Tuesday, March 23, 2010
Defending a Virtual Currency
Here's something a little different.
I was asked in the comments section  to watch a video and to offer my thoughts when considering virtual currencies and freegold. Well, the video turned out to be quite good!  So here are my thoughts...
That was a great video! I finally watched the whole thing. Of course my thoughts are from a market perspective, and not from a NWO "oh noes, they is gonna control us and enslave us fohevah" perspective.  I hope that's not what you were hoping for. (And I don't think it was ;)
Anyway, he talked about the divergence of technologies, and I think it applies to the virtual monies they create as well. Yes, technologies diverge and diverge, branching out like he says, but then a lot of branches die off and only the strong survive. Only the most credible!
And in the virtual money world, virtual money must be backed up by a credible company, that will back up your money, that will sell you a real stuffed animal (or whatever) for your points. And without physical backing of any kind, what can make it credible?
Well, we already have virtual money. We have bank credits. And they are backed by certain institutions that are credible because they have the backing of being part of the Federal Reserve system, which has the backing of the Fed, which can legally print dollar bills. So credibility traces back down the tree to its originating branch of credibility.
But today, the ultimate backing we have does not mean any thing of real value is exchanged at the source. Today, what makes institutions credible is how they go about DEFENDING the value of your virtual bucks. Because today, you cannot get anything from the institutions (like a stuffed animal or something), but you get stuff from everyone else who trusts and uses those bucks because the institution DEFENDS their usage value, their short term purchasing power stability!
Now think of the Fed and the ECB as diverging branches, one of which will eventually die like the Game Cube. They each have their offspring of virtual currency circulating out there in neverneverland. And none of it is backed by the exchange of ANYTHING from the source. It is only backed by the DEFENSE OF USE VALUE at the source.
The ECB has set up gold in its forex reserves.  That means that it plans to use gold to DEFEND the value of a euro at some point. That's what forex reserves are for. The Fed uses other means to "defend" the dollar. The Fed actually prints MORE dollars to buy debt outright to force down interest rates to fantasy levels to make the dollar appear strong. So it debases the dollar outright in order to have some dollars to trick the barometer. That's how the Fed defends the dollar.
Eventually the ECB plans to use its gold reserves to manage the value of the Euro. Not to exchange euros for gold, but to use the gold to manage the euro, manipulate it if you will. But the big difference is that it will not start doing this until it is competing in a physical-only marketplace for gold. So in a way, even though it will be manipulation from TPTB, it will be fair manipulation! It will be "hard trading" with "hard opinions" available to everyone. 
The ECB will print money and buy more gold into the reserves if it wants to weaken the euro (raise the price of gold and debase the currency at the same time). And it will sell gold into the market if it wants to strengthen the euro (lower the price of gold and lower the money in circulation by taking some in). Of course gold will be at about 50,000 euros per ounce before this even starts.
This is how "forex" gold reserves are much more powerful than the gold backing the dollar once had.  They require less gold, they never run out, and they don't require the currency to compete in an unfair way with gold. And they can be managed at one central location yet their affect will be felt wherever virtual euros exist. Under the dollar's gold standard the Treasury had to restrict the entities that could come to the gold window.
Under freegold, everyone in the world can come to the gold window! Everyone that uses your "virtual euros" has the confidence that you are DEFENDING their value against the most versatile real world physical trading thing; gold. And also that you are allowing gold to float freely, so that anywhere in the world, they will be able to buy physical gold with your euros. They are perfectly convertible at all times and places, because the ultimate institution backing them makes sure they are credible against gold, and that there will never be a physical shortage of gold priced in euros.
That's the plan they came up with. And you can apply the credibility test to any competing virtual point system by tracing it back to the credibility of its ultimate defender. And that's my take on your video.
 Why Most Conspiracy Theories are Wrong
Also from Goldsubject Dot Com:
1. Freegold theory: the massive revaluation of gold after the collapse of paper assets
2. Freegold: arguments for and against
And much more!
 Soft Supply, Hard Demand
(from Call of the Century)
It is often repeated that our markets are driven by supply and demand. In fact, supply and demand is probably the most closely watched fundamental of the market callers. They look for various signals that demand is rising, or supply is falling. Perhaps they are thinking too hard in a very soft world. Or could it be the other way around?
When we think about supply and demand, it is helpful to think of an ancient barter world, modern paper trading tends to muck it up a bit. So think about a supply of chickens at a Medieval fair. Let's say there are 10 chickens cooped up in a booth, with several buyers bidding for the chickens with their various goods. The first bidder take two chickens for the price of two bushels of apples. He hands over his apples and walks away with the two chickens.
Now, the rest of the bidders are faced with the hard reality that there are only 8 chickens left where once there were 10. This is called "hard trading" and the bidders are able to form "hard opinions" about the real supply and demand in front of them.
Next let's imagine that the first bidder only had to put up 5 apples as margin and then wait until the end of the fair to decide what he wanted to do with his purchase. How would this affect the rest of the bidding? Now the other bidders must make value assessments based on "soft opinions" relying on conjecture like "that first bidder rarely takes delivery of his chickens, he's just in it for the quick apple." This is soft trading.
Soft trading tends to draw in a lot of bidders (traders) who are willing to put down a margin requirement in the hope of making a small profit at the end of the fair. The seller of the chickens may have 30 different buyers for his 10 chickens, each putting down 5 apples (or whatever their good is). At the end of the day, 5 buyers will go home with two chickens each, 10 buyers will receive their 5 apples back plus 3 more apples in profit, 15 buyers will lose their 5 apples, and the seller will end up with 10 bushels plus an extra 45 apples while the "price" of chickens actually falls! This is because the seller, who had only 10 chickens to sell, flooded the market with 60 "paper chickens" driving the price down and at the same time making himself an extra profit.
 6/14/98 ANOTHER (THOUGHTS!)
"Your question of Euro gold backing? The Euro will not be backed or fixed in gold. It will, as Michael Kosares (USAGOLD) notes, be the first "modern currency" to hold true "exchange reserves" in gold. It is important to understand that "exchange reserves" of gold are much more powerful a tool for currency defense than gold backing! In this system, gold must be traded in a "public physical market", in that currency, Euros! As such, the Euro can "devalue gold" (Euro price of gold falls) thereby making it strong in gold! In today's world, this will happen as a "strong Euro physical market" displaces and defaults "the old dollar settlement paper gold market"! The dollar will become"weak in gold"!"