Economics

Rolex Vs. The Dollar

If you had bough a stainless steel Rolex Submariner Ref. 1680 back in 1973, it would have cost you a mere $385 (the equivalent of $1,985 today). By 1988, however, a Submariner Date would cost you $1,975, or the equivalent of $3,751 today.

Likewise, by 2004, the Submariner Date would cost you $4,250, or the equivalent of $5,054 today. Today, the current incarnation of the stainless steel Rolex Submariner Date is listed at a staggering $8,000. In other words, the Rolex Submariner has doubled in price since 2004.

Since then, the price increases which used to be intermittently made every few years is now a yearly affair. The cost of entry into the Rolex world is thus made more difficult every year as it climbs higher and higher in in the luxury watch food chain. But for the owner of a Rolex watch, the value of what you purchased is maintained by the policy of steady price increased.

But remember, between 2004 to now, the number of new dollars in existence has grown considerably. Just look at the price of commodities, gold, oil, etc. Another important factor to remember is the impressive appreciation in the Swiss Franc over the same time period, especially between 2004 and today. If you look at it on that basis, in CHF the price increase from 2004 to 2011 was only a 33.4% increase vs. 88.2% increase in the USD price over the same time period.

Precision Timepieces

The Scourge of the Faith-Based Paper Dollar – An Interview with Jim Grant

Jim Grant foresees a new American gold standard despite Wall Street’s stake in monetary chaos.

Mr. Grant is founder and writer of Grant’s Interest Rate Observer, perhaps the most iconic of the Wall Street newsletters. (Today, he will only say that his subscribers number between 5,000 and 10,000. At $910 a pop, you do the math.) He is also one of Wall Street’s strongest advocates of the gold standard, knowing full well it would take away much of Wall Street’s fun.

You might say that, as a journalist and historian of finance, he has been in training his whole life for times like ours—in which the monetary disorders he has so astutely chronicled are reaching a crescendo. The abiding interest of Grant’s, both man and newsletter, has been the question of value, and how to know it. “Kids today talk about beer goggles—an especially sympathetic state of perception with regard to a member of the opposite sex,” he says of our current market environment. “We collectively wear interest-rate goggles because we see market values through the prism of zero-percent funding costs. Everything is distorted.”

Mr. Grant is skeptical, scathing even, of the Japanese-style deflation fears that today motivate Mr. Bernanke’s monetary spigots. Good deflation, he says, is “when prices fall as a result of productive processes and technical apparatus, that is called progress.” Bad deflation is when merchants, drowning in debt and unable to get credit, dump goods at firesale prices. “The Fed refuses to make that distinction.”

Hence a horrifying irony: After the dot-com crash, Alan Greenspan and Mr. Bernanke drove down interest rates to fight a feared deflation and ended up inflating the mortgage bubble. “The Fed, in assaulting a phantom deflation, precipitated an actual one.”

Mr. Grant would prefer a monetary system tied to the amount of gold dug out of the ground to one based on the untrammeled discretion of Ph.Ds. The latter is what America got with President Nixon’s 1971 decision to close the Treasury’s gold window, breaking the last link to the classical gold standard, in which anyone was free to exchange dollars for gold at a fixed and guaranteed price. Result: the dollar, not gold, became the world’s “reserve currency.”

The U.S. government was empowered to borrow seemingly unlimited funds from foreigners and repay with a currency that the U.S. government itself could print. “Dollars pile up in Asia. Merchandise piles up here,” says Mr. Grant, as America, in possession of the printing press, has tried to achieve the “ancient hope of mankind, to live without working.”

The “fiat” dollar, he adds ruefully, “is one of the world’s astounding monetary creations. That a currency of no intrinsic value is accepted as money the world over is an achievement that no monetary economist up until not so many decades ago could have imagined. It’ll be 40 years next month that the dollar has been purely faith-based. I don’t believe for a moment it’s destined to go on much longer. I think the existing monetary arrangements are so precarious, so ill-founded and so destructive of the economic activity they are supposed to support and nurture, that they will be replaced by something better.”

But his point is an earnest one and brings us back to the modern character of Wall Street. The gold standard, he says, citing the “late, great” libertarian economist Murray Rothbard, was the “people’s system. If you didn’t like the currency, you could exchange your paper for gold and that sent a message.”

In our age of “wiki everything,” Mr. Grant finds it anomalous that we sacrifice freedom of monetary choice for the diktats of central planners acting out of the Fed’s faux-colonnaded headquarters in D.C. The fiat dollar is an “elite” system, he says, and Wall Street is its supporting “interest group”—those nimble, market-savvy, plugged-in folks know how to shuffle assets and exploit cheap funding from the Fed to leverage up their profits and soften the downside.

“Wall Street today is a statist creation,” adds the man who has known, loved and chided the Street for nearly four decades as one of its most able observers.

WSJ

Niall Ferguson’s “Civilization”

This is sharp. It feels urgent. Ferguson, with a properly financially literate mind, twists his knife with great literary brio.

If in the year 1411 you had been able to circumnavigate the globe, you would have been most impressed by the dazzling civilizations of the Orient. The Forbidden City was under construction in Ming Beijing; in the Near East, the Ottomans were closing in on Constantinople. By contrast, England would have struck you as a miserable backwater ravaged by plague, bad sanitation and incessant war. The other quarrelsome kingdoms of Western Europe – Aragon, Castile, France, Portugal and Scotland – would have seemed little better.

As for fifteenth-century North America, it was an anarchic wilderness compared with the realms of the Aztecs and Incas. The idea that the West would come to dominate the Rest for most of the next half millennium would have struck you as wildly fanciful. And yet it happened. What was it about the civilization of Western Europe that allowed it to trump the outwardly superior empires of the Orient?

The answer, Niall Ferguson argues, was that the West developed six ‘killer applications’ that the Rest lacked: competition, science, democracy, medicine, consumerism and the work ethic. Some of the best passages concern the history of consumerism, which has been less studied by mainstream historians than, say, inflation, trade policy or capital accumulation. There are excellent points about the Nazis’ failure to create a consumer society and about the modern paradox that standardization (jeans, Coke) went alongside rampant individualism. The key question today is whether or not the West has lost its monopoly on these six things. If so, Ferguson warns, we may be living through the end of Western ascendancy.

Financial stability depends on perception; the most that can be said about U.S. debt is that it opens the world’s leading power to a further crisis if sentiment flips, leading to “a kind of death spiral of falling confidence, rising yields and rising deficits”. We are teetering. I suppose we know that. As to the future, however, Ferguson is not a defeatist; Western civilization’s pluralism, freedom of thought, property rights and democracy remain huge strengths.

In sum, Civilization takes readers on their own extraordinary journey around the world–It is the defining narrative of modern world history.

Civilization: The West and the Rest