We will have a "change of events", please read,
They traveled a long road to get here. Back in the early 70's they ran out of gold after printing too many dollar commitments. If they couldn't use gold anymore, what else could be used? You know and I know that the buck would have been dumped real fast without something behind it! All the talk back then and now, "everybody's gonna hold the greenback because of the USA economy and it's military might", yea, right. Didn't see any coverage on the TV, showing the behind the door financial rooms. Truth was, everybody was going to move straight to the hard currencies and gold! Damn the effects on the world economy, figure that out later.
But, look here, the oil states said, "we will settle all oil payments in US$" ! Buy the oil in any currency and rate, but when you make the check, dollars please. The US agreed to float gold up to $250 if they went along. At that time, oil agreed because they held a hunk of gold in the NY fed bank vaults. Looking at it back then, 250 looked to cover anything! Well, anything happened and Carter had to slam gold in 78 when it crossed 250! Guess the US thought oil would just stop buying gold with excess cash, per the "agreement back in 71". Anyway, the rest is history through the 80's. Everybody learned to "love the dollar and hate the Russians"!
Everything changed in a hurry during Desert Storm. Remember how gold got hammered, big time! War in the oil fields and gold down? Looked good on the TV news, "America is winning, the dollar is good" Gold? No need! Here's what really happened.
In a very real way, the US dollar was inflated so much that even oil couldn't back it! Yes! The US ran through the gold backing in the 70's then went to a much larger oil backing in the 80's. But, even oil couldn't contain the huge expansion of dollar commitments that were created by the early 90's. Back to the drawing board. This time the US had to add gold to the oil backing mix, if the dollar was to remain on top!
A little political thought first, then we continue:
Do you really think the US is the only country that will stand a military in the oil fields? What if they told the US, NO, we want someone else to defend us? You think there are no other takers? The truth is, everyone is lined up to offer defense. The price of "oil backing the defenders currency" is worth almost anything! All the deficit spending you want, goes to the defender! Even Russia, if you can believe it! As my friend would say, "you think long and hard on this"!
Now, back to gold. The deal: you may stand your army for us, in return, "oil will back the dollar, if the dollar is made strong by gold" "in as much as our people may replace the lost value of oil with gold" "in as much as we will produce oil in amounts to equate a gold/oil/dollar ratio close to that which existed at out previous agreement in the 70's" And, pray tell, how does the USA make the dollar strong in gold? The BIS leads the creation of a paper gold market that will lower the world price of gold to the extent that it remains above "production costs".
Guess what, it worked! Contrary to all expectations of oil shortages, inflation, debt collapse and what have you, It Worked! But, there is one small problem.
The BIS and other various governments that developed this trade (notice I didn't use conspiracy as it was good business, as the world gained a lot), thought that the paper gold forward market would have allowed the gold industry to expand production some five times over! Don't ask where they got this, as they are the same people that bring us government finance and such. But, without a major increase in gold supply, the paper created by this "gold control operation" will either be paid by, 1. new supply. 2. the central banks. 3. rollover existing. 4. cash? 5. or total default! As the Asians started buying up everything (in 1997), number 5 started looking like the answer! When the CBs started selling into this black hole of demand, the discussion of #5 started in their rooms also.
What is really interesting is how gold is being viewed and traded in some areas. Some people are using it's future "reset price, in terms of oil" as a value discount. In other words, they use paper gold to buy things based on the new oil/gold relationship perceived as a given in two years or less! It is assumed that this proportion of paper gold held by oil, will be converted, no matter what? We are talking, many thousands an ounce here!
So where are we now? I'm not sure! How much gold paper is out there? If you look at the Comex ratio of average daily volume to open interest, it's sometimes around 8. Funny thing that ratio is close to the gold commitments traded in London. Multiply, say 40 million ozs by the ratio of 8 and we get 320,000,000 ozs. of gold. Now, the money is in this gold paper, paid up. Just no gold yet, I think? That's about 10,000 tons, I'll be damned! That's a lot of IOU gold, don't you think? Add to this, that between the IMF and what CBs could sell, only about 1/3 of it is available at a much higher price, if at all! Then again, I'm not in any position to know this, am I?
Wonder if anybody else knows or thinks this? Sure could mess up a sweet deal for the world economy. Does anybody have a plan, a currency plan, if things change? But, then again, just like in the early 70s, nothing changes. Does it?
________________________________________________________
Once again, the above was written by Another[1] in February of 1998. At what point did you realize this was an old repost?
Sincerely,
FOFOA
[1] This particular post may have been FOA writing on behalf of his friend, Another.
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An ideal order of natural money production based on a universal respect for private property could exist today, he says, "technically at a moment's notice." With it so close at hand, it remains only to convince others that it should exist.
http://mises.org/story/3340
Hi Shanti,
Thanks for the great article. And I'll note that they have an audio version you can download, because it is a little long. But I prefer the old fashioned way, reading. ;)
He makes one point that I have said many times, that price deflation is the natural and healthy environment created by an honest money system. And the fact that Ben Bernanke (and almost everyone else) sees deflation as something to avoid at all costs is a perfect sign that paper money is dishonest and unhealthy. If you save honest money and prices fall, you are rewarded for your time of saving. But in a fiat system, you must be constantly vigilant that the interest you earn on your savings is greater than the rate of real inflation. And it never is, at least not without taking on the risk of losing everything. Therein lies the flaw.
With honest money, you can save in a risk-free way and be rewarded. Under paper money, you are punished for saving, either by losing purchasing power or by taking on the risk of losing everything. And the only beneficiary is the entity that can create and spend money from thin air, stealing real capital from those of us that must earn and save for it.
One could argue that this "theft" is the price we pay for infrastructure and a modern society. But that is simply not true. It is the price we pay for an oversized central government that actually ignores local infrastructure. So as centralization fails along with its money system, perhaps we will move into a more localized and healthy system of money, infrastructure, and community. That is my hope.
Gold price manipulation is so important to the Keynesian central bankers simply to hide the truth from the people. First, it keeps hidden the risk-free savings advantage of gold by keeping the price in dollar terms below the inflation rate. And second, it perpetuates the myth that there is not enough gold in the world to satisfy monetary demand. This is a complete lie. It is a product of our dollar-based thinking. Obviously, at a high enough value, there is plenty of above-ground gold for this and ten other worlds. Freegold will freely trade with both goods and with fiat currencies because there will be no price discrepancy. The exchange will be voluntary and mutually beneficial to both parties.
Excellent article!
FOFOA
ps. Here's a hyperlink to the article.
Thx FOFOA !
You nail it, as it is:
"And the fact that Ben Bernanke (and almost everyone else) sees deflation as something to avoid at all costs is a perfect sign that paper money is dishonest and unhealthy."
Joseph Stiglitz was talking yesterday remarkebly on the creation of a new currency !
http://www.bloomberg.com/apps/news?pid=20601083&sid=a6_A09uIev7A
We may concluding that we are proceeding towards a transition.
Aldhough a change to a new honest monetairy system will not solve all the exesses who did metastase into the society or will it?
Now we face only a 20% of the working class to produce the GNP, 40 years ago that was 80% so how can those 20% keep feeding the 80% And by injecting money we even deteriorate further as to 15% (passing even the Pareto principle)
Anyway lots of work for the Masters.
Have just bought that book of Hullsmann, to read on our 25th mariage holliday at an ancient Greek island. When i finished, will tell you the experiance.
Rgds
Shanti
Shanti,
Congratulations on your 25th anniversary! And what better place to read that book than an ancient Greek isle.
Speaking of Joseph Stiglitz, this interesting exchange was posted on JSMineset:
Dear Mr. Sinclair,
The excerpt below was written by Kenneth Rogoff, the then Economic Counsellor and Director of Research at the IMF, to Joseph Stiglitz who was Chief Economist at the World Bank between 1997 and 2000. Mr. Rogoff appears to believe based on historical fact that monetary inflation always leads to price inflation and that this very premise generally makes things worse. Obviously we already know this, but I felt it was interesting to note this exchange between an IMF and World Bank economists.
Best Regards,
CIGA Marc
"Governments typically come to the IMF for financial assistance when they are having trouble finding buyers for their debt and when the value of their money is falling. The Stiglitzian prescription is to raise the profile of fiscal deficits, that is, to issue more debt and to print more money. You seem to believe that if a distressed government issues more currency, its citizens will suddenly think it more valuable. You seem to believe that when investors are no longer willing to hold a government’s debt, all that needs to be done is to increase the supply and it will sell like hot cakes. We at the IMF—no, make that we on the Planet Earth—have considerable experience suggesting otherwise. We earthlings have found that when a country in fiscal distress tries to escape by printing more money, inflation rises, often uncontrollably. Uncontrolled inflation strangles growth, hurting the entire populace but, especially the indigent. The laws of economics may be different in your part of the gamma quadrant, but around here we find that when an almost bankrupt government fails to credibly constrain the time profile of its fiscal deficits, things generally get worse instead of better."
The above message is from 2002. Stiglitz appears to be a tried and true Keynesian. So unless he has changed, I assume he was talking about a NWO-type fiat currency yesterday. Not exactly the solution I am looking for. But either way, the dollar is indeed looking at hard times ahead.
FOFOA
Thx FOFOA,
Your are correct, that contrarian statement on Stiglitz does not plays out in his favour, aldhough he also spoke on "reserves" not just currency in that same expression.
Anyway, the message is clear that there will be comming a transition.
And ANOTHER was telling that in times of transition the best place to hold value is GOLD.
How can you remembering pieces of 2002 that good? Chapeau !
Shanti
Hahaha... I wish I could remember pieces of 2002 that well. No, the CNBC article I linked dated that quote as from 2002. The post on JSMineset was just a few days ago.
Google has replaced the need for a photographic memory. But then again, if Google is our memory, then they can know what we are thinking about. Pros are always accompanied by cons.
@Shanti: what exactly do you mean by "Now we face only a 20% of the working class to produce the GNP, 40 years ago that was 80% so how can those 20% keep feeding the 80%"?
This discussion is about paper money not being fair and all, and as you know GNP is calculated in paper money, so it is not fair either. That means that this 20-80 proportion by no means represents real work effort, now does it?
Martijn,
I think Shanti was referring to a recent article that referred to the recent unemployment report. It said something like 20% work in manufacturing which brings money into the domestic economy. And 80% work in service-oriented jobs which live off of the 20% in a sort of parasitic way. So as people in that 20% lose their job, the 80% group will shrink even more dramatically. I wish I could remember which article it was.
It has to do with America's outsourcing of its production capacity over the years, and the shift to a service economy. The 20% actually contribute to growing the economy, while the 80% just consume, like a starving patient whose body is eating away at itself.
FOFOA
Sorry, missed that, should have positioned better before responding.
Interesting thought btw: we can continue producing stuff we don't need (extra car, another ipod) and polluting the environment, but in my opinion production is no saint. Service in the long run might be better; I make you laugh, you cook food for me, much more human isn't it?
We are not here to conquer the universe by using technology, we are here to develop ourselves, and that is what we do through interaction. Within our system that is done through the service economy. That's the reason that services are holding up and production is falling.
In the end we do know what we are here to do, and we will get there. The world is not as dark as we (some) think.
So, basic point: the service economy can hold up after all. Those 80% are not stupid or unnessesary, they might be doing something valuable.
Hi Martijn,
I don't think it is for me to make a moral judgement of one person's contributions over another. One of the lessons I learned from Another's posting was that is not about whether something is good or bad, right or wrong, that we do what we do. It is because this is simply the way it is.
And the way it is in the economy is that fresh value is created and brought into the economy through production. This can be the growing of food, the harvesting of trees, or the making of new ipods from elements mined from the ground.
In ancient times, all labor was devoted to production in one form or another. But as civilizations matured and money developed into a medium of trade, we found that we actually had an excess of production and we could now devote a portion of societies' labor to services. But that portion has grown larger and larger, and production smaller and smaller, especially in the West.
Peter Schiff had a good analogy in his book Crash Proof. It views 6 people stranded on an island as a microcosm of the world economy. I will just copy it here and that way you don't have to buy the book...
Let us suppose six castaways are stranded on a desert island, five Asians and one American. Their problem is hunger. So they sit down and divide labor as follows: One Asian will do the hunting, another will fish, the third will scrounge for vegetation, the fourth will cook dinner, and the fifth will gather firewood and tend the fire. The sixth, the American, is given the job of eating.
So five Asians work all day to feed one American, who spends his day sunning himself on the beach. The American is employed in the equivalent of the service sector, operating a tanning salon that has one customer: himself. At the end of the day, the five Asians present a painstakingly prepared feast to the American, who sits at the head of a special table built by the Asians specifically for this purpose.
Now the American is practical enough to know that if the Asians are going to continue providing banquets they must also be fed, so he allows them just enough scraps from his table to sustain them for the following day's labor.
Modern-day economists would have you look at the situation just described and believe that the American is the lone engine of growth driving the island's economy; that without the American and his ravenous appetite, the Asians on the island would all be unemployed.
The reality, of course, is that the American is not the engine of growth, but the caboose, and the best thing the Asians could do would be to vote the American off the island--decoupling the caboose from the gravy train. Without the American to consume most of their food, they'd have a lot more to eat themselves. Then the Asians could spend less time working on food-related tasks and devote more time to leisure or to satisfying other needs that now go unfulfilled because so many of their scarce resource are devoted to feeding the American.
Ah, you say, but that analogy is flawed because in the real world the United States does pay for its "food" and Asians do receive value in exchange for their effort.
Okay, then let's assume the American on the islands pays for his food the same way real-world Americans pay, by issuing IOUs. At the end of each meal, the Asians present the American with a bill, which pays by issuing IOUs claiming to represent payments of food.
The castaways all know that the IOUs can never be collected since the American not only produces no food to back them up, but also lacks the means and the intention of ever providing any. But the Asian accept them anyway, each day adding to the accumulation of worthless IOUs. Are the Asians any better off as a result of this accumulation? Are they any less hungry? Of course not.
Suppose an Asian Central Banker suddenly washes up onto the island and volunteers his services. Now each day the central banker taxes the other Asians on the island by confiscating a portion of the scraps of food the American throws them each day from his table. The central banker then agrees to return these morsels to the other Asians each day, in exchange for each Asian's daily accumulation of the American's IOUs, less a small percentage for himself because he, the central banker, also has to eat.
Does the existence of a central banker change anything? Do the Asians have any more to eat because their own central banker gives them back a portion of the food he took from them in the first place? Do the American IOUs have any more value because they can now be exchanged in this manner? Of course not.
The Asians will be better off without us
The real world lesson is that if it doesn't make sense for the six make believe Asians to support millions of real-world Americans. The fact that they do so in exchange for worthless IOUs in no way alters this reality.
There is no question that in the short run, by allowing the U.S dollars to collapse (in effect, voting millions of Americans off the island), there will be some disruptions of Asian economies. Of course, there will be some initial losers, particularly among those Asians who currently profit from the present arrangement. However, these profits come only at the expense of greater losses borne by the entire Asian population.
In the end, the cessation of America's excess consumption, which is not a benefit Asians enjoy but rather a burden they now disproportionately bear, will be the best thing that can happen to them. Like the serfs being liberated from their lords, their scarce resources will be freed to satisfy their own needs and desires, and their standards of living will rise accordingly. As their savings finance increased capital investment, rather than being squandered on American consumption, their future standards of living will rise that much faster as well.
Sincerely,
FOFOA
I've read that Peter Schiff part too, and I tend to agree. It is however difficult to draw a clear line between production and services in my opinion. For instance a hamburgerflipper does produce something (a baked burger) but is often said to provide a service, as does a hair dresser.
So generally I still tend to believe that many of services incur a production component and truly are valuable, and often a (clear) distinction between service and production cannot be made.
The outsourcing of other production is more of a problem. Since the (valuable and productive) services I was refering to cannot be exported the US tend to import more than they export. That off course is not a sustainable balance and is destined to bring trouble. So the problem lies more in the trade deficit than it does in service provision. The bottom line of Schiffs story is also rather that one guy was only consuming and not contributing and had little to do with a distinction between service and production industries. Unless of course you view consumption as service and contribution as production, but that is not the way the terms are (supposed) to be used.
Martijn,
Rather than focusing on whether the burger flipper is part of the service or manufacturing sector, perhaps we should focus on various industries, and whether they are service or manufacturing related.
Eric Janszen does a good job making the distinction at http://fireeconomy.com/.
"Where does the term "FIRE" in "FIRE Economy" come from?
Economists often refer to different sectors of an economy by groups of economically related businesses. For example, businesses in the Manufacturing sector include Food Manufacturing, Apparel Manufacturing, Wood Product Manufacturing, Petroleum and Coal Products Manufacturing, Chemical Manufacturing, Fabricated Metal Product Manufacturing, and Computer and Electronic Product Manufacturing. The Finance, Insurance, and Real Estate or FIRE sector is composed of Commercial Banks, Savings & Loans, Credit Unions, Finance / Credit Companies, Securities & Investment, Venture Capital, Hedge Funds, Private Equity & Investment Firms, Insurance, Real Estate, Mortgage Bankers & Brokers Accountants.
What is the FIRE Economy?
The FIRE Economy is one of two economies that operate in the United States, the UK, and other countries that have developed economic policies to give FIRE industries tax, regulatory, and monetary, advantages over productive industries. The other economy is the Productive Economy, comprised of businesses that produce value-added goods and services. The Productive Economy grows based on profits from sales of goods and services produced by added intellectual property, energy, and other ongoing human value inputs. The FIRE Economy grows based on interest on debt and capital gains generated asset price increases, but not increased value -- asset price inflation -- realized as capital gains. Examples of inflated assets are residential and commercial real estate from 2002 to 2006 and technology stocks from 1997 to 2000. As a result, over a period of decades the FIRE Economy has become the dominant source of income, and payments within the FIRE Economy are now many times larger than the Productive Economy in aggregate....."
Ok I can see the point here. I believe the FIRE economy does add value by allocating capital to guarantee its most efficient use. However, as they say, at the end of the we can't al be a stock broker.
A FIRE economy of 10-20 percent seems reasonable, anything above that will arise doubts.
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