-- Posted Friday, 15 May 2009 | | Source: GoldSeek.com
By Hubert Moolman
People use various economic indicators to make economic decisions that influence their wealth. It is critical to use accurate economic indicators of the conditions that influence wealth. This is true in normal times and more so in times of crisis; poor decisions could be disastrous even wiping out all of your wealth.
Money plays and extremely important role in establishing or interpreting the various economic indicators that people use. This is because it is the standard by which value is measured. It therefore follows logically that money should have value. Money is thus the ultimate measure of wealth, it can be considered as being generic value or seen as the building blocks of value. This is money’s role as a unit of account.
Example – When people refer to someone’s net worth, they use the dollar (wrongly perceived as money) as the measure when saying he is worth 5 billion US dollars. They also use the wrongly perceived money as the measure of the worth of a company or a trust etc. This is done despite the fact that the assets of the person, the company or the trust might be materially different from one another.
Simply put, we value/measure most assets in money terms.
What is extremely important when correctly measuring something is the actual measure one uses. The measure needs to be consistent, that is it should be the same today as it was yesterday. If the measure changes then one will draw incorrect conclusions or make bad decisions.
For example, we measure time in seconds, minutes and hours. These measures are consistent since the time we started using them. Imagine your watch is running slow. You will be late for meetings if you use your watch as a measure of time, whereas you would probably be on time if you were using a watch that is displaying the correct time. The difference between the two watches is that the measure (seconds, minutes etc.) of the “correct time” watch is consistent whereas the measure of your slow watch is always changing (the minutes and seconds are probably getting longer).
In the same way that a slow running watch causes you to make wrong decisions about when to leave for an appointment etc. and thus affecting your timeliness, using a flawed money to calculate various economic indicators such as inflation will cause you to make the wrong economic decisions.
So given the above, it should be clear that money needs to be consistent, it should be a constant, just like minutes or metres. A SA rand, a US dollar or a British pound is not money, because that (exchange rate or notional value) which supposedly makes it a measure changes all the time.
Gold, however is money. Its mass, which makes it a measure, is consistent. An ounce of gold today is the same as an ounce of gold yesterday. Remember, it is not the dollar price that makes gold a measure.
Inflation rate or Deflation rate, GDP, Turnover and Profit are all examples of economic indicators that are measured or established by money as an input. We use a flawed input for these economic indicators, therefore we get flawed indications. Using these indicators will usually cause us to make bad economic decisions. This causes a great misallocation of economic resources worldwide.
Let us look at a few examples in South Africa.
Example 1
Below is a chart of house prices in South Africa in rand terms. This therefore uses the rand as a measure.
based on ABSA’s average house price index
Below is a chart of those same house prices in South Africa in gold (Krugerrand terms). This therefore uses the Krugerrand or gold as a measure.
based on ABSA’s average house price index converted to gold terms
Notice the big difference in the story that these 2 charts tell regarding house prices in South Africa since 2002. The perception in South Africa is that house prices have increased significantly and almost consistently from 2002 to 2008. This perception is wrong, and it is brought about by the inconsistent and false measure (the rand) used.
The second graph gives us the true picture because it uses a consistent measure (an ounce of gold). In gold terms house prices went up from 2002 to 2004, and started to go down from 2005 to 2008 to almost 2002 levels.
Example 2- From a previous article of mine
The official cumulative inflation rate in SA from 1 Oct 2005 to 1 Oct 2008 was 24.82%. The official inflation rate is calculated using rand as money, therefore using rand as a measure.
For the same period, I have calculated an inflation rate using gold as money, instead of rand.
Here is the calculation extracted from the article:
“So at the official inflation rate of 24.82%, a certain amount of goods would cost 24.82% more in 2008 than it cost in 2005, if we use rands as money. If we look at what the same goods would have cost in 2005 in gold ounces and compare it to what it would cost in gold ounces in 2008, we would do the following.
Price of gold on 1 Oct 2005 was R 2 986
Price of gold on 29 Sept 2008 was R 7260
(Please note that I used the closing price of GLD as listed on the JSE))
In 2005 the goods cost 3.35%(100/2986) of an ounce of gold.
In 2008 the goods cost 1.38%(100/7260) of an ounce of gold
The price of the goods is deflated by 58.81%(deflation) in gold terms.
So in fact, if we were using gold as money, the price of the goods would have been significantly lower. So we actually have deflation when we use gold as money.
We equal the goods to 100% and say that the goods in 2008 using rands cost 124.82% (100+24.82%rand inflation) and using gold ounces it cost 41.19% (100% less 58.81% deflation)
That gives us a real cum. inflation rate of 203% for the 3 years((124.82/41.19)-1). That is about an average of 68% per annum.
One can thus see that using gold as a measure to calculate price changes, we have deflation over that same period instead of inflation. If we want to measure the real rate that the rand has deflated over the 3 year period then we use gold as the constant and come to a rate of 203%. Or put another way, real inflation over the 3 year period was 203%.
Again, the official inflation rate (loss of purchasing power due to using of the rand as measured in rands) of 24.82% is wrong since it uses a flawed measure, whereas the 203 % inflation rate (loss of purchasing power due to using the rand instead of gold as money) is correct.
Conclusion
The so called money that we use today is notorious for causing people to make incorrect economic decisions. It is like when your petrol gage says that your tank is full, therefore you do not fill up before the long journey you are about to undertake. However, in reality, your gage is flawed since you actually had less than a few litres of petrol and therefore get stuck without petrol a few kilometres on your journey.
The so called money that we use today is notorious for causing a great misallocation of resources worldwide. The housing bubble is testament to the fact that there has been a great misallocation of resources. Huge amount of resources were invested in housing that should have been invested in other needy areas.
People get an increasing amount of rands as wages but in reality they are getting less real value.
In order to protect yourself from this fiat based fraud, you have to make sure that the economic indicators that you use are honest, it is fundamentally correct and it is relevant, so that you can make properly informed economic decisions.
Wealth should be measured in tangible assets. Some assets are better than others to use as a measure of wealth.
Gold was and is the ultimate form of wealth. It is the epitome of wealth. There is thus no better way in which to measure wealth. All tangible assets should and can be measured in terms of gold. Using gold as money and therefore as the ultimate measure of wealth, will remove all the false signals that fiat based measures give.
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May God bless you.
Hubert Moolman EL (Economically Literate)
You can email any comments to hubert@hgmandassociates.co.za
-- Posted Friday, 15 May 2009 | Digg This Article
| Source: GoldSeek.com
