If you’ve ever looked at the keyboard of a cash register at McDonald’s, you know that it has been designed to be idiot-proof, as unchallenging to a cashier’s mental abilities as counting one’s toes. In fact, the entire fulfillment chain at Mickey D’s, from order-taking, to french-frying, to mustard-dabbing  and napkin-dispensing, has been so well thought out by gifted systems engineers  that a bunch of fifth graders could run the lunchtime shift at the Times Square outlet without getting frazzled. So why do I occasionally get the wrong change for a $20 bill? And why are the odds so very remote that the contents of  the bag I take away from the counter will exactly match my order? Bottom line, even a systems engineer with an IQ of 150 cannot anticipate all of the mistakes that a cashier with an IQ of 90 is capable of making.

But the occasionally overlooked order of fries, even multiplied hundreds of thousands of times around the world, is as nothing compared to the clerical error made on Thursday by an employee of Mizuho Financial Group, Inc, Japan’s second-biggest bank. It appears that the firm will have to eat a $250 million loss as a result of a transposition error in an order typed up to effect a trade on the Tokyo Stock Exchange. The firm, acting for a client, had intended to sell a single share of J-Com Co. for 610,000 yen. Most unfortunately, it was an order to sell 610,000 shares for one yen that was transmitted to the exchange floor – effectively a market order, due to an exchange rule limiting share moves to 15 percent per day.

Spin Control

Shares of Mizuho Financial reacted in the same way we have come to expect of U.S. stocks when the underlying company’s troubles fall short of headline criminality. That is, they rose 2%, presumably  on their way to new recovery highs, after having fallen 3.4% the previous day. The spin imparted to this episode provides us not only with a textbook example of sang-froid under pressure, but also a yardstick with which we can roughly measure the size of the game played by the financial world’s dervishes. “It’s a hiccup,” said Geoff Lewis, Hong Kong-based head of investment services at JF Asset Management Ltd., which holds about $570 billion of assets worldwide. ``People have short memories and it's not something that concerns me.''

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Gold and Deflation

Our continuing dialogue concerning deflation turned up this note from a long-time subscriber in Seattle, an attorney who also happens to be an unwavering gold bug:

“Our general expectation has been to see a gold and silver sell-off in a deflationary environment.  In a deflation, the dollar should increase in value against all assets because, as the money supply shrinks as a result of defaults, there are fewer dollars out there to chase available assets. That analysis ought to apply to gold and silver as well as other assets.

“But maybe it will not. To the extent demand is coming from OPEC producers  and the Central Banks of China and Russia, those purchasers will continue to own and receive substantial U.S. dollar liquidity-flow, and to own significant U.S. dollar assets (i.e., Treasury instruments which are in effect U.S. dollar tender). As such, they will be able to pay whatever dollar-denominated obligations they might have without resort to liquidity provided by precious-metal liquidation. In an environment of dollar-block economic instability, it is not very likely that gold-buying entities will see compelling demand for legal tender U.S. dollars that dictates liquidation of precious metals.

‘No Gold Sell-Off’

“Like the rest of your readers, I am beginning to question my own view that the initial phase of a stock-market and economic contraction will see a substantial sell-off of precious metals – a sell-off from (hypothetically) $800 to $600 would still leave buyers in the $500 range in a protected position as to the dollars they converted to gold.”

My response:

Gold's recent surge has been driven mainly by petrodollars, but this is occurring in a financial environment still characterized by credit inflation, not deflation. If the perhaps imminent onset of deflation is precipitous, as we might expect, it will wipe out the world's liquid assets. In the event, all assets will net out against all debts -- an outcome than can only produce global bankruptcy, considering that leveraged-dollar aggregates associated with the financial economy vastly exceed the notional value of services and tangible goods.

Meanwhile, no matter how many surplus dollars the oil producers may now possess, it is arguable that they will be broke like the rest of us if their investment portfolios are subject to the deleveraging effects of deflation. At that point, what would a mountain of gold ingots be worth? Gold would no longer be a useful hedge against the destruction of paper assets, since by then they would have reached the point of worthlessness. Nor would gold function in barter for oil or other goods, since that would effectively price goods beyond the reach of consumers.

Nor should we expect the central banks to sit idly by if the hoi-polloi were threatening to treat sovereign states' net worth as a function of the amount of gold held in their respective reserves.

In short, gold may not be the no-brainer investment that gold bugs seem to think it is. Granted, it's a no-brainer for defensive purposes -- but not necessarily the ticket to riches in a world in which non-believers have been rendered destitute..