What Does Your Money Buy?

I want to share a quote with you from a new book I'm reading by Jim O'Neill, creator of the BRICs investment idea. The book is titled The Growth Map: Economic Opportunity in the BRICs and Beyond, and the quote is from pages 21-22:

I strongly believe that taming inflation is essential for any economy to grow on a sustainable basis. People need to know what their money will buy. If they can't trust prices, they won't invest or do anything to improve their future. Without giving people the sense that whatever they earn and save is going to have value, no politician can talk seriously about sustained growth.

We happen to agree quite strongly with him. In his State of the Union address, President Obama boasted of manufacturing being on the rise, and that for some industries it now makes more sense to do business in the US than in other more cheaply labored countries.

That's because we've debased our currency so much. The cheap dollar makes exporting more worthwhile.

It's almost as though our government and Federal Reserve want us to become Japan.

(Though there's still a major difference: for as cheap as the yen is, most holders of Japanese bonds are Japanese companies and citizens. A default would be much more contained than the US with "pot holes" of US bonds all over the world.)

But it's not going to work.

At face value, the US as an export economy might make sense. Emerging markets that Jim O'Neill brought into the limelight have become "emerged," as he calls them. Huge demographics are entering into the middle class, and they are demanding goods and technology on par with the world's most developed countries.

These could be huge markets for US goods, and spark another boom here, pulling us out of recession and into renaissance.

But increasingly, the domestic demand of these "emerged" markets is being filled by domestic companies.

A straight look at the numbers, and you might think the growth in China should be fueling the world. Jim O'Neill points out that between 2001 and 2010, China's domestic spending increased by $1.5 trillion. And its GDP grew from $1.5 trillion to $6 trillion.

"Economically speaking," writes O'Neill, "China has created three new Chinas in the past decade."

Let's be clear: China has pulled its weight in the global economy.

The commodities boom was fueled by China's industrial growth engine. Massive amounts of iron ore, copper and oil have hit China's shores, and piled up into behemoth cities – fueling even more growth.

And now it's looking to meet the demands of its own people.

The issue of demographics is just one side of the coin, though. It's the coin itself that we're worried about.

Because increasingly, China's been importing another commodity: gold.

Last Friday, I told you China's central bank bought 454 metric tons of gold between 2003 and 2009. Investment and jewelry demand has also made China the largest importer of gold in the world. We're still waiting on the numbers for December, but October and November saw record imports stream into China.

In these two months, Chinese gold buyers bought up almost as much gold as world's central banks are expected to buy in the next six months.

Perhaps we should take a page out of China's book. Here's why:

 

Since the Federal Reserve was created in 1913, the US dollar has lost nearly 98% of its value. Why? How? The U.S. has been the major superpower since WWII...

Here's how:

 

When we need more money, we just print more money. The amount of dollars and obligations in the system is so great that the Federal Reserve has stopped reporting on the actual figures. And what has that done to gold? 

 

It doesn't take a rocket scientist to see the correlation here. That's why China's buying gold... That's what we should be doing. Even for developed countries, inflation can kill growth and eat away investor profits.

Over the next two years, gold prices could climb to $2,145 an ounce, according to Morgan Stanley. Looking at these charts, that price point seems tame.

Sara Nunnally is co-editor of Smart Investing Daily. As senior research director and global correspondent, Sara Nunnally's diverse resume includes studies in art history, computer science and financial research. She has appeared on news media such as Forbes on Fox, Fox News Live, and CNBC's Squawk Box, as well as numerous radio shows around the country.

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About the Author
Sara Nunnally

Sara Nunnally is co-editor of Smart Investing Daily and editor of Macro Trader. As senior research director and global correspondent, Sara Nunnally's diverse resume includes studies in art history, computer science and financial research. She has appeared on news media such as Forbes on Fox, Fox News Live, and CNBC's Squawk Box, as well as numerous radio shows around the country. 

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