Quote of the Day: Bubbles Don't Create Wealth

Bubbles do not produce new goods and services. They don’t create new wealth. For example, there was a copper bubble from 2009 to 2011. The price of copper more than tripled from $1.40 a pound to $4.60. Lots of people bet on it. Consider the fictional case of Joe, who bought $100,000 worth of copper. A few months later, he sold some. He took a profit, yet he still has $100,000 worth of metal. There is an old saying that you can’t have your cake and eat it too. And yet here’s Joe, who still has his money and he bought a motorcycle also. It’s not possible to consume without producing. Yet, while Joe’s copper wager produced nothing new, he consumed the bike. Logically, if Joe did not consume new production then he must be consuming old production. Joe consumed part of his savings. Joe doesn’t see the loss, because he is only thinking in dollars. Instead of looking at the trade in terms of paper, let’s focus on the loss of metal. Joe starts out with 15 tonnes of metal. He sells four to buy that new Harley, and has 11 left. Joe spent a big chunk of his copper, and now he has less. Most people don’t want to eat their capital. However, in a bubble they’re tricked. They think copper went up, but it’s just a mirage. In reality, the copper only went out—out the door. Now it’s gone. Speculating may seem similar to earning interest, but it achieves the opposite result. Interest creates new income by financing new production. Speculative gains come from paying out existing capital as income, and consuming it. We are all harmed by this destruction. Interest rate suppression undermines our civilization. It destroys the capital on which it depends.

This is from Keith Weiner president of the Gold Standard Institute USA and CEO of precious metals fund manager Monetary Metals published at the SNBCHF.com