Since winning WWII, we in the West have been the driving force of the greatest era of peacetime growth, prosperity, expansion, technological advancement and human achievement the world has ever seen. Right? Well, without knocking the wonderful experience of the last 60 years, let us take a look at how this boom was financed.
In my last post, I began with the difference between equity and debt (or credit). Here are three illustrations I drew to conserve a few words...
(To be continued...)
Down to Brass Tacks
IronHead asked about my Thoughts on a Freegold price discovery mechanism. Peter Asher then suggested (through some old posts) that if gold was declared to be "international legal tender", then there would be no "price", simply exchange rates between gold and various international fiat currencies.
Let me first tackle the legal tender issue. Legal tender only kicks in once a debt is established, like when you eat in a restaurant before paying. It relates to the settlement of that debt. But I view legal tender rules as they relate to two separate functions, cash and credit. We are already free to barter amongst ourselves on a small scale. Craigslist even has a barter section! What is stopping you from paying for second-hand merchandise with your gold? If you make a business out of it you will probably run into trouble with the IRS, but not for small individual purchases. But for larger cash deals which require official registration, like purchasing a car or a home, you must pay in dollars so that the government can collect the appropriate tax.
In Freegold I imagine that these types of cash purchases will be explicitly allowed in gold, in order to collect the tax. Otherwise governments will run the risk of revenue lost to a black market. By allowing cash purchases in gold, the government can track and tax a certain segment of commerce that would otherwise go underground during a crisis. Much like the arguments for legalizing illicit drugs. But I wouldn't go so far as to call this legal tender. More like "allowed tender".
The credit deal, or debt portion of legal tender is the contractual protection offered by the court system. I imagine that this will not change. Courts will only be able to enforce settlement in dollars. You can't force a closed tractor factory to deliver a tractor it never made, but you can force it to pay the equivalent in dollars. You can't force a barren mine to dig up gold it never had in the first place, but you can force it to liquidate assets and pay in cash. In this way, gold will not be legal tender and will not trade as a currency as a means of price discovery.
No, price discovery will be through physical delivery only. Price discovery will be strictly on the cash market.
When I buy gold from my dealer face to face (the only true cash market), he quotes me a price based on his ability to replenish his stock immediately. Usually he phones his supplier and receives a current quote. This will be the price discovery mechanism. Each gold dealer will rely on his most trustworthy supplier. And that supplier will rely on his supplier. And so on. This will create a network of gold dealers that will monitor the flow of Freegold in and out of the system. If the price is too low, then no gold will be flowing in and too much flowing out. If the price is too high, then everyone will want to sell and there will be no buyers. This global network of gold dealers will efficiently set the physical price based on immediate physical restocking after any purchase.
And on the inflation/deflation debate... Forget about it. For us savers, just focus on the dollar and gold. When you hear about a "dollar devaluation", what that means is an across-the-board price inflation based solely on PAST monetary inflation. That is the very definition of a dollar devaluation. Jim Sinclair has offered some important information recently. (See: "The New Definition Of The Dollar" and "The Non Safe Haven US Dollar")
What he is saying in a nutshell is that some Global Giants with very deep pockets have rationalized that gold is going up and the dollar is going down. And in order to make themselves some ENORMOUS profits, they will be turning their considerable market-moving weight to work with, rather than against, this trend. He has given us a specific date when this will all start happening in earnest. And for those of you that have read "Our Crowd" as he advised, you know how he gets his information.