A Fairy Tale and A Golden Thread
Gold, literally, is elemental, defined as “consisting of a single chemical element.”
So, in another sense, are Fairy Tales elemental, defined as “having the primitive and inescapable character of a force of nature.”
So it does not come as much of a surprise to find gold turning up, over and over, in fairy and folk tales. Gold has been a valued asset and a symbol of supreme value for most of history.
Fairy tales are not just juvenile stories. They are as stories that vividly and dramatically present the “facts of life.” Call them, in the Jungian sense, archetypal.
There are many examples. For today take the famous story by Hans Christian Anderson of The Emperor’s New Clothes.
The Emperor is gulled by two rogues into believing that their work, “of the most beautiful colors and elaborate patterns,” would be invisible to anyone unfit for office or “extraordinarily simple,” meaning stupid.
When the Emperor was gulled into believing this claim his ministers -- the “adults in the room” -- felt inhibited to state that they could see nothing lest they be deemed unfit or simpletons. From the Fairy Tale:
One day, two rogues, calling themselves weavers, made their appearance. They gave out that they knew how to weave stuffs of the most beautiful colors and elaborate patterns, the clothes manufactured from which should have the wonderful property of remaining invisible to everyone who was unfit for the office he held, or who was extraordinarily simple in character.
"These must, indeed, be splendid clothes!" thought the Emperor. "Had I such a suit, I might at once find out what men in my realms are unfit for their office, and also be able to distinguish the wise from the foolish! This stuff must be woven for me immediately." And he caused large sums of money to be given to both the weavers in order that they might begin their work directly.
So the two pretended weavers set up two looms, and affected to work very busily, though in reality they did nothing at all. They asked for the most delicate silk and the purest gold thread; put both into their own knapsacks; and then continued their pretended work at the empty looms until late at night.
"Is not the work absolutely magnificent?" said the two officers of the crown, already mentioned. "If your Majesty will only be pleased to look at it! What a splendid design! What glorious colors!"
"How is this?" said the Emperor to himself. "I can see nothing! This is indeed a terrible affair! Am I a simpleton, or am I unfit to be an Emperor? That would be the worst thing that could happen—Oh! the cloth is charming," said he, aloud. "It has my complete approbation." … "Magnificent! Charming! Excellent!" resounded on all sides; and everyone was uncommonly gay.
He donned his "robes" and paraded himself before his Court.
“But the Emperor has nothing at all on!” said a little child.
The “purest gold thread” (as well as the “large sums of money”) ended up in the knapsacks of the rogues, men guilty of cupidity not stupidity.
There is, of course, a moral to this story.
In G.K. Chesterton’s essay on Fairy Tales (from All Things Considered, 1956, p.188-9):
If you really read the fairy-tales, you will observe that one idea runs from one end of them to the other—the idea that peace and happiness can only exist on some condition. This idea, which is the core of ethics, is the core of the nursery-tales. The whole happiness of fairyland hangs upon a thread, upon one thread. Cinderella may have a dress woven on supernatural looms and blazing with unearthly brilliance; but she must be back when the clock strikes twelve. The king may invite fairies to the christening, but he must invite all the fairies or frightful results will follow. …
This great idea, then, is the backbone of all folk-lore—the idea that all happiness hangs on one thin veto; all positive joy depends on one negative. Now it is obvious that there are many philosophical and religious ideas akin to or symbolized by this; but it is not with them I wish to deal here. It is surely obvious that all ethics ought to be taught to this fairy-tale tune; that if one does the thing forbidden, one imperils all the things provided. …
Chesterton had it right: “The whole happiness of fairyland hangs upon a thread, upon one thread.”
In The Emperor’s New Clothes that thread happened to be of gold.
The Emperor’s New Clothes is a perfect metaphor for the mechanisms by which, with all due respect (and not implying any roguishness on their part), central bankers use to set monetary policy. Policy, it has been revealed, is clothed in pretense just as the Emperor’s new clothes were a mere pretense.
As earlier noted, gold has a multi-millennia history as money. Gold -- then and now -- has the properties that make it valuable and valued. The US dollar, decoupled from gold since 1971, has had an uneven track record in its mere 46-year career as a fiduciary (sometimes known as “fiat,” meaning “by declaration”) currency. The dollar, in fact, has lost 85% of its purchasing power since that decoupling.
The Federal Reserve System has but one "product," “Federal Reserve Notes.” Dollars. There likely are a few of these in your wallet. You can examine the top edge of one. It says, “Federal Reserve Note.”
One of the biggest “open secrets” in Washington is that the Federal Reserve System’s economic forecasts are so consistently wrong that they are the laughingstock of both Washington and Wall Street. As I wrote in a Forbes.com column entitled If the Fed Is Always Wrong How Can Its Policies Ever Be Right:
Now comes one of the world’s top monetary reporters, Ylan Q. Mui, to make a delicate observation at the Washington Post’s Wonkblog, in Why nobody believes the Federal Reserve’s forecasts. Mui:
“The market recognizes that the Fed has repeatedly erred on the optimistic side,” said Eric Lascelles, chief economist at RBC Global Asset Management. “Fool me 50 times, but not 51 times.”
Even the government's official budget forecasters are dubious of the Fed’s own forecast.
In fact, the Federal Reserve System’s flagship Federal Reserve Bank of New York has itself admitted, quietly, that it’s methodology has a terrible track record. From the same column:
A good bet would be that there’s a problem with the Fed’s reliance on an arcane art. This art is designated “Dynamic Stochastic General Equilibrium” modeling.
Sound scientific? Well.
With admirable intellectual honesty an assistant vice president in the Federal Reserve Bank of New York’s Research and Statistics Group, Marco Del Negro, Wharton Ph.D. student Raiden Hasegawa and University of Pennsylvania professor of economics Frank Schorfheide (speaking for themselves and not the Fed) open a two part analysis at the NY Fed’s own excellent Liberty Street Economics, Choosing the Right Policy in Real Time (Why That’s Not Easy):
Model uncertainty is pervasive. Economists, bloggers, policymakers all have different views of how the world works and what economic policies would make it better. These views are, like it or not, models. Some people spell them out in their entirety, equations and all. Others refuse to use the word altogether, possibly out of fear of being falsified. No model is “right,” of course, but some models are worse than others, and we can have an idea of which is which by comparing their predictions with what actually happened.
The authors go on to conclude in the second part of their analysis:
In the end, we have shown that policy analysis in the very oversimplified world of DSGE models is a pretty difficult business. Contrary to what it may sometimes appear from listening to talking heads, deciding which policy is best is very rarely a slam dunk.
Dynamic Stochastic General Equilibrium modeling sure sounds amazing. And the New York Fed recently detailed how its research group goes about compiling its Whitebook, Blackbook, contributing to the full FOMC's Tealbook, in The Monetary Policy Advice Process at the New York Fed. It is a very methodical process.
That said let’s be blunt. If NASA suffered from comparable inaccuracy the manned spaceflight program would have been shut down by an endless series of Challenger-type catastrophes many years ago.
What might The Emperor’s New Clothes have to teach us today?
Wouldn’t be nice to have at least some of your treasure secure in owning the real thing -- gold -- rather than pretentious fiduciary -- which is to say paper -- currency? Now that Responsible Gold has made it unprecedentedly easy, secure, and economical to own gold via the blockchain, why not?
Should the world monetary system ever unravel -- not that it shows any signs of doing so for the foreseeable future, yet a monetary system based on pretense is inherently vulnerable -- your portfolio would not be entirely subject to the call of the child: “But the Emperor has nothing at all on!”
Follow the thread. The persistent value of gold is no Fairy Tale.