created to serve Liberty, is now commemorated instead.

If you are like me, you have probably never seen most of the portrayals of Liberty on early American coins. Therefore, I thought it would be instructive for us to look at a few examples of American coinage through the years, contrasting the early portrayals of Liberty and prosperity with the more recent portrayals of politicians and state monuments.


"Classic Head" Liberty Penny (1808-1814)
On the obverse, Liberty in her original feminine, mythological form. On the reverse, a wreath (perhaps symbolizing peace, prosperity, or good will).


"Indian Head" Penny (1859-1909)
On the obverse, Liberty has been replaced with a male Indian, but at least the word "Liberty" is still prominently written across the headband. Wreath still on reverse.


"Lincoln/Wheat" Penny (1909-1958)
On the obverse, the male Indian and his prominent "Liberty" headband have now been replaced by a politician (Abraham Lincoln), and Liberty is now relegated to a conspicuously minor role to the left of Lincoln's profile. On the reverse, wheat--a symbol of prosperity.


"Lincoln/Memorial" Penny (1959-Present)
On the obverse, we still have the politician Abraham Lincoln. On the reverse, however, wheat has now been replaced with a political monument: the Lincoln Memorial in Washington, D.C.


"Liberty Head" Nickel (1883-1913)
On the obverse, Liberty in her original feminine, mythological form. On the reverse, a wreath.


Buffalo Nickel (1913-1938)
On the obverse, Liberty has once again been replaced by a male Indian, with the word "Liberty" taking on a minor role to the right of the Indian's profile. On the reverse, a buffalo in keeping with the Indian theme.


"Jefferson Head" Nickel (1938-Present)
On the obverse, the male Indian has now been replaced by a politician (Thomas Jefferson), with the word "Liberty" still relegated to a minor role to the right of his profile. On the reverse, we now have a depiction of a political monument: Monticello, Jefferson's estate just outside Charlottesville, VA.


"Draped Bust" Liberty Dime (1796-1807)
On the obverse, Liberty in her feminine, mythological form. On the reverse, an eagle and a wreath.


"Mercury Head" Dime (1916-1945)
This is an interesting one. On the obverse, Liberty appears to have been replaced by the god Hermes/Mercury, who is typically portrayed wearing a winged cap. Most online sources appear to claim that the figure is not Hermes/Mercury, and that it is in fact Liberty wearing a Phrygian cap that just happens to have wings on it. I suppose that might be true, but when I perform an image search for "Phrygian cap," none of the hits show wings attached to the cap. A winged cap appears to be associated primarily with Hermes/Mercury. However, since I don't know much about mythology, I won't speculate as to why Liberty was replaced with Hermes/Mercury. On the reverse, the eagle and wreath have been replaced by a fasces (symbolizing military power) juxtaposed with an olive branch (symbolizing peace).


Roosevelt Dime (1946-Present)
On the obverse, Hermes/Mercury has now been replaced by a politician (Franklin Delano Roosevelt). On the reverse, the olive branch remains, but the fasces has been replaced by a torch and an oak branch (symbolizing liberty and victory, respectively).


"Standing Liberty" Quarter (1916-1930)
On the obverse, Liberty in her feminine, mythological form. On the reverse, a soaring eagle.


"Washington Head" Quarter (1932-Present)
On the obverse, Liberty has now been replaced by a politician (George Washington). On the obverse, there is still an eagle, but now it is grasping a bunch of arrows in its sharp talons (symbolizing war) above a wreath or olive branch (symbolizing peace).

I could continue with many more examples, but I think you get the point by now. Something disturbing has clearly happened to the symbolism on our coinage over the years, especially beginning in the 1930s. That was right around the time FDR seized and outlawed Americans' gold and put America on the fast track to a command economy via his New Deal. Interestingly, while our political leaders moved our monetary iconography away from Liberty and toward state-worship, the government simultaneously decreased the precious metal content of our coins and increased the base metal content. Today, all of our coins are flimsy, light, cheap-looking tokens made entirely of base metals.

Perhaps most revealing of all is the fact that there are still two popular American coins that depict Liberty in all her mythological beauty: the American Gold Eagle and American Silver Eagle. That should tell us something important about the relationship of Liberty to real money.

[Note: Most of the coin images displayed in this post are from www.coinfacts.com]

Saturday, June 26, 2010

The Dollar Meltdown

Before I get into the main topic of this post, a quick observation:

It has been almost exactly one year since my previous post lamenting the rioting around Staples Center in Los Angeles following the Lakers' 2009 victory in the NBA Finals. Well, the Lakers won the NBA Finals again this year, and sure enough, the knuckleheads rioted again--despite the increased presence of LAPD near the Staples Center during this year's victory. It looks like vandalism and arson have now become the official L.A. tradition in celebration of every Lakers victory.

Now for the main topic of this post. I recently read Charles Goyette's The Dollar Meltdown: Surviving the Impending Currency Crisis with Gold, Oil, and Other Unconventional Investments, published in 2009, and found it to be a timely and informative book. In addition to recommending the book, I wanted to summarize its key points and give my personal impressions.

The gist of the book is that despite the real estate and credit meltdown the U.S. experienced in late 2008, that was only the beginning: a much worst meltdown, this time in our U.S. currency, has now become unavoidable due to the fact that the government responded to the 2008 meltdown by plunging our nation into even deeper debt. In doing so, they inflated the next asset bubble--this time in U.S. debt itself. That debt has now become so over-inflated, and the Fed has forced down interest rates on that debt so low (essentially to zero) that there is nowhere else interest rates on U.S. treasury bonds can go now except up, up, up. Just look at the following historical chart of the federal funds rate to see this inevitability yourself:


When interest rates start to rise, it will severely curtail business activity due to the increased cost to businesses of borrowing, thereby sparking a sharp recession. Simultaneously, as it begins to dawn on our government's largely foreign creditors that it is actually impossible for the U.S. government to pay back its debt without making its currency worthless--especially as interest rates begin to rise, which makes the debt more expensive to pay--they will start selling their U.S. dollars in exchange for other currencies and precious metals like gold and silver.

They will likely begin their sell-off gradually and surreptitously in an effort to keep bond prices as high as possible while they sell, but as the insolvency of the U.S. government becomes more and more obvious, bond prices will fall and interest rates will rise. Our creditors will then dump their bonds onto the market openly and at much greater speed, thus accelerating the currency meltdown. When the stampede out of the U.S. debt bubble reaches full speed, all of the dollars we've been exporting for decades will suddenly flood back into our financial system, causing massive inflation. Prices of almost everything tangible will skyrocket in terms of dollars.

The impending U.S. currency meltdown predicted by Goyette in The Dollar Meltdown is basically the same as the one predicted by author and businessman Peter Schiff (e.g., in his book Crash Proof 2.0: How to Profit from the Economic Collapse) and many economists of the Austrian school. Therefore, his book covers a lot of the same ground that has already been covered in other books and articles. But his interpretations and explanations are just different enough to be refreshing and interesting. His recommended investment approach for protecting oneself against the impending meltdown is also surprisingly different than Schiff's, which alone makes the book a worthwhile read.

On the basics, Schiff and Goyette agree: Get out of the U.S. dollar and into assets like precious metals (mainly gold and silver), energy (mainly oil), and commodities/natural resources (agriculture, base metals, etc.). However, Schiff and Goyette seem to disagree--and rather strongly--on the details. The reason is that Goyette's strategy (as the subtitle of his book makes clear) is just to survive the impending currency crisis, whereas Schiff's strategy (as the subtitle of his book makes clear) is to profit from it.

Goyette recommends that one's core positions in gold and silver, oil, and commodities should be in the physical assets themselves--not stocks of companies that mine or produce them. He recommends staying away from stocks completely due to political risk: the mining and commodities companies may be faced with oppressive taxes and even outright nationalization when the currency crisis hits. He provides historical examples of this to support his claim. His argument is that the nationalization of gold mining companies would destroy their stocks, but not the price of gold itself (in fact, the price of gold would climb even higher).

Schiff also recommends core positions in gold, silver, oil, and natural resources, but not exclusively in the form of the physical assets themselves. He suggests that the bulk of one's portfolio should be in conservative, high dividend paying stocks of companies based in developed foreign countries. (The main exception to this rule would be gold and silver mining stocks; their dividends are typically very small, if they even pay one, but Schiff still recommends investing in them due to the high profits the mining companies are bound to earn as the price of gold and silver rises. This can translate into spectacular growth in the prices of the mining stocks--even higher than the growth of gold and silver prices themselves.) Schiff thinks the political risk of high taxation or nationalization of mining, energy, and natural resources companies is mainly a concern in the U.S. and developing ("third world") countries, so as long as one limits one's stock investments to companies in developed foreign countries, the political risk should be relatively low.

Initially I agreed with Schiff, but then I came across this article recently describing how Australia's government wants a cut of the high profits that its gold and silver mining companies have been earning recently due to the boom in precious metals--so it's imposing a new 40% tax (!!) on the profits. If this development is a taste of what's to come on the international front, I'm not sure international mining stocks are as insulated from political risk as Schiff makes them out to be. The U.S. may be unique in the severity of its debt situation, but the U.S. government's persistent movement toward a command economy is by no means unique. Throughout the world, practically every country's government is joining one big authoritarian march away from liberty and prosperity. With such ubiquitous political regime uncertainty around the globe, perhaps Goyette is right that it doesn't make a lot of sense to invest heavily in stocks--any kind of stocks--right now. This disturbing new tax on Australian mining companies certainly supports that position.

On the other hand, I'm not yet prepared to abandon all hope of any kind of investment return in the years to come. I am not yet prepared to resign myself merely to preserving, as opposed to growing, my wealth. I believe in virtue, and that in the absence of crime and corruption, reality tends to find a way to reward virtuous actions--not always, but usually. So my belief is that people who practice the virtue of deferring current consumption in order to save and invest for the future--benefiting the entire economy as well as themselves through their prudence and sacrifice--should be able to find some way to be rewarded for that.

Whether you tend to agree more with Goyette or Schiff, or neither of them, on the details, it seems next to impossible to disagree with them on the fundamentals. The U.S. dollar is headed south due to our government run amok, and when the currency crisis hits, it may unfold with unbelievable speed. So betting against the dollar now, at this very moment in time, is a golden opportunity--probably as close to a sure bet as an investor is ever likely to see.