Sunday, February 22, 2009

Fiat Guarantees and Real World Barter Deals

These two subjects will shape the next year or two as we move forward through time. I believe they will bring about two distinct phenomena. The first is a hyperinflationary collapse of all paper, including paper currencies. And the second is FreeGold.

First, let's look at fiat guarantees. Governments around the world are frantically guaranteeing everything tied to paper money. They do this because they possess the printing press as an ultimate backstop. And they do this to prevent a run on the system, in which anyone and everyone will simultaneously attempt to remove their wealth from the paper/electronic system. This has almost happened twice already in the last 6 months. It will happen again very soon.

But these guarantees don't just end with bank deposits. Government guarantees go much deeper, to include treasury bonds, money market funds, toxic loan performance, retirement funds, failing industries, and so much more. And there will be many more guarantees which will soon present as we find out that state and private pension funds are totally insolvent. You see, governments fear civil unrest more than anything else. And the pension fund crisis will certainly bring civil unrest. So, without a doubt, even private pension funds that are "too big to fail" will be guaranteed. And the only backstop to all these guarantees is the printing press.

Guarantees are made to preserve the status quo. They are not meant to be used. But this year will be different. All these guarantees will have to be used, to prevent civil unrest. But the outcome will be even worse, as the performance of the guarantees will start an unstoppable cascade of exponential growth of the monetary base. And since no new wealth is created by the printing press, the insufficient value that will be redistributed through these worldwide government guarantee programs will be sucked directly away from anyone holding any paper currency or derivative thereof. To quiet two screaming babies, they will yank a pacifier away from one quiet baby.

At the same time, in the real world, a new system of trade will emerge. It is already under development. This system will be a fractal on the global scale of the barter system on the individual scale. When one country ships real goods, it will receive real goods in return. No longer will printed paper suffice.

One of the byproducts of this system of barter will be FreeGold. Gold, as the ultimate extinguisher of debt will be the final trade settlement of any trade imbalance. This will ultimately be true on all scales of the fractal curve. Reserves of gold will be held by nations, private companies, and individuals. And these reserves will lend credibility to each of these market participants under the new barter system. For if at "the end of the day", any imbalance of trade exists, it can be settled with the ultimate extinguisher.

As a trade partner, you will be willing to ship your goods for the goods of another country, but only if you are confident that any imbalance can be settled by something other than the printing press. This is the function of FreeGold.

On an individual level, your gold will bring you credibility as well. NINJA loans will no longer exist. (NINJA = No Income, No Job, No Assets). Some new form of fiat currency will surely replace the old, but credibility will be scrutinized when loans are given. And even the credibility of the fiat currencies themselves will be scrutinized. For a country to print a successful fiat currency, it will need to have reserves of real things with which to settle any trade imbalance at "the end of the day".

And at $1,000 per ounce, there is not enough gold in the world for gold to perform this crucial function. Therefore, as the above chaos comes to pass in whirlwind of change that is about to descend on us all, the trading of gold will simply go into hiding for a period of time and then emerge at a level at which it can fulfill it's new duty. The timing of all of this, I believe, is upon us. Watch the stock markets and gold this week for signs.

Of course this is all just my humble opinion. Please do your own due diligence. ;)

FOFOA

2 comments:

FOFOA said...

This is a very good interview with Doug Casey.

d2thdr said...

HI FOFOA,

You said ,'And at $1,000 per ounce, there is not enough gold in the world for gold to perform this crucial function. Therefore, as the above chaos comes to pass in whirlwind of change that is about to descend on us all, the trading of gold will simply go into hiding for a period of time and then emerge at a level at which it can fulfill it's new duty. The timing of all of this, I believe, is upon us. Watch the stock markets and gold this week for signs.'

However in one of Antal Fekete's writing on your blog, he said if gold goes into hiding, its difficult for it to reemerge until something worthwhile comes around. He said that after the fall of the western Roman Empire gold did not emerge from hiding for 4 generations or so.

How do you see this panning out?

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