Wednesday, August 25, 2010

Credibility Inflation


Here's a neat little concept that FOA introduced briefly in 1999. I think it explains a lot about the inflation, deflation, hyperinflation debate when it finally sinks in that this is where all the money went for the past 30 years: into inflating the credibility of the $IMFS far beyond the underlying reality. And yes, it has a direct impact on the Freegold revaluation as well. So here I will try to expound on this enlightening concept just a bit.

The Setup

Part of the reason the rest of the world did not abandon the dollar in 1971 was that the rate of economic expansion flowing from Middle Eastern oil cheaply priced in U.S. dollars was already exceeding the expansion rate of the money supply. So the switch from a semi-gold-(con)strained monetary system to a much more expandable "balance sheet money system" as I like to call it — or another name I like is "purely symbolic monetary system" — allowed for the non-deflationary addition of many new "quality of life" gadgets, widgets and shipping lanes that the world had never before imagined.

For the next three or four decades we would be able to comfortably afford the new introduction of Betamax VCR's, microwave ovens in every home, personal computers, DynaTAC cell phones, camcorders, digital cameras, LaserDiscs, Compact Discs, DVD's, MP3's, and on and on. Eventually, all of these wonderful products would be built cheaper by someone else on the other side of the world and shipped to us cheaply using the oil purchased from the Middle East with easily available U.S. dollars.

Sony BetaMax®

The reason I like the term "balance sheet money" is that whenever there is a need for more dollars they can be easily gotten from any bank's balance sheet. The dollars don't have to be there in the bank. You simply jot down the "need" for them on one side of the balance sheet and the dollars magically appear on the other side. Presto!

Of course once that "need" (demand) is supplied, the balance sheet must then be serviced with interest. But the thing about easy money is that you can always borrow new to service the old. In the previous system (con)strained by its parity fixation to the U.S. Treasury's limited supply of gold all these wonderful life-enhancing advances would have put a deflationary pressure on the dollar.

What this means is that when all these new products came to market, the dollars we needed to purchase them would have become more and more precious with each new widget that came to market. The cost to borrow dollars to buy a new BMC-100P or DynaTAC-8000 would have been prohibitive. And even if you did borrow the money, the service of that debt would have grown more and more burdensome over the life of the loan as dollars became ever more precious.


This deflationary dynamic would have stifled the global economic growth rate and confined it to only reasonable risk-taking. Which is part of the reason the foreign central banks, represented by the BIS, did not lobby the U.S. to officially devalue the dollar against its Treasury gold in 1971.

Rather than closing the gold window, the U.S. could have, for example, raised the price of gold to $200 and kept the system going for another 30 or 40 years. A move like this would have been the mathematical equivalent of increasing the Treasury's physical stockpile 5X to double what it was at the height of the Bretton Woods experiment.

But while that would have satiated the monetary transgressions of the past, it would have done little for the future. It would not have substantially changed the system to one of easy money. It would only have extended the old system of hard money.

BMC-100P - The first camcorder

It was reasoned at that time that more than just the ridiculous price of gold being broken, the system itself was broken, and needed a global finance structural change. So the international consensus was to let the U.S. default outright on its gold obligations rather than lobbying for a revaluation of its gold at a new fixed rate. But then continue using the dollar anyway, as long as relatively cheap oil could be gotten for dollars.

And with this decision, the stage was set for a renewed global (Western?) economic growth spurt, much like after the end of WWII. Only this time, the value lost through the non-delivery of U.S. Treasury gold would be more than replaced by the value oil brought to the new world economy, especially with first-of-a-kind products like Pong, released for the Christmas season in 1975.

Pong™ - The first video game

Even at the higher oil prices of the 1970's, the economic demand for oil proved to be a far superior "backing" to the dollar than the depleting Treasury gold had been. And in a certain (limited) sense, the world got its first small taste of Freegold in the 1970's.

But as gold's price began freely rising in the global marketplace, the old alarm bells went off in the dollar's management office. The dollar, which had always been viewed at par with gold, was now seen to be falling as gold soared. So during the mid to late 70's the U.S. Treasury and the IMF held a series of gold auctions to flood the market and quell the perceived danger. But by 1979 the demand for gold was so overwhelming that the auctions had to be stopped.

Through '78 and '79 the dollar plunged against foreign currencies, and in July of 1979 a desperate Jimmy Carter appointed the tough New York Fed President Paul Volker to head the "deeply divided, inexperienced, soft and indecisive" Federal Reserve Board. Then in early October of that year, while attending an IMF meeting in Belgrade, Yugoslavia, Volcker received "stern recommendations" from his European counterparts that something big had to be done immediately to stop the dollar's fall. The general fear at that meeting was that the global financial system was on the verge of collapse.

TRS80 (Pronounced "Trash Eighty")

Returning to the U.S. on October 6, Volcker called a secret emergency meeting in which he announced a major change in Fed monetary policy. The Fed would switch from controlling interest rates through the Fed Funds rate to directly controlling the money supply through bank reserves. One of the side effects of this sharp policy change was that interest rates would now be governed by the marketplace rather than the Fed. The Fed did still raise its discount rate from 11% to 12%, but then the market took the Prime Rate up to 20% within 6 months where it mostly stayed for the next year and a half.

It was later observed that Volcker's 1979 policy change was the most significant change in Fed policy since 1932, when in the middle of the Great Depression the Fed abandoned its "real bills doctrine" and started massive open market purchases of government bonds.

In early 1980, Volcker's new Fed policy began to bite. As interest rates rose, the Dollar first slowed its descent, then stopped falling, and then began to rise. Both the public and the investment community which had stampeded into Gold were lured back into paper by this huge rise in interest rates – and by the prospect of a higher U.S. Dollar.

LaserDisc™

Many facets went into this change in investment attitude, but one concrete change in the U.S. financial system was the most telling. Way back in March 1971, four months before Nixon closed the Gold window, the "permanent" U.S. debt ceiling had been frozen at $400 Billion. By late 1982, U.S. funded debt had tripled to about $1.25 TRILLION. But the "permanent" debt ceiling still stood at $400 Billion. All the debt ceiling rises since 1971 had been officially designated as "temporary!" In late 1982, realizing that this charade could not be continued, The U.S. Treasury eliminated the "difference" between the "temporary" and the "permanent" debt ceiling.

The way was cleared for the subsequent explosion in U.S. debt. With the U.S. being the world's "reserve currency," the way was in fact cleared for a debt explosion right around the world. It was also cleared for five of the biggest bull markets in history.

The global stock market boom of 1982-87
The Japanese stock market/real estate boom of 1988-90
The Dow (and then Nasdaq) led boom - late 1994 to March/April 2000
The great global real estate boom of 2002-06
The global stock market revival of 2006-07 [1]


DynaTAC-8000

And thus, in 1980, began the modern era of Credibility Inflation.

Salting the Mine

Most simply stated, credibility inflation is the expanding confidence in the fiat financial system to always deliver a higher payoff tomorrow than today. And through credibility inflation we ultimately destroy the currency structure by believing it can somehow deliver more than reality will allow.

Credibility inflation is the exact antithesis of price inflations like the 1970's. It is why we saw low consumer price inflation for the last 30 years relative to the massive monetary and financial product inflation. It is partly why we saw gold stagnant or falling for 20 years. Yet it is just as much a product of monetary inflation as regular price inflation is (more on this in a moment). And it is much more catastrophic in the end.

Periods of high credibility inflation are generally not followed by smooth cycles of credibility DEflation. Instead, they tend to SNAP BACK into sudden real price inflation when confidence abates. What happens in the most extreme cases is real price HYPERinflation.

This is one of the main concepts deflationists and mainstream economists completely miss; the SNAP-BACK of credibility inflation that can instantly take down their precious fiat currency. And it is their intentional avoidance of this obvious concept that delivers aid and comfort to masterprinters like Gideon Gono and Ben Bernanke.

When people try to protect their assets against the effects of fiat money, what are they really fighting against? The first inclination is to say "rising prices." Yet it's much more than that! Most everyone agrees that the interest rate paid by the banks never covers the loss of buying power brought on by price inflation. Especially the "after tax" return. It's the same old story, played out decade after decade. We must "invest our savings" (or become a day trader?) because the money will erode in value! Even at 3%, price inflation can eat away at any cash equivalents.

But, price inflation isn't the only story that impacts us. Rising prices come and go, but money inflation continues to affect us without fail. So why do people feel better when price increases slow or stop, even as money inflation runs ever upward? The good feelings usually evolve from the effects that money inflation (increases in the money supply) has on financial instruments. These assets take on the very same characteristic that the rising prices of goods once exhibited. They run up in currency price.

During these periods of "less goods inflation" another sinister form of mindset lurks in the shadows. Credibility inflation! Yes, it has been here many times before as every fiat currency alternates its effects upon the feelings of the populace.

Fiat currencies must, by definition, always expand in quantity. Their continued usage and acceptance is always obtained with the bribe of "more wealth to come!" Without that bribe, humans would never fall for holding a debt to receive the same goods in the future if they could get the real thing today. Human nature has always dictated that we buy what we need now instead of holding someone's IOU to receive it later. That nature is only changed through the "greed to obtain more." Like this: "I'll hold my wealth in dollars as long as my assets are going up. Later those increased assets will buy me a better lifestyle as I purchase more goods and services than I could buy now."

This is the hidden dynamic we see today. Just as destructive as "goods price increases," "credibility inflation" impacts our emotions to "hold on for the future, more is coming!" In every way, "credibility inflation" is just as much a product of an increase in the money stock as "regular price inflation" is. As cash money streams out to cover any and all financial failures, we begin to attach an ever higher credibility to the continued function of the fiat system. In effect, the more money that is printed, the higher we price the credibility factor. [2]


Selling the Salted Mine

Is this not where we are today? Interest rates – and with them, bond valuations – have run their 30 year course from 20% down to 0%. The credibility of paper assets has taken at least three severe beatings in the last decade. And now, to simply slow the acceleration of credibility DEflation, every manner of bailout and market rigging is being employed, practically in broad daylight. And this on the assumption that the global flock of sheep will only watch the numbers, not the men making them or the underlying economy from which they spring.

GDP is one of the great deceivers in the fiat money world. During the last century (??) or so, some form of GDP has always been used to measure the great mass of human endeavors. Yet, throughout this time, some form of fiat currency has always been in effect. Even during the Gold standard, fractional reserve banking expanded "gold note money" more so than the "gold money" in existence. Prior to 1929 this effect, if not creating outright "price inflation" during a time of Gold standard policy, was creating "credibility inflation" in the minds of investors. Using the backdrop of a growing GDP, people bought into inflating financial assets and ignored these signals as evidence that the fractional currency system was failing. Even though the dollar contained a policy statement to supply gold, back then a gold loan was still only good until everyone asked for gold.

The same thing is happening today. People destroy the currency structure by thinking it can deliver more than reality will allow. Instead of all debt failing slowly with each upward march of price inflation, prolonged "credibility inflation" snaps all at once as investors try to suddenly revert to a "buy now mentality." The inability of government authorities to contain the fiction of "good debt" is usually the feature behind the investor mood change. The "snap back" into a sudden "real price inflation situation" caused during this stage by a currency failure always breaks the whole structure. We approach this end today!

The GDP has been the relative gauge to mark all other measurements against. Even so, its numbers reflect little more than the result of an "expanding fiat money supply." Yes, there have been recorded downturns in GDP, but these contractions would have been worse if measured in real (gold) money. In opposite fashion, expansions paint a much brighter picture as all financial liabilities seem less a threat if held against a rising GDP. I submit that the GDP figures offer little more than a way to entice investors to increase their "credibility image" of our monetary system. Fiat moneys are always on a long term upward expansion, and they can hardly do less than bloat the picture.

Someone I know once said; "your wealth is not what your money say it is!"


A great historical example of credibility inflation with parallels to our present financial and monetary system was the system in France under the direction of the esteemed Scottish economist, John Law. In 1716 Law established the first French central bank, the Banque Générale, which was later nationalized and renamed the Banque Royale. Law used the Banque to introduce paper money in France.

Simultaneously, Law aggregated the trading companies in the French colony of Louisiana into a singular monopoly under the name "Company of the Indies" and sold shares of this company back in France. Law exaggerated the prospects of the company so well that he was actually appointed Controller General of Finances (essentially the first French Central Banker) by Philippe d'Orléans and given the official job of pumping this stock. In a way, John Law was kind of like the "Jim Cramer meets Larry Summers" of his time.

Wild speculation on the shares of the Company of the Indies led to the Banque Royale issuing more and more paper money to fund the monetary demands of the buying frenzy. And the "company profits" owed to the shareholders were also paid in fresh paper money. John Law's credibility was being entirely financed by his printing press.

Then, in late 1720, opponents of John Law's paper money attempted en masse to exchange their paper notes for gold. This forced the Banque Royale to cease physical gold "delivery," declare the essence of "force majeure" (which incidentally is a French term from French law), and admit it had issued much more paper than it had in gold. Both the Company stock value and the paper money itself plunged, ultimately to worthlessness. The monetary system in France was revamped six years later, but by the end of 1720 John Law had been disgraced, relieved of his official job, and had to flee France a poor man. He died in poverty nine years later.

Trading Salted Mines

One observation we can make is that in the long-line cycles of monetary history, technical (momentum) trading emerges in the very late stages of cycles in its most frenetic fashion. This is when it draws the most people into the unproductive activity of trading for trading's sake. And this is when it draws in the greatest profits, right before it delivers a catastrophic total loss.

In the early stages of these long-line cycles the greatest profits in society come from productive enterprises like building large companies from the ground up. But in the very late stages the greatest profits seem to come from paper churning and speculation in things that were previously traded mostly on fundamentals, based on actual, physical use.

We can see this in the famous bubbles like the tulip bubble, the Mississippi bubble, the South Seas bubble, the dot com bubble and the housing bubble. But it also occurs at the end of currency cycles. History is full of stories of traders frantically trying to trade out of their positions at the end of long-line cycles, while the currency burns around them. Look at any list of historic hyperinflations to find examples.

The modern version of this late-stage trading fad is most prevalent in the West, because that is where modern currency flows into financial assets at the highest rate relative to their real world, physical counterparts. For example, Western paper gold traders look to the seasonal preferences of Eastern physical gold users to plan their buys and sells. The Asian harvest season, after which farmers invest some of their year’s surplus income in gold is closely watched by Western traders. As is the Indian wedding season where every year Indian brides are adorned with physical gold.

Western paper gold traders love front-running these Eastern gold-buying seasons. Recall ANOTHER's comment on this from my last post:

Everyone knows that western minds don't like or want gold, but if they think you like it they will trade it up in price for the sake of "sticking it to you." Enter the world of "paper gold."

This paper trading mentality works really well right up until the moment it doesn't. And that's when it can deliver a total loss. I sometimes wonder if it should even be considered a profitable activity when a split second of fundamental phase transition can take away a decade of technical trading profits. Or the inverse, when the price of a fundamental misjudgment can be the opportunity cost of generations' worth of wealth. In a way, this is the hard question Freegold poses.

Getting Out Before the Collapse

Above I mentioned that the snap-back effect when a fiat currency loses its credibility (hyperinflation) is one of the obvious concepts intentionally ignored by deflationists and mainstream economists alike. Another obvious concept they remain oblivious to is that the two primary functions of money are in no way necessarily tied together. Those two functions being: "medium of exchange" and "store of value." Just because we have suffered their apparent fixation for centuries, they are most definitely not fixed by nature.

As long as you have the freedom to spend your money – the freedom to spend the fruits of your labor, which exists everywhere outside of outright whips-and-chains slavery – you have the choice of how to save your money. If you can spend your money then you can save your wealth in something other than money.

This is the essence of Freegold.

A medium of exchange need only have value in its usage (trade clearing) function. It can quickly lose all value when it is no longer used. This long-forgotten principle can be easily comprehended in Antal E. Fekete's "A 'fairy' tale" which I used in The 100 Year Clearing:

A ‘fairy’ tale

Let us look at another historical instance of clearing that was vitally important in the Middle Ages: the institution of city fairs. The most notable ones were the annual fairs of Lyon in France, and Seville in Spain. They lasted up to a month and attracted fair-goers from places as far as 500 miles away. People brought their merchandise to sell, and a shopping list of merchandise to buy. One thing they did not bring was gold coins. They hoped to pay for their purchases with the proceeds of their sales. This presented the problem that one had to sell before one could buy, but the amount of gold coins available at the fair was far smaller than the amount of merchandise to sell. Fairs would have been a total failure but for the institution of clearing. Buying one merchandise while, or even before, selling another could be consummated perfectly well without the physical mediation of the gold coin. Naturally, gold was needed to finalize the deals at the end of the fair, but only to the extent of the difference between the amount of purchases and sales. In the meantime, purchases and sales were made through the use of scrip money issued by the clearing house to fair-goers when they registered their merchandise upon arrival.

Those who would call scrip money "credit created out of nothing" were utterly blind to the true nature of the transaction. Fairgoers did not need a loan. What they needed, and got, was an instrument of clearing: the scrip, representing self-liquidating credit.

In this example the scrip money at the fair had value only through its use at the fair, not intrinsic in itself. After the fair, if you ended up with a trade surplus (extra scrip money), you turned in your medium of exchange for gold coins, the tradable store of value at the time. Can you imagine how this concept could work in a fair that's open for business 24/7/365?

So how can we possibly have one thing as a medium of exchange and something else as the store of value in our modern world? Has this ever been tried before in recent times? Of course it has! We have been doing it all along!! But the problems that ultimately come arise from those stores of value that are denominated in, and tied to, the durability of the scrip money, the medium of exchange.

Once upon a time, when the medium of exchange was physical gold coin, it was very durable. And stores of value denominated in that durable medium of exchange, denominated in gold, were quite durable for a time. But through the gold standards of the past century that "paper denominated in gold" became the medium of exchange. And now gold will once again become the store of value.

You see, these two monetary functions play off each other in a see-saw fashion. As "assets" (claims really) denominated in the medium of exchange fail and collapse, true physical "store of value" assets alternately rise to the occasion. It is only our ingrained misconception that both monetary functions must be somehow fixed at parity with each other that leads us to foolish ends. And understand also that the Giants of this world know better.

The Freegold Monetary Quadrangle – Explained in Gold is Money - Part 3

Today all governments of the world hold only two assets in reserve, meaning "for a rainy day." They hold claims against counterparties denominated in the medium of exchange and they hold gold, the store of value. And some of the more forward-thinking governments are already floating their gold reserves on the books, for all to see.

Now, the claims held in reserve have two vulnerabilities; the solvency of the counterparties and the durability of the scrip they are denominated in. Of course new scrip can be easily conjured on the national balance sheet to keep the counterparties technically solvent so most assuredly it will be the scrip itself that fails. The gold in reserve, on the other hand, has no counterparty and plenty of durability. So what monetary asset do you think will rise to fill the global monetary reserve void when the scrip finally fails? Palladium?

Bear in mind too that these Giant balance sheets can move the price (value) of gold more in a split second than all of us could in a lifetime of buying. And with any such tectonic shift in the importance of gold on international balance sheets, you can say goodbye to the fractionally reserved commodity (paper) gold trading arena and anything remotely associated with it.

The Collapse of the Salted Mine – Hyperinflation

First of all I would like to clear up probably the most common misconception about hyperinflation. What most people believe is that massive printing of base money (new cash) leads to hyperinflation. No, it's the other way around. Hyperinflation leads to the massive printing of base money (new cash).


Hyperinflation, in most people minds, conjures images of trillion dollar Zimbabwe notes. But this image is simply the government's reflexive response to the onset of hyperinflation, which is actually the loss of confidence in the currency. First comes the loss of confidence (hyperinflation), then, and only then, comes the massive printing to keep the government and its obligations afloat.

And what sets the stage for hyperinflation is a period of high credibility inflation followed by the loss of credibility. During our period of high credibility inflation the dollar was invisibly hyperinflated in a near-monetary sense. This has already happened. We are already there.

When I say the dollar has already hyperinflated in a near-monetary sense, I am talking about the number of dollars people, entities and even foreign nations think they have in reserve. Not in a shoebox, but in contractual promises of dollars to be delivered more or less on demand by somebody else. Claims denominated in dollars. This is how the vast majority of "dollars" are held; as promises to deliver more dollars. And this is why they are held this way. Because of the more in "more dollars." "Let me spend your dollars today and I will give you more dollars tomorrow!"

The Credibility Waterfall

I think it is fair to say that we have finished our 30-year run of high credibility inflation and we are now in the early stages of credibility deflation. The real question now is, can the credibility of the financial system deflate without tripping a breaker, without causing a credibility waterfall in the currency in which it is denominated?

The difference between today and a few years ago is that a few years ago credibility inflation was being fed by private credit (debt) expansion. Asset values, like homes, were being sustained and driven higher with the arrival of new marks. But today the Ponzi cycle of credibility inflation has peaked, there are no more new marks, and its decline is being managed centrally with the government expansion of new base money to conceal the failures one at a time.

And as in any Ponzi scheme there comes a point when redemptions can no longer be financed by new marks. I think the tipping point of credibility must come once it is clear that Bernie Madoff, I mean Uncle Sam is writing redemption checks that can never be cashed. The point is, we are already past the tipping point. So timing isn't really a question anymore. The credibility waterfall has already happened. But somehow we still have early marks continuing to stockpile rubber checks as if they are worth something. Does this mean credibility still exists? I think not.

I suppose this begs the question, is all that dollar debt out there in the world really worth anything anymore? If you answer yes simply because you cashed some of it in today for new underwear, then I say you didn't answer the question. The question is, is all that dollar debt out there in the world really worth anything anymore? The answer is no, it is not. Only at the margin, where you reside, can it still be cashed in for new underwear. But in aggregate, it is worthless, even today.

And then the next logical question should be, what is gold really worth today? If you answered $1,240 per ounce simply because you bought a gold Eagle today for $1,240, then I say you didn't answer the question. The question is, what is gold REALLY worth today? And the answer is it is priceless, but probably could be had in extremely large volumes for somewhere between $10,000 and $50,000 per ounce. (How much physical gold could China realistically get today if it tried to cash in $2T in debt paper for gold? At today's price it could get more than 50,000 tonnes, but only if that's the real value of gold.)

Only at the margin, where you reside, can physical gold still be had for $1,240 per ounce. But in aggregate, in the vaults of the world's central banks as the only reserve asset not tied to the medium of exchange, it is priceless, in the truest sense of the word.

My advice: Get as much of this priceless reserve asset as you can while it's still going for $1,240 at the margin. Seems like a bargain to me.

Sincerely,
FOFOA

[1] Brown text from The Early Gold Wars by Bill Buckler, The Privateer
[2] Blue text written by FOA in 1999

95 comments:

Pete said...

Wow, quite an insightful post, and logically presented.

Well done.

Tyrone said...

FOFOA, reveal FreeGold!!

Thanks for the article, and cheers!

Paul said...

Your posts just get better and better. Rapt.

Credibility Inflation sounds like the same thing economist Steve Keen gets in his computer models of fiat economies. Also known as "The Great Moderation".

http://www.debtdeflation.com/blogs/2010/07/03/are-we-it-yet

costata said...

FOFOA,

Another excellent post.

"Now, the claims held in reserve have two vulnerabilities; the solvency of the counterparties and the durability of the scrip they are denominated in. Of course new scrip can be easily conjured on the national balance sheet to keep the counterparties technically solvent so most assuredly it will be the scrip itself that fails. The gold in reserve, on the other hand, has no counterparty and plenty of durability. So what monetary asset do you think will rise to fill the global monetary reserve void when the scrip finally fails? Palladium?"

Or a rhodium sponge bath from "the Tokyo Rose of the gold world"?

h/t Ed Steer of Casey Research for the quote.

Tyrone said...

Returning to the U.S. on October 6, Volcker called a secret emergency meeting in which he announced a major change in Fed monetary policy. The Fed would switch from controlling interest rates through the Fed Funds rate to directly controlling the money supply through bank reserves. One of the side effects of this sharp policy change was that interest rates would now be governed by the marketplace rather than the Fed. The Fed did still raise its discount rate from 11% to 12%, but then the market took the Prime Rate up to 20% within 6 months where it mostly stayed for the next year and a half.

With today's mountain of debt, is this even an option?
Impacts of such a move?

FOFOA said...

Hello Tyrone,

I think you may find an answer to your question here. But unlike my posts, this one is REALLY long. So here are the relevant snips:

What happened in 1980 is that the Fed, under the great Paul Volcker, successfully defended the dollar (and other national currencies, which are and were all backed by the dollar) against exactly the same event I'm predicting now: a currency crisis with self-accelerating flight to precious metals.

Volcker faced an existential threat, and he used every weapon at his disposal. The most obvious, and the one he is best remembered for, was ending almost all debasement and letting the market set interest rates. Short-term rates went well above 20%, considerably exceeding the official value of the I-word, and certainly into positive debasement-adjusted territory.

But for another example, one action the Fed took was to just tell banks, on the basis of no legal authority at all, to stop lending to anyone who was buying gold or silver.

This illustrates the tenor of the times. Finance in 1980 was a tame little pussycat. Hedge funds barely existed. Today, the Fed would never do this, not because banks would disobey - banks are still pussycats - but because today's global financial market is a huge, snarling wolf-dog, and displays of fear are unwise.

Markets do not, in general, think. Most investors, even pros who control large pools of money, have a very weak understanding of economics. As I've already mentioned, the version of economics taught in universities has been heavily influenced by political developments over the last century. And your average financial journalist understands finance about the way a cat understands astrophysics. The business section is not exactly where anyone who plans to be the next Bob Woodward wants to end up. This has an obvious effect on retail investor psychology.

The result is that historically, the market has had no particular way to distinguish a managed delevitation from an inevitable bubble. Because of Volcker's victory, and the defeat of millions of investors who bet on a dollar collapse, the financial world spent the next twenty years assuming that there was some kind of fundamental cap on the gold price, despite the lack of any logical chain of reasoning that would predict any such thing.

Even now, there is no shortage of pro-gold writers who predict gold at $1000, $2000 or $3000 an ounce, as though they had some formula, like the P/E ratio for stocks, that computed a stable equilibrium at this level. Of course, they do not. They are only expressing their intuitive feeling that gold is very, very cheap right now, and tempering it with the desire to be taken seriously...


...

FOFOA said...

...

Gold's main weapon is one we alluded to already: a sudden, self-reinforcing, and complete collapse of the dollar and all other artificial currencies (except maybe the Swiss franc). It's time to look at exactly how this would work.

In a nutshell, the problem with the dollar is that it's brittle. It's hard to imagine a Volcker-style, contractionary defense of the dollar today. When Volcker did his thing, the US was a net creditor nation with a balance-of-payments surplus. Its financial system was relatively small and stable. And it had much more control over the economic policies of its trading partners - the political relationship between the US and China is very different from the old US/Japanese tension.

Fed policy since the crash of 1987 has been to insure against risk by stabilizing crises with liquidity injections - that is, hefty dollops of new money. It's no secret that the financial industry has responded by taking on more and more risk. This vicious cycle of "moral hazard" is a policy that's hard to change. For today's Fed, short-term rates of 5% are dangerously high. 25% is not a serious option.

Any fractional-reserve banking and monetary system, like the US's, is destabilized by any outflow of dollars. For the Fed, what is really frightening is not a high gold price, but a rapid increase in the gold price. Momentum in gold is the logical precursor to a self-sustaining gold panic.

In a self-sustaining panic, flight to gold destabilizes the banking system and the bond market, causing waves of bankruptcy across the financial industry. The Fed's cure for bankruptcy is more liquidity - but monetary expansion only increases the incentive to buy gold. In the endgame, money flows out of the dollar as fast as the Fed can pump it in. This is the collapse scenario that leads to... Freegold!


Sorry. I added that last word. But the whole piece is well worth your time even though it was written in 2006! It is by Mencius Moldbug. Here's his current blog.

Sincerely,
FOFOA

Desperado said...

Brilliant post Fofoa. I particularly enjoyed how you interposed pictures of those old consumer items enhance your argument. I remember those days well, and there was a subtle change in the 70's with the explosion of all those "must have" items on the market. The Zeitgeist has moved on, and now the addiction to the conquest of the latest piece of consumer bling has become as transparent as the worthless dollar.

I guess I had better use my Visa card to go buy that ipad while I still can ;->.

Robert said...

Fofoa!

+++ above posters above vs. ignorant posters above poster's above:

fofoa.bogsgpot.com.

A coming time vs. "futures" is coming...

My view is that gold, at a minimum, holds it's value through the storms ahead... But, keep it close and physical...

Or it could get to your $55,000 / oz. RICH for alert gold holders...

The Sim said...

Inspirational and enlightening!

(But why you gotta bust on palladium? It's a perfectly nice metal, too! Lol)

The Sim said...

Incidentally also makes a good argument, I think, why the Fed should raise interest rates significantly as the only possible way to reset the system. As a saver I desperately long for the halcyon days of 20% CDs. But they won't do it, so we've got to take matters (and gold) into our own hands.

Saul said...

A great post, really well written. Bravo!

oldinvestor said...

The following is posted in the comments section in a piece by Ambrose Evan-Prichard at the Telegraph See a reference to it in the comment section at http://www.zerohedge.com/article/gold-spikes-world-gold-council-says-gold-demand-surges-36-q2-sees-ongoing-demand-out-china-a


A highly reliable sage source from the gold banking world and international consulting is loaded with deep insight, vast experience, solid connections, ongoing relationships, privileged insider information, and diverse industries tied to banking. He tipped the Jackass off in early August 2008 as to the weekend of September 15th being one to mark in history as three great failures would occur. He gave one month advanced notice of a locus of failure in three places, with great urgency. My guesses of Lehman Brothers and Fannie Mae were correct, but a blank came on the third which turned out to be AIG. He has frequently shared a viewpoint on the inevitable USTreasury default in the coming years. He first enlightened me as to the USFed resignation pathway to default, after it was loaded to the gills in toxic irredeemable impaired assets that no banks wanted. As buyers of last resort, the USFed would choke to death. Rather than a citation of path to default, he shared a great risk of a major event. He said, "The USGovt will devaluate the US$ by 50% overnight in the not too distant future. They need 11 days to do this. If they push it, they can do it in 6 days. So look for a long holiday weekend as an opportunity. The best time to do this is the Christmas / New Year time window. They tried to do it in 2005/2006, but the Chinese put a gun to their heads in Washington and they backed down. You can slice and dice it as you like, but the USDollar is dead and so is the Euro. The systemic change will be a cataclysmic and traumatic event for the West, since all it stands for will go into the toilet in a blink of an eye. The period immediately following the collapse will be filled with violence and total breakdown of law & order. Keep an eye on Greece. It is the guinea pig and incubator for what is coming to Western societies." He went on to mention some positive regenerative power left in the US people to reclaim their country and to restore its legal framework. Soberly, he warned it will be ugly, but loaded with great opportunity. So he sees a sudden massive USDollar devaluation with grand shock waves from vengeful reaction.
B.I.S. GOLD SWAP & L.B.M.A. DRAIN
◄$$$ L.B.M.A. IS DEAD, DRAINED, AND DEFUNCT. LIKE THE BIG BANKS, IT IS A ZOMBIE SHELL OF A MARKET ENTITY. A MAJOR RUN ON THE BULLION BANKS HAS BEGUN IN EARNEST. ITS PHONY STRUCTURE IS BEING REVEALED. SETUP STORIES ARE COMING TO HIDE ITS EMPTY INVENTORY. THE DATA DARK EVEN IN LATE JULY WAS PROBABLY DUE TO A SUCCESSFUL LEGAL RAID. $$$

continued

oldinvestor said...

continued

It has come to my attention that coordinated raids of the London Metals Exchange have taken place, all very legal, but done in a manner that its officials do not realize the scope of the organization. Several buyers acted in organized coordinated fashion. The raids took place in July and continue. The buyers went into the market with a massive volume compared to what can be considered normal. The buyers were ringed around the globe, in direct communication. In at least two instances agents within the inner sanctum of the London gold market worked in collusion with the buyers, the agents volunteering valuable information where certain quantities existed. This data enabled optimal positioning for the trades, where demand was made where supply laid. The buyer then cleaned all the physical out in one sweep, with pressure given by attorneys when necessary. The sellers obviously had misjudged the buyers financial resources and inside knowledge. A degree of military precision was demonstrated, along with seemingly unlimited financial resources. Hints of hidden unconditional political backing was mentioned, for applied pressure, although in vague terms. No trace of their activity was evident, as would be expected with numerous high volume demands for delivery. No insurance register spikes were permitted, as the buyers flew under the normal radar screens when lifting the gold bullion without protection. The raid, or legal surgical removal, might have been the largest ever. They took advantage of deep insider knowledge, even deeper pockets, and precise execution team to pull off the event. In doing so, the LBMA members inventories were nearly drained. The London officials scrambled to replenish their raided gold supply. Members of the exchange are in the process of having cut off their entire raw precious metal supply at the source. On the following week, the LBMA shut down all trade data.

continued

oldinvestor said...

continued

THE LONDON METALS EXCHANGE SUFFERED A MAJOR HEART ATTACK FROM A GLOBAL GOLD RAID, VERY LEGAL. LONDON SUFFERED MAJOR DEPLETION OF ITS GOLD INVENTORY DURING THE COORDINATED RAID. THEY SHUT DOWN ALL DATA REPORTING UNTIL THEY COULD REJIGGER AND DOCTOR THEIR PHONY INVENTORY DATA. The financial press reported data darkness, but omitted the story about global coordinated legal raids on
gigantic gold supply at numerous supply sources. They undoubtedly did not know about the raid, or were ordered not to report it. That would have been damaging for the gold cartel.
In the aftermath, a note came from a well established trusted gold banker source. He hinted at knowing at least one or two participants in the coordinated raid. He said "The Boyz at the LBMA probably had digestion problems, and are putting their inventory books back in order after some of their member inventory was raided the other day. From what I hear, they did not see that one coming. A second wave should hit them not before long. They are absolutely defenseless. It is called feeding one's adversaries their own medicine while turning the tables on them." Incredibly, the group has managed to solicit the cooperation of two agents from inside the LBMA, exploiting a division inside. People within the LBMA are working to destroy the LBMA. My guess is that 15 to 20 parties worked closely together, with military precision and without telltale insurance contracts that would serve as warning flags internally.
Some direct questions were delivered to this source, who has 25 years of experience in the gold trading business. My question was: "Did the London dark data problem have anything to do with the Bank For Intl Settlement Gold Swap?" His answer was LIKELY YES. My question was: "Did the BIS have to bail out London in supplying them urgent gold inventory?" His answer was SURELY YES. My question finally: "Was the story permitted to be incorrect regarding the Portugal Central Bank as distraction?" His answer was COULD BE YES. Very intruiging!!
Two analogies make sense. One is of a big car whose engine lubrication is slowly drained. The temperature of the moving parts is rising, as the engine grinds, and a seizure comes. Another is a man with a bad case of chronic diarrhea, who cannot stop emitting the nether substance. He continues to lose his inner juices as effluent until he passes out. Eventually he dies from dehydration and electrolytic starvation. The gold market is living on borrowed time. The window will soon close for private citizens to purchase gold bullion in any form.
Time is running out. Seizures and magnificent deceptive cover stories are to come. Let's see how much credibility the mainstream stories contain. The flimsy stories, in my view, will be shot full of holes, shot to hell. The Gold price will skyrocket when it becomes clear that the gold inventory is non-existent in the gold metal exchanges. The Powerz might evade legal responsibility by means of assorted lies and stories, but the end result will be absent gold supply in inventory. No supply, huge demand, and price rises without resistance.
◄$$$ A DRAIN ON THE L.B.M.A. INVENTORY IS WELL ALONG. EVER SINCE THE DEATH EVENT OF WALL STREET, THE MOVEMENT BEGAN TO TARGET LONDON. THE L.B.M.A. TEMPORARILY SHUT DOWN THEIR DATA REPORTING. THEN IN FOUR DAYS, IT WAS RE-OPENED. A SHOCK WAVE PROBABLY STRUCK THEIR INTERNAL STRUCTURE, FORCING A QUICK RECOVERY.

oldinvestor said...

This is the first part of the comment.

The following is posted in the comments section in a piece by Ambrose Evan-Prichard at the Telegraph See a reference to it in the comment section at http://www.zerohedge.com/article/gold-spikes-world-gold-council-says-gold-demand-surges-36-q2-sees-ongoing-demand-out-china-a


A highly reliable sage source from the gold banking world and international consulting is loaded with deep insight, vast experience, solid connections, ongoing relationships, privileged insider information, and diverse industries tied to banking. He tipped the Jackass off in early August 2008 as to the weekend of September 15th being one to mark in history as three great failures would occur. He gave one month advanced notice of a locus of failure in three places, with great urgency. My guesses of Lehman Brothers and Fannie Mae were correct, but a blank came on the third which turned out to be AIG. He has frequently shared a viewpoint on the inevitable USTreasury default in the coming years. He first enlightened me as to the USFed resignation pathway to default, after it was loaded to the gills in toxic irredeemable impaired assets that no banks wanted. As buyers of last resort, the USFed would choke to death. Rather than a citation of path to default, he shared a great risk of a major event. He said, "The USGovt will devaluate the US$ by 50% overnight in the not too distant future. They need 11 days to do this. If they push it, they can do it in 6 days. So look for a long holiday weekend as an opportunity. The best time to do this is the Christmas / New Year time window. They tried to do it in 2005/2006, but the Chinese put a gun to their heads in Washington and they backed down. You can slice and dice it as you like, but the USDollar is dead and so is the Euro. The systemic change will be a cataclysmic and traumatic event for the West, since all it stands for will go into the toilet in a blink of an eye. The period immediately following the collapse will be filled with violence and total breakdown of law & order. Keep an eye on Greece. It is the guinea pig and incubator for what is coming to Western societies." He went on to mention some positive regenerative power left in the US people to reclaim their country and to restore its legal framework. Soberly, he warned it will be ugly, but loaded with great opportunity. So he sees a sudden massive USDollar devaluation with grand shock waves from vengeful reaction.
B.I.S. GOLD SWAP & L.B.M.A. DRAIN
◄$$$ L.B.M.A. IS DEAD, DRAINED, AND DEFUNCT. LIKE THE BIG BANKS, IT IS A ZOMBIE SHELL OF A MARKET ENTITY. A MAJOR RUN ON THE BULLION BANKS HAS BEGUN IN EARNEST. ITS PHONY STRUCTURE IS BEING REVEALED. SETUP STORIES ARE COMING TO HIDE ITS EMPTY INVENTORY. THE DATA DARK EVEN IN LATE JULY WAS PROBABLY DUE TO A SUCCESSFUL LEGAL RAID. $$$

Jb said...

Dear FOFOA,
At the end of Bill Still's latest 'The Secret of Oz' video (free on YouTube) he warns of the engineered monetary collapse underway. Do you have any comments regarding his assertions to be wary of 'gold backed money? Is this direction the banks are trying to take us? Thank you.

Ender said...

oldinvestor, It is not uncommon for some story to pop up on the net that faithfully proposes that the end of the world is at hand. Yet, the end never seems to play out in ‘the blink of an eye.’ Please do share more information with us, but only as long as credibility remains.

Ultimately, we seek to validate what you’ve posted.

robert said...

I have a question regarding the price coin dealers pay for gold coins that they have to order.

My local coin dealer will sell me one-ounce American Eagles, for example, at $60 over spot - saying that he only makes an $8.00 profit.

Does anyone know if that is true?

Thank you.

oldinvestor said...

Yea, I had a question about the credibility myself. I think I have tracked this down to a post over at investorvillage.com. It does not give any attribution, so we do not know who the original author actually is. I thought it interesting enough to post here, but it does definitely have a whiff of “over the top”

erik said...

@Oldinvestor...goes along with what Harvey Organ has been saying. Keep us informed. Thanks.

Patrick said...

Robert,

This site gives you an idea of the premiums you have to pay above spot...it is in euro, but nevertheless. Another fine article fofoa.. you keep surprising us with your angle on reality..

Patrick said...

www.gold4ex.be

Blondie said...

oldinvestor,

Your quote is from Jim Willie. Note that JW has made several similar allegations about the imminent demise of the LMBA and COMEX, through the use of 'economic hitmen' etc over the last couple of years. Max Keiser made similar claims late 08 about COMEX gold default by Christmas.

I'm sure it gets them plenty of attention, but at what cost to credibility? We all know it will happen sooner or later, so he will be "right" eventually.

Even a broken clock is right twice a day...

Tyrone said...

Jim Cramer mentions owning gold...

at the 2:04 mark
Cramer: Own some gold

Mike said...

that whole article had the style Jim Willie.

i wouldn't rely on it one bit.
harvey organ now believes him also.

maybe he will finally be right.
but i wouldn't count on it.

what does he know every week that no one else does. another week another article another secret only he knows.

he however is a good read for those believes of paper gold and gold stocks hehe

Mike said...

Robert,

i know a primary coin dealer for Scotia Bank in Toronto and the premiums haven't climbed up yet from them. still pretty low margins for gold wafers and maples.
ie $35 for maple's over spot and $25 for a wafer. this of course are premiums on a few coins/bars. they would drop as you buy more bulk.
i asked them if they could get 400 maples and they said that wouldn't be a problem for the next day.
but i can guarantee you they won't say that to a few hundred people hehe

but i can tell you that most coin ships in Toronto would be selling at high premiums which is typical anyways.

i posted this on FOFOA's last article in the comment section. i noticed that Kitco's premiums have exploded, now over $100 for an eagle over spot and many similar coins are just as high. i also notice some gold dealers online (BG and cache metals) whos premiums are pretty high also $60-$75 over spot for the same coins. those are Canadian online dealers.

i think once you see Tulving and APMEX have those types of premiums then that would be pretty good confirmation that the retail market is getting tight.

scotia macotta premiums are insane for their online store, i dont know how anyone could buy from them. but i dont think its because of supply issues but just because they can.

i think kitco has those high premiums maybe because of their customers selling their pool accounts for real metal (perhaps pretty high demand from it). ie unallocated to physical.

robert said...

re: what coin dealers charge over spot for gold coins

Hi Mike and thanks for all the great information.

Yes, I agree with you that supply is getting tight and premiums seem to be rising.

One of my favorite coin dealers just quoted me $60 and $80 over spot for Eagles - and I thought that was high.

I normally buy Eagles and Maple Leafs from private sellers on CraigsList for $20 to $30 over spot - but no one has hit my bids in the last 45 days.

However, I did buy some a few rolls of Silver Eagles today from a private seller at $1.00 over spot - which is a good price - but I'm sensing that market is getting tight too.

Thanks again for your information.

Robert Campbell

stibot said...

The question is, what is Mauritius Post Office stamp REALLY worth today? And the answer is it is priceless, but probably could be had in large volumes for somewhere between $20B and $150B per stamp. (How much Mauritius Post Office stamps could China realistically get today if it tried to cash in $2T in debt paper for Post Offices? At today's prices it could get more than 100,000 stamps, but only if that's the real value of Mauritius Post Office.)

samsara said...

I am also interested in FOFOA's comments in reply to Jb's question above regarding "The Secret of Oz" video.

I don't normally comment here; but, since I'm doing just that today I must say, I love what you write FOFOA, even though I really, really, really have to concentrate to understand what you're saying! I continue to learn...thank you.

David said...

"I am also interested in FOFOA's comments in reply to Jb's question above regarding "The Secret of Oz" video."

Me as well....

Robert said...

In these interesting times, I am still ever the advocate for owning physical gold.

Disclosure: I talk and walk my book! When I receive extra $, some of them go right into gold, from my local coin shop. At some point, I may upscale my purchases to over 10 oz. at a time and look at Tulving and Apmex.

Of course I preach to the choir here of those who passed Gold 101. Any of you who have children NEED TO BUY PHYSICAL GOLD NOW.

Small amounts of gold (eg. 1/10 oz Gold Eagles) have all sorts of interesting uses... !!!

The power of giving!!!

FOFOA is granting us a service which is likely PRICELESS, just buy physical gold, and the odds of gold buyers coming out of anything really awful may be life-saving.

Best of luck, FOFOFOAs! I am a:

FOGARB!

(friend of gold and rolling bearings)

samix said...

I did watch the first few minutes of the "secret of OZ" and found some fallacies in it

1)They compare the copper currency of Rome with the Fiat money of today, this is not correct, copper has got intrinsic value but paper currency has no intrinsic value.

2)They seem to portray that Gold is the currency that was used to impoverish the people after the demonetization of copper and brass....I can't seem to swallow that!

Pete said...

@samix

Perhaps you should watch the rest of the video...the author gets to a point later on.

@FOFOA

I agree with David, i'd be interested to hear your comments on that video.

costata said...

FOFOA,

David Galland of Casey Research makes some interesting observations in this post.

The bad news is that the higher nominal price of gold has caused a 5% decrease in jewelry sales over the prior year.

"And even that number is skewed, because the currency value of the gold purchased is up – way up. For example, India – the 800-pound gorilla in the global gold jewelry market – saw total gold jewelry sales fall only by 2%, but in local currency terms, there was a 20% increase in the nominal value of the gold trading hands."

"China, which only relatively recently reauthorized private gold purchases, saw a 5% increase in jewelry demand, but that translated into a 35% increase in local currency terms."

http://www.caseyresearch.com/editorial/3621?ppref=DLC192ED0810E

FOFOA said...

Hello Jb, Samsara, David and Pete,

You said…

"Dear FOFOA,
At the end of Bill Still's latest 'The Secret of Oz' video (free on YouTube) he warns of the engineered monetary collapse underway. Do you have any comments regarding his assertions to be wary of 'gold backed money? Is this direction the banks are trying to take us? Thank you… I am also interested in FOFOA's comments… Me as well.... I agree with David, i'd be interested to hear your comments on that video…"


Most people that come to my blog come bearing two misconceptions that are very hard to shake. The first is that I must be some sort of a gold activist. Untrue. Unlike Bill Still who is trying to start a movement, I am simply an observer reporting my observations. I am not obsessed with gold. My wedding ring is platinum because I prefer that color. And I never ask you to take outward action to coerce someone else's actions or thoughts. I only recommend the personal action that will preserve your wealth through change, should you decide to take it.

The second misconception is that I must favor a return to the gold standard like virtually everyone else in the "gold bug" community. Also untrue. I don't favor anything because I am simply an observer. But more importantly, my observations are NOT of a return to a gold standard. Fiat "easy money" will continue in the monetary role of 'medium of exchange' for the rest of our lives. The separation of monetary roles in the global financial system is my key observation.

I suspect that because the four of you are interested in my thoughts on this film, that you are more or less still under these misconceptions about me and my message. Hopefully this will help. That said, here is my take on the film in one short paragraph, followed with a little more depth.

Bill Still's historical misguidedness in the film (which is quite profound really) can be somewhat cured by understanding the repeating cycle of the two true classes, the debtors and the savers, rather than Bill's classes, the bankers/goldbugs versus the have-nots (a view remarkably close to Marx). His factual misinterpretations can be fairly corrected by understanding the difference between a monetary 'store of value' and a 'medium of exchange,' rather than simply using the word (concept) "money" indiscriminately. (See my Gold Is Money Parts 1, 2 and 3) And his prescriptive misgivings are easily remedied through the elegance of Freegold, which gives both the debtors and the savers what they need and want, rather than a pure fiat which always screws the savers in the end.

It is interesting to me that Bill is forcefully making the easy money argument right at the collapse of a long-term easy money regime. This is why the video may feel a bit dissonant to the casual conservative saver. And it is also why his prescriptions directly fail the logic test. They ignore (or worse) the saver. How are you going to get savers to save in instruments denominated in this new "even EASIER 'debt free' greenback" after the collapse of today's easy money regime? You are not! And this is the side of the issue the film doesn't even touch.

This film is essentially a liberal populist rallying cry for the debtors, the easy money, big government crowd. Good luck with that at this point in history. ;) It is this easy money crowd that's about to get blamed when the present easy money system comes crashing down. They'll be lucky (and happy) to just get Freegold, and NOT a new gold standard!

Cont...

FOFOA said...

Throughout the movie Bill is continually singing the praises of what he calls "debt free money." But all he means is that the government stays debt free while it spends freely created money. This ease with which the money can be created is part of the reason these "debt free monies" always end in tears for the savers of any era, who always get wiped out in the end.

Bill's perspective in this film is most certainly as a debtor, not a saver. But then he confuses who the two perpetually struggling classes truly are, which leads him to some funny conclusions about gold.

Please read my post The Debtors and the Savers if you haven't already. It describes two groups of people that are always, more or less, in a state of struggle for monetary and political power. I called them the debtors and the savers for the simplicity of my post. But for this discussion it might be better to call them the easy money crowd and the hard money crowd. Same groups, different names.

In all periods of history one of these two groups is in power. And the other one wants power. My post was written with a bias toward the hard money crowd, because hard money regimes generally take back power when easy money regimes collapse. Easy money regimes, on the other hand, generally take back power through violence (or at least coercion backed by the threat of violence).

Bill's video, unlike my post, was written with a bias toward the soft money crowd. He describes some of the same historical events while championing the other side. It's not really a matter of winners and losers because each side was a winner and a loser at different times in history. The difference really comes down to personal perspective; to which side can you relate?

After publishing The Debtors and the Savers I did get a few unhappy emails from "easy money" readers. They were mostly unhappy with the way I characterized the French Revolution and one was unhappy with my presentation of the Russian "Oligarchs." This was expected. In fact I was surprised I didn't get more email like this.

Note that I am not a hard money advocate. This is why I used the term "the savers" in my post rather than "hard money crowd." The difference has to do with the separation of monetary functions that is happening today. The "hard money crowd" is getting their "hard money" in the store of value role and the "soft money crowd" will keep their "soft money" as the medium of exchange. A good deal for both sides, and perhaps a bit more peaceful than past transitions.

While watching the film, my "leftist utopia" warning bells went off when he said his proposal would end hunger, poverty, disease and misery. Yeah, I've heard that one before! And as the film went on I noticed that it is literally riddled with historically false and dubious assertions.

Did you like how he insinuated that the War of 1812 was started by the bankers? Or that the assassination attempt on Andrew Jackson was a hit put out by the bankers? That Lincoln's assassination was a hit by European bankers? That Bismarck's assassination attempt was by European bankers? And even that President Garfield's assassination was a banker hit? In Garfield's case a raucous public trial followed the assassination and ultimately a public hanging with the assassin reading his own poetry before dangling. Yet strangely, in the face of public trial and death, the assassin never revealed that bankers were behind his actions. The bankers must have held his family hostage to keep him silent for a year, right? ;)

Cont...

FOFOA said...

All of these historically false insinuations are a serious black mark on this film in my opinion. And how about the assertion that the Civil War was secretly orchestrated by European bankers? If you choose to hold this dubious view of history, that is your right. But if you hope to start a movement that will change the collective mind of Congress and possibly the US Constitution, I think it is a big mistake to base it on a conspiratorial view of history that's not in the history books.

It is not surprising to me that Bryan's Cross of Gold speech was prominent in this video. That speech really exemplifies the easy money crowd's position; "the encroachment of the aggregation of wealth" (the savers); "the common people of any land [never] declare themselves in favor of the gold standard" (the debtors). I have said this myself, to all of you who say the common people will welcome a return to "hard money" as an escape from "the banksters." Simply not true. "The debtors" always want easy money to ease the burden of debt… and to slowly screw the savers.

In the film Ellen Brown says "you don't have to pay for it later through debt, you can pay for it now." But I would argue that this is exactly the path we are on today. The system as viewed by deflationists like Ellen Brown appears to reveal that our grandchildren are going to pay for our government's debt and unfunded liabilities for generations to come. But this is simply not true. When the currency collapses today, it will all be paid instantly, by anyone who is still holding dollar debt, including the Chinese.

In the truest sense of the concept, Washington DC's profligacy will be paid up "today," not generations into the future. Ellen would simply like to institutionalize this inflation process so that it happens constantly. And that means institutionalized and accepted high inflation, to tax only the savers, eliminating in-your-face income taxes for everyone, and in lieu of federal debt issuance.

But this assumes that the federal government is, today, revenue-constrained by taxes and debt. This is simply not the case. The US federal government is not revenue-constrained by taxes and debt, which can be seen when the Federal Reserve directly buys US debt with freshly printed cash. The perceived cost of paying future tax revenue to the Fed for this particular money spent by the government, is simply the direct replacement of one thing for another. Future interest payments instead of present direct price inflation, which taxes the savers. The net present value effect on the overall economy is exactly the same.

In other words, our system today, in fact, is not qualitatively different than the one proposed by Ellen Brown and Bill Still. Their main beef is with the fat cat bankers. Understandable, but still wrong from a systemic change position. They want to go from easy money to easier money. A systemic shift without historical or logical precedent. It can only make sense (theoretically, not practically) in an argument if you intentionally ignore the purchasing power of the savers.

The deflationist view is that we are about to suffer a decade or two of deflation as payment for past profligacy. Deflation is the mechanism for paying all the debt back in real terms. This simply cannot happen. Those debts are now so big they can never be paid, and never will be. Once you accept this simple truth, and all of its necessary effects, it becomes clear that we are focusing on the wrong things.

Cont...

FOFOA said...

My observation is that banking will be forced to evolve into a mere utility thanks to the collapse of the dollar. See my Say Goodbye to Wallstreet post. This is not so dissimilar to Bill Still's prescription for publicly-owned banks. In fact, it matters not if a bank is publicly owned or privately owned once the savers have a viable alternative to fiat-denominated savings. The final result will be virtually the same.

Throughout the film Bill says, over and over again, "debt" "debt" "debt," but never do we hear him mention the other side of the debt coin, the saver who buys that debt. The banks don't own all this debt like he presumes. They sell it off to savers and pension funds. And the national debt is sold to foreign central banks. If you eliminate all the US federal debt (which incidentally is about to happen anyway), what do you think your trading partners (like China) are gonna buy with all their surplus "easy greenbacks?" That's right, no debt to buy, so they will buy gold. This is Freegold!

To be honest, I would support Bill's proposals if they ever came to serious consideration in Congress. But they won't. They can't. They don't have a snowball's chance in hell. But even if they did, the final outcome would not be materially different than the natural collapse of the current dollar and Freegold.

No gold standard. No "hard money." "Debt-free money" issued (at will) by the government. And the parallel physical Freegold marketplace that will naturally keep it all honest. This would be the result of Bill Still's proposal.

Look at Thomas Edison's quote in the film. "One promise fattens the usurers and the other helps the people." What is really meant by this? One benefits the savers and the other helps the debtors! This is the main difference between easy money and hard money. Hard money helps the savers and easy money helps the debtors. "Debt free money" is only debt free for the government. It is the ultimate easy money.

Freegold separates the monetary functions in the time dimension, giving each side what it wants and needs. The liberal debtors get their easy money in the short run and the conservative savers get their hard money for the long run. Think it through, because it makes a lot of sense. And you don't even need a picket sign to make it happen. Just sit back with your popcorn and your gold.

Sincerely,
FOFOA

erik said...

@FOFOA

Unbiased, clear-headed reply. Thanks

Too bad you don't write history books.

Pete said...

@FOFOA

Thanks for the considered and detailed reply. This is exactly what I was hoping for.

I can't speak for others, but when a video like Bills comes along and makes me reconsider all of the things that I 'thought I understood', especially providing the story in a convincing, historically-linked way like he did, then it is hard not to feel that dissonance that you speak of.

But your comments continue to make a lot of sense, where others do not.

Thanks again,

- Pete

Jb said...

Dear FOFOA,

Thank you very much for your response. Gold and popcorn are two of my favorite stockpiled commodities! Best - Jb

Blondie said...

I too appreciated your comments on this movie, FOFOA.
I have left my own opinion here, but I will take the liberty of reposting it here too:

"I read your comment as linked, and find nothing there with which I would argue.

You point out a number of historical liberties Still appears to have taken with European Banker involvement in American history. I am not an American, so was not familiar enough with these incidents to have picked those up. In that context, and that of his previous "Money Masters" historical series, I had been working on the assumption Still was working with historical fact...

I found Stills movie interesting in the concept of non debt-backed currency. I was not sure what the implications of this would be. Still obviously believes it to be crucial to the integrity of the system. You seem to have addressed this issue fairly comprehensively.

I had arrived at my own conclusion in the last few days that it would not make any real difference. My reasons:

The backing of a currency, or not, by debt or gold or dried bananas, is irrelevant, except perhaps as a ruse. Currency is nothing more than a concept used for transacting. This is its only function. It requires no "backing". It should not be expected to act as a store of wealth. This is something it cannot be. This is something it should not try to be, or pretend to be, either.

We already have something which has been used most successfully as a store of wealth for millennia. We simply need to free it from the constraints of the current flawed system. This is gold. When allowed to freely float it will provide all the checks and balances currency requires.

But even if we don't free it, it will shortly free itself, regardless.
"

samix said...


Currency is nothing more than a concept used for transacting. This is its only function. It requires no "backing". It should not be expected to act as a store of wealth.


I would like to differ over this and strongly disagree, from a point of view of a normal Joe who works 9 to 5 and gets his salary at the end of the month in the form of a currency would definitely want that currency to act as a store of value(of course I can convert it to gold) , It is this unbacked currency, which is actually backed by faith that causes so many hardships for people like me who are then forced to invest that currency for the fear of loosing purchasing power or the faith that backs it.

This causes simpletons like teachers, scientists, artists, doctors and other 9 to 5 professionals to dabble in markets that they do not even remotely know about and are mighty fleeced by the financial charlatans.

Yes, they can covert it to gold, but when at the end of every month during the salary week people rush to convert their unbacked paper money into gold you know whats gonna happen, less value for the work that they put in through the month.

So unless they are payed part in gold I don't think that the injustice and be repaired.

Fauvi said...

I think digital gold as money, medium of exchange and store of value is the best solution and seems quite fair to me. The CFR (Ben Steil) has written something about this some years ago. digital gold money is no debt money and keeps its value but of course you have controll. Of course freegold brings gold bugs more advantages but it's not very fair for those who have no gold or for those living in countries which are not part of the meritocracy.

costata said...

samix and Fauvi,

If you don't mind I would like to expand a little on some of the concepts that FOFOA discussed in his comment while treating your comments as one unit.

".... strongly disagree, from a point of view of a normal Joe who works 9 to 5 and gets his salary at the end of the month in the form of a currency would definitely want that currency to act as a store of value ....

If you introduce the dimension of time into this issue the problem that you describe should not be a cause for concern. Provided the currency you are paid in is not in the midst of high or hyper-inflation, under Freegold it will hold its exchange value for long periods. Exchanging currency for gold (post-Freegold) should not be an urgent need in most cases, merely a choice.

Under Freegold the value of your currency will float in terms of gold. If the government in your country is managing the currency well you should enjoy a stable currency. Gold exchanged anywhere for your currency will determine its exchange value ie. purchasing power.

As explained in the A/FOA archives if the USG had allowed the price of gold to float in a free market the destruction of the US$ and the systemic damage to the $IMFS could have been prevented.

"Of course freegold brings gold bugs more advantages but it's not very fair for those who have no gold or for those living in countries which are not part of the meritocracy."

Even if your government attempted to restrict their citizen's access to gold it would not prevent Freegold from passing judgement on the government's management of your currency. IMO this will be a strong discipline on governments everywhere to maintain a stable currency.

If the government is not managing your currency well Freegold will provide an early warning system. That isn't perfect but it is IMO an improvement on what we have now.

I think digital gold as money, medium of exchange and store of value is the best solution and seems quite fair to me.

It may be fair but it simply wont work if we expect to have, for example, international trade. Professor Fekete has explained in depth that without "real bills" to supplement a circulating gold currency, gold standard or gold exchange standard NONE of these systems can function mathematically in a multi-lateral trade environment.

If you go to his website you will find his papers. If you cannot locate the relevant papers please let me know and I will find them and give you the links.

costata said...

samix and Fauvi,

If you don't mind I would like to expand a little on some of the concepts that FOFOA discussed in his comment while treating your comments as one unit.

".... strongly disagree, from a point of view of a normal Joe who works 9 to 5 and gets his salary at the end of the month in the form of a currency would definitely want that currency to act as a store of value ....

If you introduce the dimension of time into this issue the problem that you describe should not be a cause for concern. Provided the currency you are paid in is not in the midst of high or hyper-inflation, under Freegold it will hold its exchange value for long periods. Exchanging currency for gold (post-Freegold) should not be an urgent need in most cases, merely a choice.

Under Freegold the value of your currency will float in terms of gold. If the government in your country is managing the currency well you should enjoy a stable currency. Gold exchanged anywhere for your currency will determine its exchange value ie. purchasing power.

As explained in the A/FOA archives if the USG had allowed the price of gold to float in a free market the destruction of the US$ and the systemic damage to the $IMFS could have been prevented.

"Of course freegold brings gold bugs more advantages but it's not very fair for those who have no gold or for those living in countries which are not part of the meritocracy."

Even if your government attempted to restrict their citizen's access to gold it would not prevent Freegold from passing judgement on the government's management of your currency. IMO this will be a strong discipline on governments everywhere to maintain a stable currency.

If the government is not managing your currency well Freegold will provide an early warning system. That isn't perfect but it is IMO an improvement on what we have now.

Continued/

costata said...

I think digital gold as money, medium of exchange and store of value is the best solution and seems quite fair to me.

It may be fair but it simply wont work if we expect to have, for example, international trade. Professor Fekete has explained in depth that without "real bills" to supplement a circulating gold currency, gold standard or gold exchange standard NONE of these systems can function matematically in a multi-lateral trade environment.

If you go to his website you will find his papers. If you cannot locate the relevant papers please let me know and I will find them and give you the links.

Cheers

fletcher said...

I interpret Bill Still's argument as working hand in hand with Freegold.

The main argument of his movie is that the IMF$ (privately held central banks) are the cause of many (all) economic problems, and that this is the case under both a debt-backed fiat currency (as now) or a gold backed currency, given that it is the same central bankers that are in control.

Central Bank control of a gold backed currency is not Freegold.

Under Bill's govt issued money, it seems that there would need to be two key criteria enshrined for it to work. Firstly, that interest rates should be 'free' and set by the market, and not the gov't. And secondly Freegold, as together this would ensure the necessary regimen to ensure limits on money printing.

Blondie said...

Thank you Costata.

Fauvi, Samix,
I would like to add this to Costatas comments, with which I agree entirely:

You both seem to have some issues regarding what we should construe as "fair".

IMHO, what is fair is that we all have the capacity to think for ourselves, to become informed, and to make our own choices based on the information we choose to accept as valid and true.

What is not fair, IMHO again, is to ask others to take responsibility for the results of these choices. That is socialism, and it appears to me that those are the grounds upon which your objections are based.

When stock xyz rises 20% in one day, we don't think it unfair that everyone wasn't previously issued with an even number of shares do we? Some people did their due diligence, made a decision, and chose to buy some shares in xyz. In this case, it was a good choice. Why should everyone get a piece of the reward?

I maintain that currency is nothing more than a means of exchange. That is its only function, other than as a unit of account (provided it is relatively stable). This requires no backing, whether by gold, debt or unicorn horns. When relieved of the expectation it be a wealth storage device as well, currency is no more than a concept.

Please demonstrate why you believe it needs to be backed. I say it doesn't.

Fauvi, why do you want your digital gold to perform all three functions for you? Debt/non debt, gold/non gold, it makes no difference to currency. FOFOAs point has always been that the functions will separate.

Jimmy said...

STEVE FORBES BELIEVES IN GOLDSTANDARD!!!


Daily Bell: You have studied economics for most of your life, it appears. Do you consider yourself of the Austrian school? Are you surprised by the progress the Austrian School has made in the 21st century?

Steve Forbes: The basic tenets of the Austrian School have withstood the test of time, and while I may have some variation of views on how you'd implement say, the gold standard, I think the basic tenets are absolutely there. Hayek, Mises and – though he's not considered a fully part of it – Schumpeter had insights on entrepreneurship. Liberty is good, government domination is NOT!

Daily Bell: You mentioned a gold standard. Should the Western world return to some sort of gold standard? What would it be? Is it feasible?

Steve Forbes: We will return to a gold-based monetary system. I don't think we'll go back to a 1920s or 20th century-style gold standard. But I think monetary policy will be tied to the price of gold, which manifestly it is not today. So, yes, a gold-based system is coming back, and it will be good!

Mike said...

rumbling going on in UST's?

http://www.zerohedge.com/article/rumor-pboc-governor-zhou-xiaochuan-has-defected-china-after-suffering-half-trillion-ust-rela

S said...

FOFOA,

I commend you for including the Cross of Gold analogy as it is probably the single greatest living monument to the age old debate (smet) tussle.

Congrats on 2 Yrs.

Tyrone said...

To FOFOA or others,
Something I've been pondering.

Hypothetical scenario/questions:

Assume the price of gold suddenly spiked up $400 and all holders of a gold ETF decided to cash out to take their gain.

1) Where does the money come from?
(futures and derivative garbage?)

2) Would the fractional amount of gold held by the ETF be liquidated?

3) Would(could) holders be given the full amount, including the gain, or would they be given something less?

I struggle to understand "futures" and "derivatives"; my senses reject them.

Blondie said...

Thank you Costata.

Fauvi, Samix,
I would like to add this to Costatas comments, with which I agree entirely:

You both seem to have some issues regarding what we should construe as "fair".

IMHO, what is fair is that we all have the capacity to think for ourselves, to become informed, and to make our own choices based on the information we choose to accept as valid and true.

What is not fair, IMHO again, is to ask others to take responsibility for the results of these choices. That is socialism, and it appears to me that those are the grounds upon which your objections are based.

When stock xyz rises 20% in one day, we don't think it unfair that everyone wasn't previously issued with an even number of shares do we? Some people did their due diligence, made a decision, and chose to buy some shares in xyz. In this case, it was a good choice. Why should everyone get a piece of the reward?

I maintain that currency is nothing more than a means of exchange. That is its only function, other than as a unit of account (provided it is relatively stable). This requires no backing, whether by gold, debt or unicorn horns. When relieved of the expectation it be a wealth storage device as well, currency is no more than a concept.

Please demonstrate why you believe it needs to be backed. I say it doesn't.

Fauvi, why do you want your digital gold to perform all three functions for you? Debt/non debt, gold/non gold, it makes no difference to currency. FOFOAs point has always been that the functions will separate.

Blondie said...

(this is the third and final time I will post this comment. the comments have a habit of disappearing lately)

Thank you Costata.

Fauvi, Samix,
I would like to add this to Costatas comments, with which I agree entirely:

You both seem to have some issues regarding what we should construe as "fair".

IMHO, what is fair is that we all have the capacity to think for ourselves, to become informed, and to make our own choices based on the information we choose to accept as valid and true.

What is not fair, IMHO again, is to ask others to take responsibility for the results of these choices. That is socialism, and it appears to me that those are the grounds upon which your objections are based.

When stock xyz rises 20% in one day, we don't think it unfair that everyone wasn't previously issued with an even number of shares do we? Some people did their due diligence, made a decision, and chose to buy some shares in xyz. In this case, it was a good choice. Why should everyone get a piece of the reward?

I maintain that currency is nothing more than a means of exchange. That is its only function, other than as a unit of account (provided it is relatively stable). This requires no backing, whether by gold, debt or unicorn horns. When relieved of the expectation it be a wealth storage device as well, currency is no more than a concept.

Please demonstrate why you believe it needs to be backed. I say it doesn't.

Fauvi, why do you want your digital gold to perform all three functions for you? Debt/non debt, gold/non gold, it makes no difference to currency. FOFOAs point has always been that the functions will separate.

Chuck said...

This is interesting...

http://ichart.finance.yahoo.com/b?s=GCU10.CMX&lang=en-US&region=US

Chuck said...

Charts are fixed now, but the overview still showing:

Day's Range: 1,234.00 - 3,401.50

http://finance.yahoo.com/echarts?s=GCU10.CMX+Interactive#symbol=GCU10.CMX;range=1d

David said...

Thanks FOFOA.

Tuco said...

OK, Blondie has posted this comment 3 times already, but it keeps disappearing, so I'll try on his behalf. Here goes...

Blondie said:

Thank you Costata.

Fauvi, Samix,
I would like to add this to Costatas comments, with which I agree entirely:

You both seem to have some issues regarding what we should construe as "fair".

What is fair, IMHO, is that we all have the capacity to think for ourselves, to become informed, and to make our own choices based on the information we choose to accept as valid and true.

What is not fair, IMHO again, is to ask others to take responsibility for the results of these choices. That is socialism, and it appears to me that those are the grounds upon which your objections are based.

When stock xyz rises 20% in one day, we don't think it unfair that everyone wasn't previously issued with an even number of shares do we? Some people did their due diligence, made a decision, and chose to buy some shares in xyz. In this case, it was a good choice. Why should everyone get a piece of the reward?

I maintain that currency is nothing more than a means of exchange. That is its only function, other than as a unit of account (provided it is relatively stable). This requires no backing, whether by gold, debt or unicorn horns. When relieved of the expectation it be a wealth storage device as well, currency is no more than a concept.

Please demonstrate why you believe it needs to be backed. I say it doesn't.

Fauvi, why do you want your digital gold to perform all three functions for you? Debt/non debt, gold/non gold, it makes no difference to currency. FOFOAs point has always been that the functions will separate.

allen said...

Ron Paul Calls for Audit of US Gold Reserves

August 24, 2020
kitconews.com

Texas (Kitco News) -- U.S. Rep. Ron Paul , R-Tex., plans to introduce a new bill next year that will allow for an audit of US gold reserves, he told Kitco News in an exclusive interview.

Paul dropped the news in the interview, indicating that the bill still does not have an official name yet but will be unveiled at the start of the new U.S. Congress.

"If there was no question about the gold being there, you think they would be anxious to prove gold is there," he said of the Federal Reserve.

This is not the first time the congressman has made his pitch. "In the early 1980s when I was on the gold commission, I asked them to recommend to the Congress that they audit the gold reserves -- we had 17 members of the commission and 15 voted not to the audit," said Paul. "I think there was only one decent audit done 50 years ago," he said.

Though Paul did not say whether there is any truth to claims that there is no gold in Fort Knox or the New York Federal Reserve, he said, "I think it is a possibility."

"If we ever get around to deciding we should use gold in relationship to our currency we ought to know how much is there," said Paul. "Our Federal Reserve admits to nothing and they should prove all the gold is there. There is a reason to be suspicious and even if you are not suspicious why wouldn't you have an audit?" he said.

Jeff said...

Steve Forbes, FOFOFOA?

Steve Forbes: We will return to a gold-based monetary system. I don't think we'll go back to a 1920s or 20th century-style gold standard. But I think monetary policy will be tied to the price of gold, which manifestly it is not today. So, yes, a gold-based system is coming back, and it will be good,

http://www.thedailybell.com/1328/Steve-Forbes-on-Overseas-Wars-the-Coming-Gold-Standard-and-the-Rise-of-Citizen-Agitation.html

Blondie said...

this is the 5th attempt at posting this comment...
Thank you Costata.

Fauvi, Samix,
I would like to add this to Costatas comments, with which I agree entirely:

You both seem to have some issues regarding what we should construe as "fair".

IMHO, what is fair is that we all have the capacity to think for ourselves, to become informed, and to make our own choices based on the information we choose to accept as valid and true.

What is not fair, IMHO again, is to ask others to take responsibility for the results of these choices. That is socialism, and it appears to me that those are the grounds upon which your objections are based.

When stock xyz rises 20% in one day, we don't think it unfair that everyone wasn't previously issued with an even number of shares do we? Some people did their due diligence, made a decision, and chose to buy some shares in xyz. In this case, it was a good choice. Why should everyone get a piece of the reward?

I maintain that currency is nothing more than a means of exchange. That is its only function, other than as a unit of account (provided it is relatively stable). This requires no backing, whether by gold, debt or unicorn horns. When relieved of the expectation it be a wealth storage device as well, currency is no more than a concept.

Please demonstrate why you believe it needs to be backed. I say it doesn't.

Fauvi, why do you want your digital gold to perform all three functions for you? Debt/non debt, gold/non gold, it makes no difference to currency. FOFOAs point has always been that the functions will separate.

samix said...

Hello blondie


Please demonstrate why you believe it needs to be backed. I say it doesn't.


An unbacked currency is a bane on the human society which allows the printers(issuers) of currency to squander the wealth of the generations while little people like you and me keep slogging for the next meal.

The points that I raised in my previous comment are not socialist, trade should be equal no one should be asked to trade their months hard work or wares with intrinsic value for currency backed by nothing, this is unfair.

The price of the stock rising is a different thing all together, the people who brought the shares deserve the increase.

But the man who worked all month along does not deserve to be paid in worthless unbacked currency that keeps diluting by the minute, in such a scenario the month long hard worker gives more than he is compensated for.

Please note socialism is where the government tries takes care of everyone whether a hard working man or a lazy couch potato at the expense of the hard worker.

I am not even interested in taking care of the lazy couch potato, I am more interested with the hard working man, if he gets paid in full for the work that he has put in for the entire month.

I hope I was able to put my point across.

JR said...

Hi Samix,

"An unbacked currency is a bane on the human society which allows the printers(issuers) of currency to squander the wealth of the generations while little people like you and me keep slogging for the next meal."

Suppose the "unbacked currency" is a medium of exchange but not a "store of wealth" - would that impact the ability of printers (issuers) to "squander the wealth of generations?"

FOFOA said...

Hello Samix and Blondie,

I think JR is on to something here. It is the eternal truth that no printer of money can ever be trusted with self-constraint that leads to the squandering of wealth.... but only when wealth is considered to be the same as that money.

If we think of a transactional currency in the 'medium of exchange' role, kinda like Fekete's scrip money, then we can say it is always backed by whatever performs the 'store of value' role at that time in history. Can we not?

Right now, it seems, US Treasury Bonds are the supposed 'store of value' to the dollar's 'medium of exchange' role. During the gold standard the 'store of value' was gold, price-fixed to the dollar. As you earn your transactional currency most of it will probably go for other goods, like at Fekete's fair, but your surplus, that which you will hold for a rainy day, will go into the 'store of value' at that time.

Thinking of it this way -- that you can always spend your money on SOMETHING -- there is always a "backing" of sorts. The question really comes down to the quality of the backing that is most widely used by the populace and promoted by the system.

Now both of these monetary roles concern our concept of 'money.' So as long as the 'store of value' portion of the equation is 'honest' and 'fair,' I say we have honest and fair money. Furthermore, I say that history has shown that whenever these two are one and the same, or when they are fixed at par by the government, that great harm is ultimately done to the populace, or at least to the savers.

The problem with the gold standard was that the 'store of value' was not allowed to float against the expanding 'medium of exchange.' It was still good for alert savers to hold the 'store of value' during these times, because ultimately the 'medium of exchange' would have to be devalued. But during long stretches of time there was no movement in the trading price of the 'store of value.' So within those limited time brackets, even the saver of physical gold was being cheated by the socialist expansion of the 'medium of exchange.' Thus FOA's term, "hard money socialist."

...

FOFOA said...

So even a "gold backed" currency does not fully prevent this problem. You see, the problem seems to be that whenever the currency and its backing are presumed to be the same thing, the savers get screwed. During the gold standard the dollar and gold were presumed to be the same thing. Today, dollar-denominated debt is presumed to be the 'store of value' to the dollar's 'medium of exchange.' And even gold is not allowed to float freely today because it is traded in a type of expansive paper market that is a reflection of the old dollar.

It is a fallacy to think that making the currency to be equal to some physical backing item will keep it honest. It never has before, in the long run. And the second fallacy is the belief that for a currency to be honest that the backing item -- the 'store of value' -- MUST be distributed by the printer himself. During the gold standard the US Treasury was a one-way gold window distributing the 'store of value.' Today, the US Treasury is a one-way debt window, distributing the 'store of value.'

How about an honest and fair currency backing that can be bought ANYWHERE from ANYONE? How about an honest and fair currency backing that is NOT considered to be the same as the currency, in quantity or quality? How about an honest and fair currency backing that FLOATS in price against the 'medium of exchange' scrip money at all times? How about an honest and fair currency backing that performs its "savings" function even over relatively short periods of time, not just during the fiat devaluations that come along every few decades? How about an honest and fair currency backing that will not collapse whenever the fiat collapses, but will actually do the OPPOSITE?

Is this not much better than some silly backing assumed to be the equal to the scrip money at all times, handed out by crooked politicians with ever-increasing rules and flow restrictions?

What exactly is YOUR definition of the "backing" that would be best for a currency? I have given you mine.

Sincerely,
FOFOA

Fauvi said...

Blondie,

I've made my choice long ago and I can't wait to see this house of cards getting down. You say it's socialism my idea. Maybe. I don't say that Freegold is not besser for us, the enlighted - so think/feel all the shenegians we hate so much today.They have been way to clever compared to us as their profits are much larger.

I think it should be a fairer system for the stupid masses too. Why? Because we live among them.
Indians trade their gold, that means everytime they sell it - as they need some liquidity - eventually they buy it back. In times of Freegold you won't be able to buy it back. When gold will be that high and you will have to touch your reserves, you will spend it! It will be gone! Will you be able to buy it back? I doubt it.

What do you need your gold for? Just look at it and be happy that you have it? Thank you very much, I know by now that I am rich in terms of Freegold, why do I need the confirmation how much is it worth?

There might be times in your life when you need it de facto. How sure are you about your own productivity in 10 - 20 year time? Or what your children will want? It's a matter of location, policy of your country if your well being will go on and for how long. I don't care so much about the others but in an unfavourable environment Freegold will not help you very much and forever.I cannot be only saver - all of us are also spending and in order to spend you have to be productive. Are you sure you can always stay productive? Does it depend only on you? I think not.

In the Middle Ages gold and silver was money for everybody. In smallest denomination it could be today too. And you could keep your stash in your bunker until you wish to "change" it in smaller grains. You would stay rich and your world might be more stable. :)

I do not contradict FOFOA and I am sure we will have a monetary system for the benefit of the same rich people we have today and a shift to the East. That's the way money will go. I can't be happy with that. If the Western world is going to have big problems as it seems I will not very much enjoy life.

Fauvi said...

"How about an honest and fair currency backing that can be bought ANYWHERE from ANYONE?"

Wonderful, but who will be able to buy it at that time or how much of it, mg for an the average income? And of course completely dependent of your economical location. So you will look to live in a productive country, otherwise with your average income you will not be able to save in real value if you live in a country with bad demographics,poor resources, low education level or if your government is spending to much!
All factors you are not resposible of! But of course you are resposible if you don't look for a better "location"!
Not quite the best solution for the world...There is simply no system suits all and for us, egoistical enlightned persons Freegold will be great (at least for the time of our lives) which I completely agree with.

samix said...

FOFOA, as a alternative to the monetary system that we have I am all in for the freegold system where the price of gold is allowed to float in terms of the currency, unlike the hard backing like we had in the US.

Atleast I will be able to the redeem the currency for some gold.

What I am against it completely unbacked currency like the fiats floating around today that are backed by nothing but the decree of the government.

Blondie said...

Well, I'm glad I persevered with getting my last comment posted; it seems to have sparked some thoughts.

samix,
Yes, you put your point across, and JR quickly saw the misunderstanding between us. My apologies, I had thought that I had implied that an unbacked currency would not also be regarded as a store of wealth. I should have stated it outright in the last post. In any case, JR quite correctly identified the issue, and FOFOA subsequently picked up the ball and ran with it :)

Perhaps we can agree on this:

Any currency used as a medium of exchange requires no backing as long as there is an independent store of wealth available and freely floating in that currency.

I believe this arrangement should meet the criteria of "fair"?


Fauvi,
Freegold is the fairer system you want for the "stupid masses". The selling and buying back of gold would be

exactly the same as now, except for the number of zeros on the currency.

Relatively speaking, nothing would change.
With Freegold, anyone wishing to save part of their income would use that part to purchase gold, regardless of the quantity their saved currency will purchase. Just the same as what one expects today from their savings account at the bank, but you won't require interest payments, as the buying power when saved in gold will be kept. When reconverted, in part or full, at any time in the future, the currency received will purchase the same amount of real goods and/or services it would have when saved.

It is not desirable for gold and/or silver coins to circulate directly as currency. Freegold has absolutely nothing to do with this. Nothing.
I'm sorry, but I can only conclude from reading your comments that you are confused as to the functioning of Freegold.

Pete said...

A thought:

What if the world adopts Freegold. Gold will be worth whatever the market will exchange for it, excellent.

Won't this carry with it the potential for the big players to manipulate currency?

For instance, lets say I get paid an equivalent of 1oz of gold per year wages. Then some of the big players in the market decide to hoard gold, restricting the supply. Gold increases in market value, to the extent that now I only get paid 1/2oz in gold per year in wages.

After being paid 1/2oz of gold for a decade and accumulating some savings (say 3oz of gold over 10 years), the big players decide to cash in on the increased market price of gold by buying up some cheap assets. Gold floods the market, and reduces it's value, to the extent that now I am being paid 1oz of gold per year in wages again. However my savings are half of what they could have been in that time - i've lost 5yrs of savings value in a short period of time.

Is this realistically possible? Currency fluctuations that are extreme enough to affect entire economies? Currency manipulation by large market players?

I guess gold hoarding seems to be a bit of an issue. Although if anyone responds to this, please don't focus solely on that in your response.

sobione said...

Hi guys
Help is needed with one question: why US cant change to float the value of their gold on month/month or quarter/quarter basis (like ECB does)? Why do they keep gold on their books at fixed rate (some silly 42 bucks/ounce)?

Take care

samix said...

@Blonie: yes we can agree to that definition!

@sobione, that's what the Bretton woods agreement states that is why.

Know that Nixon has not closed the gold window shut officially, The united states has only suspended the conversion of dollars to gold.

Though even I am now thinking why don't they re-evaluate their gold, I guess somewhere in the previous commentaries FOFOA has covered this too.

Michael H said...

Excellent post, FOFOA.

Has anyone brought this post to the attention of Karl Denninger? It seems like a perfect answer to his "gold isn't going to go up because the inflation already happened" argument, from his debate in May/June with Gordon Gekko.

http://market-ticker.org/akcs-www?singlepost=2139375

His words:

"Those who are looking for hyperinflation are about 20 years too late. We already had it. First in stock prices, and then in houses. Anyone who cares to argue that taking the SPX from 100 to 1500 over a period of 20 years is not "hyperinflation" has rocks in their head."

So yes, Karl is right, we've already had a serious bout of inflation ... but as FOFOA points out, we're not done yet.

AgAuPM said...

Another great post that took time to write and explain how things work in banker's world.

But eventually their fraudulent activity and manipulation ends when public demands physical money (gold and silver) instead of fiat money.

Sep 2010 will be very interesting if price of silver breaks $20 and Comex has to deliver 15.01 million ounces of silver.

Current Comex silver delivery numbers in first 3 days of this month, I've presented in my blog post at AgAuPM.com

By sharing info and educating masses we might crush these manipulators.

Mike said...

another head fake by those smart Chinese guys

http://www.bloomberg.com/news/2010-09-01/pboc-researcher-says-gold-may-slump-on-central-bank-selling-news-reports.html

Paul said...

@Pete

Interesting scenario. Losing 5yrs of savings value in a short period of time would be gut wrenching. As I'm sure it has been for all those many many savers to whom it has just happened. Many people have just discovered that their savings held in what they believed to be secure assets, were far from it. So yes it does happen.

I would argue, however, that it would be far less likely to happen with Freegold, separation of currency and wealth.

Currencies now are not really anchored to anything. Everybody is playing them, with massive leverage. Governments intervening daily, hedgefund algos forcing tighter and tighter correlation, everybody and their mother trading FX. It's watching a ship half full of water, washing from side to side. I'm not sure there could get more currency manipulation than there already is.

Looking at the specific of your scenario, you describe a hoarder restricting the supply of gold, then flooding the market. You're mistaking gold for a commodity. Because gold is not consumed, all gold is available all the time, for a price. The supply cannot be changed, except very slowly by mining. You cannot flood the market when it's priced correctly. The market is already flooded.

Paul said...

@Pete cont.

Although what you describe could potentially happen with silver....

Pete said...

@Paul

Good response there Paul.

I definitely agree that our current system is a lot worse than Freegold for price manipulation and potential loss of savings.

But I don't quite understand the notion that hoarding would not restrict supply. I'm saying, what if Bill Gates decided to buy up as much gold as he could, continually. He never releases this gold to be used as currency, hence there is less gold in the system. He won't sell the gold at any price, because he wants to manipulate the value of it later.

Obviously it would need to be a significant portion of the total gold being used in that country.

Surely less gold in the system will translate to a higher value of gold? Just as twice as much gold in the system would translate to a lower value of gold?

I'm not suggesting that gold is consumed...just taken out of the trading system (and put in a vault).

For an even more extreme scenario, what if everyone in the country hoarded gold, because they saw it's 'value' (eg, the goods it could be exchanged for) going up? Then the value of gold would go up...people wouldn't trade the equivalent of one ounce of gold for a pig, they figure that by next week they could get two pigs instead.

I'm not trying to bring down Freegold...I think its the best alternative so far. All I am suggesting is that it is not perfect and could also be subject to manipulation by large players, or mass sentiment.

Paul said...

@Pete

The ratio of traded gold to hoarded gold is very small. This is because the price is kept artificially low. If you tried to buy 100 tonnes of gold at $1250 you would not be able to. If the price was higher, then the ratio of traded gold to hoarded gold would also be higher.

Now image a price at which traded gold balanced hoarded gold. People and governments could freely move their excess production into and out of gold, globally.

Bill Gates would not be able to manipulate that process. China would not be able to manipulate that process.

The only things that would be able to manipulate that process would be the annual increase in gold stocks (estimated at 3% historically) and the annual increase in global wealth (estimated at 3% historically).

So funnily enough your 2 pigs would have influence. If the world suddenly started producing twice as much pork (organic free-range of course), then pigs are devalued against gold, the price of gold goes up, and everyone is wealthier. The reverse is also true of course. How very fair.

dojufitz said...

Bill Bonner reckons the current price of Gold is fair value...

Quote ;
The only reliable bull market of the last ten years has been in gold. The yellow metal lost $2 yesterday, closing at $1,248. That is only $14 below its all-time high. Which means, while we've been watching Bernanke, Jackson Hole, and stocks - gold has been quietly creeping up...

.stocks go down; stocks go up - and gold keeps moving up...

.fiscal stimulus, monetary stimulus, quantitative easing - and gold keeps moving up...

.recovery...no recovery - gold keeps moving up...

.inflation...deflation - and gold keeps moving up...

Are you beginning to see a pattern?

Yes, gold is in a bull market. It moves up on bad news. It moves up on good news. It moves up on no news at all.

And if we're right about how this period of Great Correction ends, the price of gold in dollar terms should go up much, much more.

But here's the important thing. Gold is money. You can use it to buy things. In terms of what gold will buy, it does not seem undervalued to us. Much has been written on the subject. But as near as we can tell, gold is now fairly priced.

Go ahead; buy all you want. It is a good way to maintain your wealth and protect it against the monetary and economic calamities that are doubtless coming. And if you expect to make a lot of money on it, you'll probably succeed. When the Bernanke Fed loses its grip - which it will - and when the public gets on board the gold bull market - which it will - gold speculators will probably make a lot of money.

We've been a gold bug for the last 30 years. Two thirds of that time was miserable, punishing and humiliating. Only the last 10 years have been rewarding. We expect the next 10 years to be even more rewarding.

But the reward now is different. It is speculative...not inherent. When we bought gold in '99, we were buying an undervalued asset. We were buying real money, cheap. We made our money when we bought.

Now, gold is fully priced. It is a still a good way to save money. But we cannot expect to make money by waiting for the metal to revert to the mean. It's already at the mean. Gold is now a speculation.

A warning: we still have not had the sell-off in the financial markets that we expect. The Dow has still not sunk down to 5,000. The lights are still on at banks that should have been put out of business months ago. The public still believes another "stimulus" effort might do the trick. Leading economists still believe they can manage the economy back to growth and prosperity.

We have not hit bottom yet. Far from it.

When we do, the price of gold could be substantially lower. Which is okay with us. We bought years ago. We're happy with our gold holdings and don't really care if the price drops. Heck, we'd be happy to see the price back below $1,000; we'd buy more.

But speculating on a rising gold price is a different thing. Most likely, speculators will be wiped out once or twice before gold hits its final top.

dojufitz said...

Bill Bonner reckons the current price of Gold is fair value...

Quote ;
The only reliable bull market of the last ten years has been in gold. The yellow metal lost $2 yesterday, closing at $1,248. That is only $14 below its all-time high. Which means, while we've been watching Bernanke, Jackson Hole, and stocks - gold has been quietly creeping up...

.stocks go down; stocks go up - and gold keeps moving up...

.fiscal stimulus, monetary stimulus, quantitative easing - and gold keeps moving up...

.recovery...no recovery - gold keeps moving up...

.inflation...deflation - and gold keeps moving up...

Are you beginning to see a pattern?

Yes, gold is in a bull market. It moves up on bad news. It moves up on good news. It moves up on no news at all.

And if we're right about how this period of Great Correction ends, the price of gold in dollar terms should go up much, much more.

But here's the important thing. Gold is money. You can use it to buy things. In terms of what gold will buy, it does not seem undervalued to us. Much has been written on the subject. But as near as we can tell, gold is now fairly priced.

Go ahead; buy all you want. It is a good way to maintain your wealth and protect it against the monetary and economic calamities that are doubtless coming. And if you expect to make a lot of money on it, you'll probably succeed. When the Bernanke Fed loses its grip - which it will - and when the public gets on board the gold bull market - which it will - gold speculators will probably make a lot of money.

We've been a gold bug for the last 30 years. Two thirds of that time was miserable, punishing and humiliating. Only the last 10 years have been rewarding. We expect the next 10 years to be even more rewarding.

But the reward now is different. It is speculative...not inherent. When we bought gold in '99, we were buying an undervalued asset. We were buying real money, cheap. We made our money when we bought.

Now, gold is fully priced. It is a still a good way to save money. But we cannot expect to make money by waiting for the metal to revert to the mean. It's already at the mean. Gold is now a speculation.

A warning: we still have not had the sell-off in the financial markets that we expect. The Dow has still not sunk down to 5,000. The lights are still on at banks that should have been put out of business months ago. The public still believes another "stimulus" effort might do the trick. Leading economists still believe they can manage the economy back to growth and prosperity.

We have not hit bottom yet. Far from it.

When we do, the price of gold could be substantially lower. Which is okay with us. We bought years ago. We're happy with our gold holdings and don't really care if the price drops. Heck, we'd be happy to see the price back below $1,000; we'd buy more.

But speculating on a rising gold price is a different thing. Most likely, speculators will be wiped out once or twice before gold hits its final top.

Pete said...

@Paul

Another great response thanks Paul, it seems to make more sense now.

I think that hoarded gold would really be storing the 'value' of the product/service it was exchanged for - meaning that for hoarding to even occur, an entity must either sell their assets in exchange for gold (which would depreciate the value of the assets if they were sold en masse and flooded the market, not to mention loss of income) and try to accumulate it slowly. Unless you were a CB with a hoard already.

So hoarding would achieve not much except to store value...which is 'value' that could be put to work to increase profits...a much easier (and legal) way to profit rather than to hoard, surely.

Now the only issue would be assaying - i know the gold isn't meant to be used as currency, but it does need to reside somewhere. And dodgy gold is a bit of an issue for the future, especially if the relative value increased to the levels FOFOA and others suggest it might.

But i've heard there are some pretty nifty techniques for assaying out there...like using electrical resistance or resonance or something like that. The old 'bite the coin' trick probably won't suffice.

Pete said...

@Paul

Another great response thanks Paul, it seems to make more sense now.

I think that hoarded gold would really be storing the 'value' of the product/service it was exchanged for - meaning that for hoarding to even occur, an entity must either sell their assets in exchange for gold (which would depreciate the value of the assets if they were sold en masse and flooded the market, not to mention loss of income) and try to accumulate it slowly. Unless you were a CB with a hoard already.

So hoarding would achieve not much except to store value...which is 'value' that could be put to work to increase profits...a much easier (and legal) way to profit rather than to hoard, surely.

Now the only issue would be assaying - i know the gold isn't meant to be used as currency, but it does need to reside somewhere. And dodgy gold is a bit of an issue for the future, especially if the relative value increased to the levels FOFOA and others suggest it might.

But i've heard there are some pretty nifty techniques for assaying out there...like using electrical resistance or resonance or something like that. The old 'bite the coin' trick probably won't suffice.

Paul said...

@Pete

Sorry, I never seem to be able to get all my thoughts in a single post!

To address your valid point -

"Surely less gold in the system will translate to a higher value of gold? Just as twice as much gold in the system would translate to a lower value of gold?"

This is true where commodities can actually leave the system, by being consumed. With Freegold, the system is both the traded gold and the hoarded gold. So gold cannot leave the system, and can only gradually enter the system.

To manipulate, you'd have to not sell your gold, you'd also have to ensure no one else sold their gold.

Even if some massive hoard of historical gold suddenly appeared, or a gold meteorite hit the earth, it would have to be a large percentage of all gold ever mined to have an impact on the price.

e.g if the general belief was that 200,000 tonnes of gold existed globally, and suddenly a 20,000 tonne gold meteorite hit the earth, in a true gold physical marketplace, why should it move the price by more than 10%? (assuming it didn't wipe out all life of course)

samix said...

wow! I enjoyed the gold action at comex today!

fredquimby said...

Hi FOFOA and all.

I bought my first Queen Elizabeth II Sovereign today. It is now sat next to my Vreneli. St.George and Vreni would have made a good pair...haha Now I have two gold coins, I just noticed the different noise they make clinking together. I like.

I was hoping the year of my QEII would be the same as Browns Bottom so googled it...alas not 1982 when mine was made. I am gonna specify 1999 next time. haha

The article that I chose to check the date with is from The Times April 2007 article

A really great damnation of Gordo and how it seems he listened to no one before selling the gold. OK, the folk quoted are all banksters so maybe have ulterior motives, but I still can't get my head around a good reason WHY Gordo decided to do it. It can't have been bloodymindedness alone surely?

Apart from the direct obvious winners, they who bought it for £275 an oz, who else would drop to there knees and say Gordo, thanks for that, you saved our bacon. Was Gordo doing a MASSIVE favour for someone? There must be a big fat reason why the sales were announced too and that he sold so much so quickly. And if it had been there for centuries, SURELY there is a rule somewhere that says the Queen must agree to such a thing? Surely the countries reserves are under her command too?

Another question raised in this article:

"The gold standard lasted until Britain was forced to abandon it during the first world war. Churchill returned to the standard in 1925 but it was again abandoned in 1931."

Any ideas about the whys and what fors here? Why was it abandoned and by whom?

(did they truck Browns sold gold out to the buyers, is the treasury still looking after the gold for whoever bought it ala IMF?!)

Cheers!

fredquimby said...

I meant to say:

P.S Did they truck Browns sold gold out to the buyers? or is the treasury still looking after the gold for whoever bought it ala IMF style?!

Robert said...

FOFOA and you who comment here. I have learned so much about Au from you all, and I had already passed "Gold 101". Such a big and complicated subject Gold is.

As I mention over at zerohedge.com, when money comes in (I have passive streams of income), some of that goes into physical gold.

I suppose the fact that only, what, 3% of Americans have even held (or touched?) a gold coin means that most Americans are really clueless about Gold. I cannot see any other explanation why there is no interest in the Ancient Metal of Kings.

Disclosure: I am very much a Gold fan. I have almost 7% of my net worth in physical Gold and slowly am inching that up.

This is an outstanding blog!

"Robert"
DoChenRollingBearing at zerohedge.com
FOGARB (Friend Of Gold And Rolling Bearings)

Mike said...

freegold is closer it seems, the dollar losing its function.

the best quote from the article is here....

http://www.bloomberg.com/news/2010-09-08/china-russia-push-yuan-ruble-trading-to-diminish-dominance-of-u-s-dollar.html

Bhanu Baweja, global head of emerging markets fixed income, currency and credit research at UBS AG, said in a phone interview from London. “It makes sense for two large economies to exclude a third, overly dominant economy from their trading equation.”



isn't this the system that the BIS designed, one where one country (aka USA) isn't relied on for world trades and can't bring the world down when it has economic problems.

Patrick said...

ANOTHER: Mr. Powell, In the time before us, China will trade in Europe with "great intensity"! As this trade develops, little use will be found for use of dollars in trade and little purpose for to devalue the yuan, except for the revenge against neighbor nations. A good purpose will be found to trade dollars for gold! The gold could be sold to ECB or gold could be held for reserve of 15% or higher to match Euro group reserve requirements! Much will be the future for this position! As such the Yuan may become part of Euro Group basket, yes?

I think, in the future, for one to make their currency lower against the dollar will be as:" trying to hold the hand one meter below a falling stone"?

Greg said...

I got to this post after reading your Hyperinflation part I and I must say you are making me think.

Your "two balloons" in your other post is an interesting twist and I think its interesting to note that those two balloons can easily be represented by numbers of people. There are 270 million in the debtor balloon and 30 million in the saver balloon. This isnt insignificant.
The authorities are papering the losses in the 10%ers balloon and still asking the 90%s to pay the debts as well. The 10%ers are essentially getting paid TWICE, and the90%ers are losing their homes and savings.
It is this extreme inequality which will kill the
credibility of the system and lead to collapse.

You alluded to something in this post which I think is critical. Its apart of human nature which our monetary system only makes worse. It has to do with decisions we make today with our money. Many forgo consumption of real goods today and simply save the money in the expectation that they will get the same later with the saved money. Why would anyone ever make that assumption? The future is never guaranteed. The idea that they really had the option to consume more at some point in the past seems unrealstic as well. They consumed all that they needed and yes they could have bought more real goods but where to store them? How to maintain them so their value will not erode? The hypersavers have some very unrealistic ideas about what they are saving and what the rest of us need to sacrifice so their savings are protected.

Its this discontinuity of expectations between savers and consumers that is the road to our extreme inequalities today. The system as you pointed out is politically biased towards saving the savers, mainly because all the people with power ARE the savers.

Its clear form your story though that the MMT crowd is right about a lot of things, especially the idea that we are still operating our soft money software on hard money hardware.

FOFOA said...

Hello Greg,

If I could recommend a post at this point in your exploration it would be The Debtors and the Savers. Enjoy.

Sincerely,
FOFOA

DP said...

The credit expansion boom is built on the sands of banknotes and deposits. It must collapse.

sands → mirage

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