Niall Ferguson On Whether The Financial Crisis Will Lead To America's Decline And A Glimpse Of The "Post-Pax Americana" Dark Ages

http://www.zerohedge.com/article/niall-ferguson-whether-financial-crisis-will-lead-americas-decline-and-glimpse-post-pax-amer

"Complex systems look like they are in equilibrium, but they are not: they are constantly adapting, highly decentralized, interdependent systems and this process of adaptation can continue for quite a long time. And you think to yourself when you look at it, that's in a wonderful equilibrium. That's how we think about the economy. That is how economists teach economics. They talk about it in terms of equilibrium. The bad news is that in fact we inhabit a complex system that has virtually nothing to do with the neoclassical model that you are taught in Econ 101. And that's why the economists failed to predict the financial crisis... For me American power if you generalize beyond the realm of finance through the geopolitical system is a perfect example of a highly complex system which looks like it is in equilibrium but like all the great empires of the past is quite close to the edge of chaos. And our nightmare scenario should be that something happens to us like happened to the Soviet Union... It suddenly just falls apart. And I think the trigger, the catalyst if you want to switch to chaos theory the butterfly in the tropical rainforest that flaps its wings and posits the distant thunderstorm is going to be the credibility of fiscal policy. That just seems to me like the obvious place where things can turn nasty, and they turn nasty with amazing speed."

I blogged about the US Mint depleting their inventory of Gold Buffalo coins a couple days ago:

http://gregnguyen.blogspot.com/2010/09/us-mint-has-run-out-on-buffalo-gold.html

Last month, they had depleted their inventory of the more popular Gold Eagle coins.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aKIgT9DddcYY

The Silver Gold Eagle coins have at times been sold out as well. This is not supposed to happen when an asset is in the throes of a long-running bull market. Higher prices should invite more production.

For instance, if wheat prices soar (like they have been due to drought in Russia), more farmers will allocate their acreage to production of wheat in order to increase profits, eventually bringing prices down to equilibrium. Gold was priced at $35 an ounce until President Nixon took us off the gold standard in 1971. It is now priced at approximately $1300. A much higher price should yield much higher production, as mining companies are motivated to produce higher quantities at inflated prices.

The problem is that an increase in supply has not accompanied gold's price increase, because there is no easy gold to find. Miners have to look far and wide for new deposits, and they have to dig deeper to find smaller amounts of gold (lower grade deposits). Higher gold prices have not fueled increased supply, despite incentive to increase production. Simply put, there is not enough supply to meet increased invesstment demand. Extrapolate that scenario out as you must.