Wednesday, October 21, 2009
Gold is Money - Part 2
In our last discussion we distilled the pure concept of money down to the innate human ability to mentally associate relative values. Today we will expand this thought in order to apply it to some very different functions we associate with our modern, common understanding of money. Hopefully this exercise will help to reveal a deeper understanding of where we are heading.
Confusing the Human Instinct of Value Association
Taking the pure concept of money further, we can say that money is the range of numbers that we hold in our memory, or numbers that we write on paper in a bookkeeping account, for the purpose of value association.
Imagine an ancient barter system, where one cow trades for two goats. And one goat is worth five chickens. In our mental association of values we might use the chickens as the primary basis and attach a value of 1 to a chicken, to make trading a little easier. So a chicken is 1, a goat is 5, and a cow is 10. We now have a simple monetary system of 1 through 10 in which the numbers themselves are our money, and an object of wealth, the chicken, is our unit of account.
So if I have two cows, three goats, and 25 chickens to trade, I might calculate in my head that I have a total trading value of 60 monetary units with which to trade. That number 60 is my primitive concept of money. But I wouldn't say that my money account was only in chickens. I would have to say that I have a total value of 60, but my money account is in chickens, goats and cows.
Over time it was discovered by early man that gold was the most accepted tradable wealth of all, and soon almost everyone was accounting for their wealth using gold as the basis for the mental unit of account. Gold was better than chickens for many reasons, not the least of which that sometimes chickens died. Also, gold could be divided into smaller and smaller pieces. When you did this with chickens, again, they died. This was certainly acceptable at meal time, but not out on the road, traveling the trade routes.
So the pure concept of money was the account, the rating system for value, the worth association in your head. Physical gold became the main wealth object used in that bookkeeping practice. This is how it was for at least a thousand years. But as all things evolve, man eventually became accustomed to speaking of gold in the context of money accounting. Even as languages evolved the concept of money accounting and the physical wealth holding of gold became mingled as one and the same.
This transition was subtle and unnoticed, an evolution transcending generations and even civilizations. But it has led to what has become a major conflict in the money affairs of our modern world. As gold receipts took over as the concept of money accounting (the mental value association role), man became confused as he now had to value his cows and goats against chickens that were never there in the first place. Receipts for chickens that far exceeded the actual chicken count. And how to value real chickens in this case? One imaginary chicken receipt = 1 real chicken??
You see, man has not changed as much as we might think since his barter association days. We freely exercise our skill at the value associations of all real things. Real things must remain free to float up and down as the reality of supply and demand dictates in order for our innate skill to be most efficient. Our inherent need to constantly change valuations as we see fit is what is driving physical gold to break free from its modern monetary attachment.
We inherently want to use gold as a wealth item par excellence. We want to trade its changing value within the same universe of floating values that all other tangibles trade. But for the benefit of the bankers and the US Govt, in the pursuit of stable credit and debt values, we have tried to fix gold's value to our "pure concept of money" so that banks can lend THE MONEY CONCEPT ITSELF, in lieu of lending real things, or real gold. Gold cannot be rigidly fixed to any money concept that must constantly inflate in order to survive, as any lendable and borrowable fiat currency must do, because physical gold is in finite supply.
Lending a Mere Concept
Today's dollar is a purely symbolic currency. It is not officially attached to anything. Our modern money system, like those in the past (even ones attached to gold), is built upon the notion that a mere CONCEPT can be lent in lieu of actually having to lend (temporarily part with) something of real value. The banking system wants to lend us 'the number 10', and have us pay it back, with interest, in chickens, goats and cows. They literally want to have their cake and eat it too.
This system of lending a purely symbolic monetary CONCEPT instead of lending real wealth requires the perceived value of that CONCEPT to remain relatively stable or else the entire banking system will collapse. It is to this end that bankers, governments, politicians and economists always try to entangle (think: forced quantum entanglement) gold into the money system and control its value in order to keep their CIRCULATING DEBT CONCEPT viable and valuable.
This is the problem with the architecture of the dollar, versus how all non-reserve fiat currencies will work in a free gold environment. The dollar must cheat in order to retain any illusion of stability. There are other ways for a fiat to remain stable. Responsible currency management is one. And in a system where the value of all real things (including gold) float freely against the parallel universe of fiat currencies, this will be how they will work.
When the dollar became a mere concept in 1971, so did all fiat currencies in the world. Their only value lies in the tradable value associations we give them, based on what can be purchased in the parallel universe of real things. But because we have been encouraged to save these symbolic debt concept units in lieu of anything with real value, a mismatch has grown to epic proportions whereby not even a fraction of these debt units can be traded back into the real economy at anywhere near today's prices.
We have lent, borrowed, saved, sliced, diced, sold, resold and insured so many units of a mere CONCEPT while neglecting to pay attention to the comparative size of the real economy with which the CONCEPT must run in parallel.
Our political drive, our collective spirit, and our American lifestyle has encouraged the near-exponential growth of this system so that we could buy real goods from others without sending them real wealth in return. So that we could grow and expand our great nation on a CONCEPT alone! We have proclaimed a strong dollar for the past 15 years, promoted it to be "as good as gold" and not only a perfect substitute, but a much better substitute for real wealth holdings... "because you must earn a YIELD". The dollar is even held as a "hard money" wealth reserve behind other currencies!
And over this period of the last 38 years, while our dollar perfected its role as a medium of exchange, it also left in its wake a world chock full of worthless CONCEPT-denominated paper wealth that people and nations bought and held in lieu of anything real. Today we are in a transition that will take us out of this jumbled mess and, in the process, will destroy much of our wealth illusion as it appears to simply evaporate away. But the truth is that it was never there to begin with!
Saving the System - Not its Value
It was said, many years before Paulson, Bernanke and TARP, that the financial system will be saved at any cost! Apparently this statement has proven to be true. But at what cost?
You see they are now faced with a dilemma they will not discuss publicly. On one side is their product, the conceptual unit of credit account, their currency. And on the other side is their offspring, the financial system, Wall Street. What saves one will kill the other. They can save the present value of their product and kill their offspring through starvation. Or they can save their offspring by delivering what it desperately needs to survive... a constant expansion of credit (aka monetary inflation). But this will, of course, kill the value of their product, the currency.
They can save one or the other, but not both. And it was always known, but has now been proven, that the system will be saved at ANY cost. (Unfortunately for them, they did not think it through far enough to realized that the cost of saving their offspring will also kill it and a whole lot more. But that line of Thought is straying a little too far from the topic of this post.)
In order to survive, the system, the financial industry, Wall Street NEEDS a constantly increasing supply of CREDIT! If the population won't give their own blood to save this dying Frankenstein monster, then the CB's and governments WILL! It is happening now. Right under our noses. For more than a year now!
This is why it is SO important that we hold only physical gold in our own personal possession in order to escape this tangled mess. Only touchable, graspable physical gold metal under full ownership conveys ALL of the properties that have come to be attributed to this kingly wealth asset. By contrast, financial contracts denominated in gold as facilitated by bullion banks, gold derivatives, gold loans, gold depositories, gold pool accounts, gold ETF's, or known by any other name, are all at their core pure and simple... (wait for it)... CREDIT. And what feeds the monster?? All together now... CREDIT EXPANSION!!
And because the underlying potential for depositors to exercise their claim on the gold metal within the system poses a constant threat (to pull the rug out from under the confidence in this particular variety of credit) which grows as the credit expands, a limit is eventually reached where the participants will tolerate no further expansion. And guess what? We may have just reached that limit!
The bottom line is that the banking system will be "saved" at the expense of sacrificing the market value of every last credit instrument they have created. Anyone and everyone with their savings inside the system will take a serious purchasing power haircut. The only people that will enjoy the full value of their wealth (and more) are the ones who hold it outside of the imploding system. Inside the system, credit of any color, green OR yellow, is only credit.
Long versus Short
Today's paper currencies are not just a medium of exchange, but they are still a pretty good store of value in the short term. The greater the rate of price inflation, the shorter the term that you will want to be holding the actual currency. Wealth assets, on the other hand, are the store of value for the long term. This differentiation is understood by almost everyone today. And it is so close to the concept of Freegold that it will not be "a giant leap for mankind" to get there.
The only difference is that right now, most of the public has come to believe that wealth is simply paper ownership of wealth producing industries and paper claims on real assets that can never be recovered at today's values. This is true for most all items, not just gold. And as we hold these paper documents for the long term, understanding them to be better than holding the actual currency because they provide a "yield", the recoverability of the underlying real asset is being constantly eroded away. In other words, we are unknowingly losing principle at the same time as we think we are gaining a yield!
From 1980 to 2001, the expansion of the financial industry far beyond the means of its parallel real world counterpart was a signal that our human instinct to buy things, or assets (even if only paper debt assets), rather than to hold the actual currency, was still intact. But the fact of the matter was that the dollar currency itself was expanding during this time period at a furious pace to meet its global usage demand WITHOUT causing the price inflation that should have accompanied such an expansion.
This strange "pseudo-deflationary" signal (versus gold) during a time of high currency inflation might have told the people that it was okay to hold the currency itself during this period. That something odd was afoot. As the currency was expanding with such ease, but at the same time gaining purchasing power especially against gold and oil. But the people only spent their currency, which demonstrated their natural inclination. To spend currency, and to buy real wealth assets for the long term (even if those assets were little more than a value illusion).
But today a totally different signal is being broadcast loud and clear, and being equally ignored. That gold is now about to resume its historic role and value as a wealth asset, long suppressed by its troubled association with inflating transactional currencies.
Ever since our dollar became a mere concept in 1971 it has required the illusion of a stable gold price in order to remain viable in its various roles. And a stable gold price it has had! Yes, even with the spike in 1980 and the quadrupling in price of the last 8 years, gold has remained relatively stable and locked into its confusing association with inflating currencies, mainly with the help of the inflating paper gold market, but also through anti-gold propaganda.
If gold had truly abandoned its currency role in the 1970's, and taken on the unfettered role of wealth reserve par excellence, we would have seen prices in the many thousands even before the 1980 price spike. The dollar and its insidious wealth-derivative offspring had multiplied that much even before the official link with gold was finally broken.
Half versus Whole
Our ancient instincts have not gone away. We have not "advanced" as much as we think. Our use of "the pure concept of money" has not changed since the days when we engaged in direct barter trade. We still want to accumulate wealth item along side and separate from our transactional "pure concept of money" which is really just a number in our mind, or marked down on paper. We know that this "number" is not something to be saved, except perhaps for as long as it takes to arrive at the next transaction. (See: Fekete's A ‘fairy’ tale)
You see our modern money concept has been surreptitiously eroded into only one half of our ancient barter understanding of the money concept, and one half does not equal a whole. Most of today's money, other than the monetary base, is borrowed into existence. It represents a debt, and a debt is an incomplete transaction. It is only one half of what our instincts require as a wealth reserve, which is a fully completed transaction resulting in an accumulation of hard value. And yet we still buy these "wealth assets" denominated in only "half a concept", half of the monetary concept that our mind intuitively understands.
This is a flaw! It is a big one, especially now as "the other half" is waving the white flag of surrender and default. Some very smart analysts see this as deflationary. They truly believe that the waving of the white flag will make this "half a concept" actually rise in value against its parallel real world economic counterpart. But that is not what will happen.
What will happen is a paradigm shift. The paradigm shift will be the sudden planetary recognition that the global debt(concept)-based paper investment pyramid is collapsing from its own weight and size. And that the best safe haven retreat is physical possession of the one and only hard asset that is globally recognized as an official monetary wealth reserve, an officially recognized hard collateral asset, a true national treasure, and an historic denominator of wealth with a history longer than recorded history itself!
As I see it, we are running out of time... fast! All it takes is for one event to destroy global confidence. One event. Maybe the current rumors will turn out to be just that, rumors. I hope so, because the dominoes that would fall will stretch all the way to empty shelves at your local grocery store. But even if the current rumors are a dud, how many other explosive probabilities are lurking in the murky swamp of banking, finance, money, and paper gold?
Clear anecdotal and circumstantial evidence is emerging that some sort of a squeeze is underway against institutions that might be short gold. A PR battle royale is also underway in the media to counter the effects. It is amazing to me that we can still walk into our local coin dealer and buy gold at a small premium to the paper price. But this, too, is probably part of the confidence battle that is being waged. Someone may be going to great lengths to ensure that the shortage at the top is not visible at the bottom.
The mint has already canceled certain gold coins because of too high of a demand. We have gold hitting all time record highs. Yet the mainstream media think it is most important that you understand the solid fundamentals behind each down-tick in gold.
I hope you can see what is happening. The giants are battling it out like Greek Titans while the masses are being subjected to an anti-gold propaganda machine of unthinkable proportions. All I can say is don't delay if you are still planning to move your savings out of the Frankenstein feeding tube and into the safety of gold. If you are waiting for a dip or a correction, you may just miss the greatest transfer of wealth the world has ever seen. Any price within $2,000 of today's gold price is a steal. Forget about corrections, even if they come. It is only a matter of time until physical gold runs dry, the paper markets suffer "an event", and the value of physical gaps up higher than ANY of the analysts have predicted. Don't miss this one time event!
THOUGHT, concept and some writing credit goes out to Randy (@ The Tower) circa 2001, and of course to my Trail Guide! Thank you for your priceless guidance!