Every Download Is Sacred

People's tastes are changing.

An excellent blog post appeared in the Guardian newspaper entitled “Are Downloads Really Killing Music? Or Is It Something Else?“, where it was stated:

But the reality is that nowadays, one can choose between a game costing £40 that will last weeks, or a £10 CD with two great tracks and eight dud ones. I think a lot of people are choosing the game – and downloading the two tracks. That’s real discretion in spending. It’s hurting the music industry, sure. But let’s not cloud the argument with false claims about downloads.

The change in culture away from music has to do with technology and a fall in the quality in musical production.

The advantage of progams like Amarok, iTunes and other music collection software is that you can rate your songs and delete the rubbish that you would otherwise have to get out of your sofa and skip. You can set music for your mood, or the time of day, or the kinds of people who happen to be visiting. Also, you can easily share your stuff. It’s just so easy to stick a CD in the drive and soak up the tracks in lossless quality and pass them on. Music has become cheap, like the framed posters you can get at the two-dollar shop.

When the printing press was invented, the cost of obtaining a book plummeted (probably by a hundred times), since it no longer needed to be written by hand. When the Internet reached prevalence, the underlying cost of producing the electronic form of a novel plummeted (easily by a hundred times). You want someone to make an illuminated manuscript of the Harry Potter series? It’ll cost you many thousands, if you can find someone who can do it. The corollary is that since text is so easy to publish now, there’s an awful lot of cheap rubbish about (you’re reading it, for example). It’s no longer worth paying for, yet a lot of it is very good.

The same is for music. Most of it now is electronic. No one has to be able to sing in tune, voices are modulated and modified and forced so that they fit the rhythm and melody which itself was constructed in an electronic composing suite. A lot of music has no live instruments whatsoever. The creative quality of most of the music that is produced by the major record labels has a low creative quality. Mediocrity abounds. It’s not worth paying for.

Everybody can see that the nature of the music business is changing, but still the recording industry cannot come to terms with this fact. Instead, it keeps churning out the same garbage and expects people to pay top dollar for twenty cents-worth of plastic. People are better off buying a blank CD and putting something worthwhile on it.

In the future, music will arise from a community of enthusiasts and will be, largely, free. The best musicians and the best productions will be commissioned now and again to create works for a particular piece of entertainment, like a film or software. There will still be live performers, and if anything, this will be the mainstay of music. The recording companies ought to accept this and move on.

Swinders in the Mist

It's a jungle out there...

Do you remember the days in the old school yard? Remember how some kids couldn’t take any loss of face? Investors who lost their fortunes in the Madoff Scandal (the guy who made off with over $50 billion from his Ponzi scheme)  are now hoping to claim the appreciated amount of money instead of the initially invested amount:

The customers say that, by law, they should be given credit for the full value of the securities shown on the last account statements they received before Mr. Madoff’s arrest in mid-December, even though they were bogus and none of the trades were ever made. According to court filings, those account balances add up to more than $64 billion.

…

“We are talking about some of the saddest cases imaginable,” he said. “These are people in their 70s and 80s who cannot work and have no possible source of income to replace the money” lost in the fraud.

Let’s not forget that 70 and 80 year olds are adults too, and are as responsible as anyone else for their mistakes or for losses made with what had to be surplus funds to invest with Madoff. We’re not talking about orphans or destitute old  bums living out of cardboard boxes in alleyways. They never had any money to invest in the first place.

It’s like a private school sports team that can’t accept defeat. Investors are stamping their feet, complaining that the rules weren’t fair and that they ought to get their money back. Had it been the opposite scenario, had these investors made a wrongful profit, you could be assured that they would not let go of a cent.

Frankly, these investors with Madoff don’t deserve any media attention or extra compensation. Yes, they were victims of fraud and yes, they are rightly sore about it all, but Madoff was not guaranteeing the investment money (he was not posing as a Government backed financial institution, such as a bank). There was no legislation protecting investors from making a loss. They took a risk and they lost. It’s the same for anyone who gambles and loses – why should they have it any different?

The argument that receipts of the inflated sum at investment should be used to gain a tax advantage is problematic, because it encourages Ponzi style schemes (if you win, hooray, if you lose, it’s a tax break). This was not a real investment, and it should not be treated as though it ever was one. When people gave their money to Madoff, who promised to bank it for them, they accepted that they may never see the money again. This is the reason why you should diversify your investments and not trust any one vehicle, or if you absolutely positively don’t want to lose the money, buy gold and put it in a vault or something.

What this illustrates is the mentality of US investors. They are like two-year-olds who can’t come to terms with the negative meaning of the world “risk”. But of course, in this financial crisis, there must be no losers. Everybody has to be bailed.

Here Comes Sound Money

Fiat Money Failure

Our suspicions, just a day or two ago, that gold may not be the metal of choice in a standardised (non-fiat) monetary system, grow stronger today. Russia is likely to take the “palladium standard” as the basis of the Ruble. But first, a short history of alternative toilet paper.

Back in the days of the Soviet Union, in Brezhnev’s era, the edition of Pravda (possibly the most inaccurately named newspaper in history) featuring his speeches was highly prized, not for its content, but for its utility as toilet paper. The Brezhnev editions went so much further than the regular rag. The main disadvantage of newsprint was that it had to be folded and cut, and that it left a nasty black residue on the skin. Things improved somewhat with the dissolution of the Union and the debasement of the Ruble. Rubles were softer, smoother and pre-cut to a convenient size. Users of it still complained of the ink running and the occasional tear during use. Plus, it didn’t come in rolls.

Today, however, things are looking different. Pravda is no longer such a worthless read, and the Ruble is no longer looking like always being such a waste of dead tree. The State Duma’s speaker made this statement:

“We could offer the world the Russian ruble made of palladium. It would be a very strong currency. One may recollect the golden ruble, which Russia had during the tsarist times. It was a freely convertible currency and was circulating very well”

That gold is not the only choice for a standard monetary unit is not a new idea in the least. Silver has also been touted as being a worthy candidate, but both metals are abundant, really, and far too much of these metals exists in the public arena for there to be a fair transition to a new currency basis. Discussion around the Internet still revolves mainly around gold, which is still highly regarded as the currency standard of first choice, although in reality things are not so clear cut:

Goldbugs and Fiatbugs are actually sort of similar; both insisting that it’s an “either-or” situation where gold and paper are mutually exclusive. That’s hogwash. Anything that is able to achieve widespread recognition as a medium of exchange is a viable currency, be it gold, silver, paper, or sand dollars. Empirical evidence shows us that gold has had quite a successful run as a widely recognized form of currency, and suggests that it will continue to enjoy status as currency into the future, despite fiatbugs’ protestations to the contrary.

Palladium is just another one of the group of metals (including gold, silver, platinum) which could be used in minted coins and as the metallic strip in notes. It is already used in Canadian currency. Its price is very highly, currently at around US$250/oz, it was at over US$1000/oz at the beginning of the 21st century.

Russia’s favouritism for Palladium is, of course, because Russia is one of the world’s major sources of the metal, alongside South Africa. It is, therefore, unlikely that other nations would take Russia’s lead and take on the same precious metal as their currency base. This could be a very good thing:

If Russia takes on Palladium for its currency standard, and other nations choose not to (as they well should), it may save the world from a single world currency and the grip of the IMF.

Gold: Whose Precious?

My Precious

In recent newspaper articles and, for a long time, on the Daily Reckoning, gold has been touted as the Next Big Thing in commodities, that it is destined to return to glory as the chief component of a world reserve currency. It is, however, just a metal, albeit a pretty one. One has to wonder just why a substance which, truth be told, is in abundance compared to its utility in industry, is so sure to be the natural heir of our current, doomed fiat based monetary system.

The history of Gold is a fascinating subject which reaches back to the dawn of civilisation. A general timeline of the historical milestones relating to gold can be seen here (PDF), but in this article we address Gold’s more recent history in order to answer the question: Is gold a part of our monetary future? Is it a wise investment?

Technicalities

Gold is a metallic yellow substance of molecular weight 197. It is the most malleable of all metals and is more dense than lead (1 cubic centimetre weighing 19.3g at 20 degrees C). Its high electrical conductivity and corrosion resistance has made it a particularly useful metal in the electronics industry for the coating of electrical contacts and for wire bonding of integrated circuits to printed circuit boards, especially in situations where a low failure rate is desired. Other minor uses for gold have included reflective insulation (such as in the lining of McLaren’s Formula One engine compartments) and as a reflective surface of some of the more expensive CD’s. Gold also has some medicinal uses. Prior to the 20th century, gold was solely used for jewellery, decoration and as a form of currency. Even today, the vast majority of newly produced gold is used for jewellery (over 80%). That said, around 25% (30,000 tonnes) of the world’s gold is in the possession of central banks, particularly of the USA, Germany, the IMF, France, Switzerland and Italy. Privately owned bullion accounts for around 20,000 tonnes. It mostly just sits there, doing nothing, as far as anyone can tell.

Gold Producers

The rate of gold production around the world has risen steadily during the 20th century, with a peak attained around 2000AD. Its abundance (measured as ounces per capita) has increased, despite its function as collateral to the issuance of money entering obsolescence. South Africa produces the largest quantities (roughly 500,000kg per year), followed closely by USA and Australia. South Africa is also the world’s largest gold resource, but countries such as China, Indonesia and Canada produce modest quantities compared to estimated reserves.

Considering that the basic, industrial need for gold is rather small (around 500,000kg per year), it is the demand for jewellery and market speculation that can be said to have driven production to its current high levels. This is an important consideration. Were the jewellery industry less powerful, or if shiny metallic jewellery were to lose its fashionable status, there would be a glut of gold on the market in excess of demand. After all, gold is nowhere near as important to the world’s daily activities as, for example, oil, fresh water, arable land or food.

Retail sales of jewellery are an extremely important part of the gold riddle when it comes to considering gold’s potential future role as a monetary base. By becoming attached to the stuff, the populace shows its faith in gold as a valuable commodity, even though gold has only modest functional use. Even though central banks have shrugged off gold in the past and embraced fiat currencies, everyone else is still in love with the lustrous metal, particularly those in developing economies such as India.

The Gold Market

The factors determining the price of gold are many, and many of them are steeped in controversy. Like any commodity, price is determined by supply and demand, but each end is heavily manipulated (the purchasing of jewellery is far from a rational activity).

At the supply end, it can be rather difficult to determine just who owns the world’s gold mines. In Australia, for example, more than 70% of shareholders in gold mining operations are foreign companies. Most of the mining happens in developing countries, however, where the story of gold mining today is as sad as ever. It is typified by heavy labour, deaths from accidents, pollution and poisoning of water supplies, massive open cut mines which, after they are spent, become expensive environmental liabilities. Just a single ounce of gold requires the production of 30 tonnes of waste rock.

On the question of market price manipulation, one organization (the Gold Anti-Trust Action Committee) has managed to shed a significant amount of light. Their research suggests that an unholy alliance exists between the US Government, western central banks, acting in part through Wall Street investment ‘banks’ such as Goldman Sachs to push the gold price to artificially low levels:

While the people who formed GATA sensed as early as 1998 that something was wrong technically in the gold market, it took us a couple of years to figure out that the culprits were not the visible players in the futures markets — the New York investment banking houses — but rather the Western central banks, and that the investment houses were just their agents, their cover. A British economist, Peter Warburton, may have been the first to put it together comprehensively, with his 2001 essay, “The Debasement of World Currency: It Is Inflation, But Not as We Know It,”…

In essence, it is alleged that these banks, which manipulate interest rates as they see fit, as well as effectively fixing the international currency exchange rates, also rig the gold price in order to milk the market and increase their sphere of influence. A speech by Russian Central Bank deputy chairman Oleg Mozhalskov reveals some interesting insights as to why this might occur:

For the central bank, the gold stock is the international payment reserve for the whole country — for the state authorities, private companies and corporations, as well as individual citizens. Like any reserve, it needs to be conserved, in terms of both actual physical form and its value. To a lesser extent, we need to be concerned about its liquidity, or more precisely, market price developments.

…

The contemporary gold market has emerged as a byproduct of a series of agreements between governments, initiated by the United States and supported by the other major powers, in whose possession the bulk of all gold ever extracted lies.

The Horse’s Mouth has spoken. The term gold market is probably a misnomer, however.

Central banks currently issue fiat money, but they still keep gold reserves, by and large. This shows that they were never of the opinion that fiat based currencies were going to last forever, but it also seems that they all believe that gold will undergo a return to its former seat of power. They understand that the current approach of using US dollars as a reserve currency is untenable, since the US dollar is based on an empty promise, leading to a situation of undisciplined over-expansion of money supply (which, not surprisingly, we are now seeing). American central banks and the US Government would be well aware of this fact, and so it should come as no surprise to any reader to know that many accuse them of artificially suppressing the gold price to create the impression that gold is less valuable and that fiat money is a better vehicle for doing business.

Buy in the evening, sell in the morning.

Central bankers deny that they manipulate the day to day fluctuations in the price of gold, but it has been noticed by some that the 24h gold price follows a predictable pattern, day after day, which can be used to make a tidy sum over many years (in the order of doubling one’s money every other year or so), by buying in the evening and selling in the morning. A random snapshot of today’s gold price movements confirms this theory, which managed to raise at least one eyebrow. Unnatural patterns in markets are what they are.

The problem with gold, for central banks, is that it just sits there, doing nothing. They want it to move around so that it can rise and fall in value. For this reason the central banks have released some of their gold reserves. An added incentive to release gold is to lower its price to support the fiat currencies (the central banks’ main product). The suspicion, however, is that these banks have released too much of it (without admitting the fact) and so have less in reserve than they claim to have. If this guess is correct, then it may well be that some central banks (ie: the Federal Reserve) will not want to allow gold to become a reserve currency any time soon, as it may attract an audit of its true gold holdings. On the other hand, gold is likely to be more precious than it is currently priced. Unless, of course, gold gets dumped by central banks and some other element wins favour.

Whose Precious?

It is clear, then, that the gold market is made up of several extremely large players (central banks and other similar institutions) and masses of little investors. The likelihood of making a profit from fair trading, based on conventional principles, is rather small. Also, given that central banks may have much less gold in storage than they claim, there is just as much probability that a future gold based currency will end up being another ‘fiat’ currency. That is, banks will issue certificates of non-existent gold, and the population will have to simply trust the banks, because it’s highly unlikely that the piles of gold bricks will be on perpetual public display.

The only reliable method of owning gold (and being sure that you own it) is to have the bullion in one’s hot little hand, to gaze at and adore, or to keep it in the form of jewellery. Either way it is still a fanciful venture for most people, because it is not foreseeable that gold will be circulating in person, in a cash society, any time soon. Nobody will sell you a carton of milk and a loaf of bread in exchange for several grains of gold dust. Gold is not a practical metal.

Gold, therefore, is not our precious, because we feel that money and effort is better invested in productive projects which address the immediate needs of the people around us, such as food production, essential services and the trade in other tangible goods. As maligned as housing may be, for example, it is still a more useful thing to own than a gold nugget, since people will be willing (even forced) to pay you to live in a house, but they won’t be as willing to pay you to have a quick hold of a gold nugget.

GM through Kresa’s Eyes

Double meanings.

Whenever reading news, it’s far more entertaining to see how they fit within a hypothesis than to simply soak the information up unquestioningly like a sponge. The latter approach seems to be the norm, however, judging from conversations overheard at coffee houses, markets and workplaces. This week we considered once again how things might be setting themselves up for one of our pet doomsday scenarios – global war. War, of course, is not an end in itself, but a means, among other aims, of establishing a new system of world government.. Such a goal requires the dissolution of systems obstructing its implementation, such as national sovereignty which is usually enshrined in constitutional law and held in high regard by the masses. In many nations, abrogating this would require referenda or absolute majorities of Parliament. This is a lengthy and uncertain undertaking, but using war as a pretext can speed things along nicely.

A very interesting and important economic development was noticed in an article by Fareed Zakaria at Clear Markets entitled “Boom Times are Back, Outside the U.S.”:

Around the globe, though, markets are humming. China’s Shanghai index is up 45 percent, India’s Sensex is up 44 percent, Brazil’s Bovespa is up 38 percent and the Indonesia index is up 32 percent. Now, stock markets don’t tell the whole story, but the reason many of these are rising is that the underlying economies of most of these countries are still registering significant growth. The evidence abounds. …

When all was right with the world (for some people anyway), the ones with all the money had all the weapons (the United States of American and NATO). But today, the economies with healthy balance sheets, sustainable debt levels and growing, hard working and productive populations are those with weak military capabilities. Indeed, it’s frequently stated that the world’s combined naval capacity is still no match for that of the United States. This may appear to be the case on paper, but in practice things might be very different.

A little while ago there was an article in the New York Times and elsewhere, describing the scenario of all out war with Iran as being potentially the same as that of a memorable 2002 war simulation where the US navy was resoundingly defeated in record time by being swarmed by small boats. “The whole thing was over in 5, maybe 10 minutes.” were the words of Lt. Gen. Paul K. Van Riper of the winning team. It just shows in a practical way that in modern warfare, defence is easier than offence. It is also not surprising that the U.S. is particularly cold footed on the idea of an Israeli attack on its perceived arch enemy. Currently, the U.S. is neither ready for another ground based invasion, nor is it likely to come out unscathed from an air war with Iran.

While some might see the wealth of the Second World against the military might of the First World as a form of balance, it is in reality a serious imbalance. If two men in the street face eachother, one with a sack of gold and the other with a loaded pistol, the likely outcome is easy to imagine. The man with the gold might swallow his pride and share the gold, but he still risks being shot, because, as has been described by many great thinkers, authors and historians, statecraft is, at best, amoral.

Another thing to consider is what impact the American financial crisis will have on its military capability. As explained today by Bill Bonner on The Daily Reckoning, the General Motors bankruptcy is indeed a foretaste of things to come for the United States as a nation. If the key manufacturers of the U.S. are divided up and sold off, probably to foreign interests, does this not compromise the U.S. military supply chain?

The General Motors bankruptcy would, ordinarily, strike at the heart of the U.S. Military Industrial Complex (MIC). This, however, will not be the case. The new CEO who will likely oversee the subdivision and sell off of GM, already appointed, is Kent Kresa:

Northrop Grumman CEO Kent Kresa and other executives are part of “St. Andrew’s Prep,” an informal network of Andrew Marshall protégés. Marshall directs the Pentagon’s Office of Net Assessment and is an iconoclastic military strategist who was given wide power to define future defense priorities by Defense Secretary Donald Rumsfeld.

This is significant, because it will ensure that the firesale will avoid the risk of key GM assets falling into foreign hands but remaining under the influence of the MIC. It confirms the very sensible theory that a nation’s military infrastructure is actively protected from economic storms. Funny money can do whatever it likes; the US dollar can turn itself into a Peso, but the things that matter happen regardless.

The U.S. is not going to give up its military supremacy, just because central bankers have decided to throw the populace into the throes of poverty and unrest. On the contrary, this can only serve to provide the MIC with ample supply of intelligent but desperate men who until now could not be enticed to join (and die prematurely from serving in) the armed forces. If anyone wonders how the US was going to meet its CO2 production targets as a result of the Waxman-Markey Bill, what with population growth continuing and social change so difficult to achieve, this may be what is coming.

It is still unclear, however, who would want to stand up to the U.S. in a military standoff. North Korea (which frequently looks like China’s alter-ego) doesn’t look anything close to being organized enough to take on its enemies. Consideration for other more realistic players, such as Russia or China (or both together), as being players in an international conflict with Western powers, needs to be taken seriously. Russia, for example, is building its military, showing that it anticipates regional instability in coming years, coming from NATO. China has been doing the same for a long time now, and is likely to ramp up efforts to make best use of its surplus productive capacity (just like the U.S. has always done).

So at this stage, we’re still of the expectation that the Global Financial Crisis, which it should be stressed is an entirely human-made one (nothing natural about it whatsoever) will continue along a fairly predictable path, peacefully. This goes for the next year or two. But after that, when various new military projects mature and the economic fallout starts soiling the currently tidy international relations enjoyed by various powers, things might get interesting. The wrong kind of interesting.