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64 comments:
Hello FOFOA
I am only now learning of this topic, and not fully up to date. Thank you for bearing with me.
A few general comments/questions: 1) It is clear that the $ cannot continue to hold a debt of this magnitude, and default will have to take place. However, in order for the currency to keep its standard, there is no limiting the interest rate to rise up to an extent that it will effectively postpone devaluation, perhaps indefinitely, while the bearers of the price will be the people through depression. It is hasty to assume incapacity of the CB to envision the future of the $ at the current spending rate.
2) Assuming hyperinflation, the average citizen is indebted enough that this will effectively wipe his debts and increases his assets (home, car). This comes then for the US economy as a boost, while defaulting on everybody. Then, how come banks (the effective owners of the debts) would allow this to happen?
3) There doesn't seem to be a ground for reevaluation of the Gold "to its true value": as all currencies are now intertwined, it suffice to devalue versus the Euro, while Gold at Euro prices will slightly rise but European financial system would stay relatively stable. Especially that the $ destruction will lead to a depression and deflation of other currencies.
Thank you for your insights
To continue in the spirit of what Gabriel above asked:
Is there a path to a Freegold reserve system without hyperinflation?
FOFOA said:
"And trust me, most of you have no idea what I mean when I say Freegold. I can tell by the comments lately."
As the reknown of you blog expands, the number of "Freegold 101" students joining will tend to outpace the existing volume of 200-level students. I know I'm somewhere in the 150's and I've read more than 30 or so of you posts, most of them more than once.
I may be a "rock", but I'm far from offended. It's your blog and you have every right to defend whatever standards you wish in terms of discourse. Heck, I'd be happy if you just gave out reading assignments instead of so calmly and patiently explaining things again for the 300th time.
You're a treasure FOFOA!
Hello Gabriel,
1) There actually is a limit. When faith in the dollar fails, interest rates will be chasing price inflation never to catch up. And beyond a certain point they don't even matter anymore. In a true currency collapse there is no interest rate you can offer that can be serviced with anything other than printed money. If, on the other hand, you raise rates preemptively or allow the market to do so, you kill the rollover of debt and force hyperinflation upon yourself as you must now either roll the debt yourself with fresh cash or watch the whole system implode almost instantaneously. And given a choice of sudden suicide death of the banking system or hyperinflation, you will choose hyperinflation of the currency every time.
There is a reason the Fed is defending zero interest rates. Remember, it doesn't control them directly, it defends its target rate with fresh cash.
2) In an aggregate view of debt, the banks are NOT the effective owners. The savers, pensioners, retirees, and hard working producers are. They are the ones that will be wiped out. The banks are the middleman and they will be fundamentally transformed because their product has failed.
3) The problem with all the fiats around the world is that they are just that, fiats. And they have been marked to market against the US dollar for so long that when dollar repudiation (flight to the physical plane) starts in earnest, it could very well be contagious across all currencies, regardless of whether they deserve it or not.
They all are, after all, purely symbolic currencies.
The real hyperinflation that COULD ensue in other currencies depends on A) how the owners of debt in that currency react to a dollar repudiation, and B) the local government's knee jerk reaction if/when their currency is repudiated. We know the USG's reaction because of its severe case of bureaucratic elephantitis which only has one treatment, generous dollops of dollars. But we don't know how other governments will react if their currency is repudiated during a panic. How they react DURING the crisis will be key to either a moderate currency dip or full blown devaluation.
But it can certainly be argued that ALL fiat currencies are overvalued today versus the physical plane simply because of their long-standing parity with the dollar. Forget about fundamentals during a panic. The panic creates the reality.
Continued...
When the dollar collapses it won't be an FX event. It will be a paper versus physical event. A monetary plane versus physical plane event. All the currencies today are pretty much equal (other than the debt, but that will be gone in a flash during the collapse). And if you take the debt out of the equation, what keeps the others at present or even higher valuations versus the physical world? Their desire to make the debtors pay in real terms? Remember, it's not up to them how the market decides to value their currency.
I think Another alluded to this. And I think the key to the euro is that physical gold is for sale at the banks. When the collapse starts I imagine that price hyperinflation will take hold in the eurozone as well. And people will rush to the banks for cash (for the poor) and gold (for those with substantial savings). And they will find it there. Remember, the euro already has EUR500 notes and gold for sale at the banks.
I imagine the BIS could start the Freegold physical market immediately. It simply has to quote a buy/sell spread and let the other Giants buy or sell to it. All the gold in the euroland banks would immediately be priced to this new market. So they wouldn't need to deliver more gold to the banks. What they already have in stock will rise in value. And I believe they already have little 1 gm. wafers. (Can someone in Europe confirm this?) A 1gm. wafer might go for EUR 300-500 at that point. Or maybe even EUR 1000. That would be a 33X revaluation inside the eurozone. And anyone with at least a thousand euros in the bank could get one.
So the panic in Europe could be pretty short lived. And the euro would not fall so far because the panicking savers would be given what they need, a floating Freegold reserve, rather than bidding up anything and everything else in the physical plane. Gold will serve its purpose as a giant sponge.
As for other currency zones, I don't know. As I said, it will be chaotic and unpredictable. That's why I try to stick to Freegold and dollar hyperinflation rather than trying to predict the unpredictable.
Sincerely,
FOFOA
Hello Aleksandar,
If there is, I don't see it. I see two states moving forward. State A and state B. In state A the dollar doesn't collapse in waterfall fashion, it just slowly slides, and the paper price of gold rises continuously.
In state B, the paper gold market fails to deliver (because physical stock is withheld) and we end up with Freegold.
Simple as that. Two states, completely incompatible with each other. We are in state A right now. So there will either be a transition, or there will not. And the odds of "not" decrease along the time axis. That's the way I see it. But notice that in both cases the preferred savings is clear.
Sincerely,
FOFOA
I ask this because with the speed and sophistication of all matters financial nowadays, also the internet and such, it may be that the onset of hyperinflation is stopped in its tracks by instant POG reevaluation. Something like in the late 70s sans Volcker.
Hello Alek,
"...it may be that the onset of hyperinflation is stopped in its tracks by instant POG reevaluation. Something like in the late 70s sans Volcker."
May I ask, would that be a revaluation of paper gold?
You see, therein lies the rub that would kill the dollar rather than save it.
Sincerely,
FOFOA
FOFOA,
Assuming there are still places to buy such in the future, when all of this is over and civilization begins it's next great bull market, if you can see fit to 'come out of the cold', as it were, I will be honored to meet you and buy you a beverage of your choice. And get your autograph. And a picture with you. Heck, I'll even be happy to rent a rickshaw, tell the driver to take the day off and pull you around town for the day myself, if that's what it takes.
Dave
FOFOA, I think we should look to both the Colonial and Civil war experiences in an attempt to puzzle out possible scenarios.
While I support your freegold thesis from a macro perspective, I get the sense you fall into a similar trap as Texan. That is, you appear to conflate the desire of CBs and/or central governments to maintain the present $dollar reserve system as ability. Or, nothwithstanding that, a free-for-all as gold becomes the new de facto trading standard.
From my perspective, there is a 3rd option, and that is whether or not a state/federation/Union has sufficient political/military power in which to impose a new (domestic) monetary standard.
If you venture down this path, then the problem is reduced to whether or not the Union is maintained. If we have a crisis under the present regime, it just doesn't seem like the fed.gov can prevent states from issuing their own scrip.
Take California as a case in point. The polls are showing the marijuana initiative running far in favor of legalization. If MJ is legal while a federal crisis erupts, I can easily see state scrip being issued backed by this and other agriculture output.
Scenario two - Obama is forced to resign or is impeached, Biden skips out, and we get a strong man (guess who?) nominated before the new House Speaker is promoted. Could the strong man hold the US together? If he is to have any chance at all, around 10,000 bankers, lobbyists, regulators & politicians (eg Frank, Dodd, et al) would have to be arrested & jailed.
So down goes the Fed/SEC/FDIC system and in its place is constructed a new greenback system. If the new "leader" has sufficient backing, he will be able to launch a new fiat currency.
I'm sure you get the picture. Freegold is appealing in either a MadMax world, or a situation still controlled by existing CBs.
A third way, which I illustrated above, deflates the value of gold to the extent that individual sovereigns can muscle control over a new legal tender. Of course, say good bye to int'l trade, but that is foregone anyway if the USA is to avoid dissolving into an all out civil war. (That is, we need to put 10s of millions of people to work.)
I have the feeling things are changing behind the scenes. This stable rising price of gold is unprecedented. After a $50 move, gold ALWAYS was hammered at least 40% in the next few days. This is not happening, why? Someone didn't give the order this time. Why? Is the system too unstable, and a sudden drop seen as too risky? Perhaps this is the calm before the storm.
FOFOA, do you believe the government will remove the onerous taxes on PMs for Freegold?
FOFOA, since you were kind enough to provide a ready reference in describing hyper-inflation, perhaps it would be useful to outline some primary scenarios in which to game play the $USD, freegold and new, as yet to be announced, fiat tokens.
Note: for newer readers, FOFOA defined a hyperinflationary event as a period when "physical goods and services stop bidding on (fiat) money."
From my perspective, I see three major themes developing:
1. USA! USA! USA! Also known as the "Mish scenario", in which the US, like Japan for the last 20 years, is able to issue Ts to finance endless deficits for the foreseeable future.
As such, Ts make an excellent investment during a deflationary period, since they are backed by the full faith & credit of the US taxpayer. And as we know, the US is going to remain a solvent political entity for many, many years to come.
So don't be silly, or a dope, to suggest anything other than the US remaining #1 for, well, forever.
2. Freegold. Or as FOFOA puts it, his #1 favorite topic. I'm hoping FOFOA steps in here and expands this section a little bit, but at the risk of possible misunderstanding or misrepresentation, it assumes a radical upwards revaluation of gold as global currencies seek a new anchor to replace the $USD.
3. Strong man. As a student of history, this is my favorite projected outcome for two reasons:
a. We've got around 5,000 years of recorded history that suggest people like a strong leader. And if they don't, well the stooges have ways of making people conform.
b. We've got around 2,500 years of recorded history that suggest that nation-states are able to define money in purely legal terms given the right circumstances.
As to both a & b, FOFOA or anyone else can point to the same exact historical record that favors the emergence over & over again of gold as both the preferred exchange unit as well as store of value.
So there you have it. Please feel free to expand/edit/destroy. I would guess most here would dismiss #1. For anyone believing in #1, they might prefer Mish's own blog for reassurance.
So in terms of this forum, it really comes down to b or c: gold (or gold back currency/notes) or (unbacked) fiat a la' Colonials and/or Greenbacks.
Hello Snerfling,
Did you see my response to Jenn on page 2 of the last thread? Seems like you missed it. I'm afraid you don't understand what I mean when I say Freegold.
A new domestic currency is certainly a possibility. A brand new fiat just like the greenback or the continental. Or even the confederation note. Or even local or state currencies. Sure, no problem. This changes nothing on the Freegold front, nor on the dollar hyperinflation front. You seem to be aware of the separation of monetary roles that is happening. Do you understand that no government has an OUNCE of control over the store of value role? Even with a strongman dictator? Do you understand what is important to a strongman dictator? See my post to Jenn.
Freegold has nothing to do with a MadMax world. I don't foresee a MadMax world and anyway, Freegold has nothing to do with that scenario.
You say you like my macro perspective, but then, like so many others, you propose intricate micro scenarios that I assume you think offer an end run around my macro perspective. They don't. And this shows me that you don't understand Freegold.
So many on here have read a couple of my posts and they think they understand what I mean by Freegold. Have you read Bondage or Freegold yet? That's an old one, and just one of many, but it contains a vital element to understanding what I mean when I say Freegold.
Let's look at your "b or c." b= gold or gold backed currency. You seem to think this equates with my term, "Freegold." It doesn't. Freegold is not a backed currency in the conventional sense. It is a parallel physical gold market that floats against the currency. You can consider that backing, but it is backed by the AGGREGATE of reserves within the zone, not just the official CB reserves. And your "c", an unbacked currency - this is closer to my Freegold.
There is a good reason that I use macro explanations and focus on only two things. That ensures I will be right in the end. In case you haven't noticed, I'm pretty careful about what I write. But I don't need to prove this to you. Like ANOTHER, I am more than happy to let time reveal its secrets. But I do enjoy sharing my thought process with others. And that is why I'm here. Not to debate complicated micro scenarios that have no bearing on the bigger picture.
Your MadMax interpretation of Freegold has no connection with my vision. You'll either have to trust me on this or else go read all of my archives and the Another and FOA archives as well to figure it out yourself. Perhaps naming this thing was a mistake, like propping up my own strawman that I then have to defend.
But like I said before, "no one has shown me another way it could play out. When I see one, I will let you know."
In the meantime, I am done debating these complex micro scenarios. I will consider them all silently but I will not waste my time responding unless one provides something of interest to the big picture or shows a deep understanding of Freegold. I will continue trying to share what I see and engage with those of you who do so on a clear and logical macro plane. But if you want to put forward your NWO scenarios or complex "powers that be" scenarios that supposedly end run around Freegold, you can interpret my silence as being unimpressed. Not that you should care, but I'm just saying.
Sincerely,
FOFOA
Understanding Freegold is not about understanding the how and why of the transition. It is not about a comprehending a future high price of gold. It is about gold's equilibrium value in a market that is not distorted by a parity relationship between physical gold and some piece of paper.
In Freegold, any exchange between fiat and gold will be completely neutral. It won't be a "bad" thing to go in either direction, from fiat to gold or from gold back into fiat. It will be a completely neutral decision in the here and now. The only determining factor in where you have your wealth will be if it is to be deployed now or later. And being an "active investor" will be deploying your wealth now, not saving it.
People get hung up on the "high price of gold." But once we are there, it won't be a high price anymore. People simply cannot see past the dollar reserve boundary. It is a complete mental block to the Western mindset.
Forget about the massive transfer of wealth that is coming sometime in the future. Forget about figuring out how "they" are going to keep it from happening. It's already a done deal. "Baked into the cake" if you will. If you can get past this mental barrier and view the world as it will be, not as it is today, you have made some progress.
Sincerely,
FOFOA
@ Snerfling:
I do not see Freegold and your strongarm scenario as exclusive. Freegold is what will emerge in the end. The transition to freegold might get messy. The rosy scenario is a hyperinflation lasting 6 months or so, followed by a return to stability. The less rosy scenario is dictators, followed by WW III, followed by freegold in the aftermath as the Bretton Woods Agreement followed WW II.
I have been thinking about the last decade. Another and FOA wrote in the late 90's/early 00's and saw the dollar collapse as imminent. So far it has held on. How? And, how much longer can it hold on, and what are some ways it could prevent its demise?
(I am half-way through the gold trail, so maybe some of my answers will be found therein ... )
How the dollar has held on:
1. Inflating a new bubble, renewing the 'use demand' for the currency to fuel a rise in real estate costs.
2. Gaming of the inflation statistics, to hide the erosion of real wages in the US, and maintain confidence in the currency.
3. Intimidation of oil states to ensure continued dollar pricing of oil, culminating in the US invasion of Iraq and Afghanistan.
4. Managing the gold price upwards, to release some pressure in the system but always keeping the investor off-balance by attacks on the gold price via the paper gold markets.
5. Using derivatives and hidden monetization to lower interest rates and borrowing costs below market rate.
continued ...
Where we are now:
1. Housing bubble popped, total credit in the system is diminishing. Either they find another bubble (it is too soon to reinflate the stock market or real estate), or they must open the monetization floodgates.
2. Gaming of statistics will continue. There is still some room to descend before the entire population stops believing anything the government says.
3. There are war drums beating regarding Iran, but the US seems to be having trouble with its two current wars and I don't see a third being successfully fought. I'm not sure how the oil states see the invasion of Iraq and Afghanistan: will it serve as a deterrent, or will other states see the current wars as evidence that US military might is not omnipotent?
4. Gold price will continue to rise. The physical market is probably the dollars current weakest spot. Nobody knows how much gold is left in US official vaults to counteract a run on physical.
5. Borrowing rates are incredibly low. They can go marginally lower, but when they go higher the US government finances will explode, and the US will have much trouble rolling over its short-term debt.
continued ...
And now some speculation about what may buy the dollar another 5 years or so.
I imagine most of this will not merit a response from FOFOA :)
I only came up with one so far:
A new credit bubble is needed. Can gold be made the next bubble? It has been rising in price, so only a bit of marketing and some financing (a crucial component of parabolic bubble phases) could put it well into bubble territory. Or silver/platinum/palladium, if playing with the gold market is too dangerous.
A bubble in precious metals may create enough dollar credit demand to keep the system from imploding after the housing collapse.
Yet, somehow, this bubble must also be kept from destroying confidence in the currency.
FOFOA:
I think a few quotes may help some of the FG-101ers:
“We can't solve problems by using the same kind of thinking we used when we created them.”
Albert Einstein
“If you can't explain it simply, you don't understand it well enough.”
Albert Einstein
“Our wretched species is so made that those who walk on the well-trodden path always throw stones at those who are showing a new road”
Voltaire
Hello Jeff,
"FOFOA, do you believe the government will remove the onerous taxes on PMs for Freegold?"
Yes, I believe the new government will. This will be the end result. For the taxing authority under Freegold, given the choice between a sales tax and a capital gains tax, the sales tax would bring in more revenue because the price of gold will be relatively stable in Freegold. But sales taxes only raise the price of a good in your zone, which, only in the case of gold, weakens the currency you print. The lower the price of gold in your zone, the more purchasing power your currency will have internationally (and domestically). And we all know that the printing press is more valuable than anything else, right? So a sales tax on Freegold will be a net-negative value for the government. And a capital gains tax will be pretty insignificant. Gold may also be considered money at that point, and will not be taxed on that basis. As I, Another and FOA all said, the government will find it in their best interest to ENCOURAGE everyone to save in gold.
As for collecting a capital gains tax on the transfer of wealth, I believe this will prove to be logistically impossible. And if they try a zero-basis CGT on Freegold the US will experience a massive capital outflow through the black market. So any such attempt will be short-lived and quickly repealed in my opinion.
Sincerely,
FOFOA
This is an intriguing article.
http://www.24hgold.com/english/contributor.aspx?article=2851234612G10020
It looks at the design of the new $100 dollar bill, which you have to say is covered in gold symbolism and references to the US constitution. The author comes to the conclusion that a reversion to the gold standard in imminent. Oops.
But what is to stop the US guv initiating freegold, as FOFOA speculated the BIS could? Could this benefit the dollar just as it would the EURO, if the US revalued it's gold reserves to market.
FOFOA, I know in a previous post you explained they couldn't do this, due to the Nixon's suspension of the gold window. Is this the only reason? If a global agreement allowed US (global) freegold, could the dollar survive in your opinion, as the Euro could? Does it all come down to the unknowable quantity of gold resident in the US?
Cheers
Paul
I am sure I am a FG 101 person. Can anyone link a few of the main posts that summarize FG. FOFOA linked
a John Law article which helped augment a lot of the stuff I've read here.
Near as I can tell, FG expects some kind of singularity where every one decides that gold is a better store of value (for many many reasons) and so it reprices instantaneously to some new equilibrium where savings are in gold. I agree with this.
Then I gather that fiat will continue to exist as a
transactional medium, but I am a bit fuzzy on why fiat would continue to exist, at least in any meaningful sense? Why would anyone accept fiat and not dump it as fast as possible, if it had no role as a store of value? I haven't found a post on this.
Finally, what exactly is meant by "neutral exchange" between fiat and gold? Can't I buy gold now freely, and sell it? I know it's a paper price, but if I transact physically, it's also a physical price. And I get that not all multi trillions of savings currently stored in treasuries could move into gold without the singularity. But for a little guy like me, buying or selling an ounce here or there, what is the difference between the physical exchange of gold before and after this singularity? Is it simply an acceptance that the role of money has split, so little 1g wafers of gold are bought and sold in every store, like in India?
Thank you, I really like the blog.
I am trying to figure what happens with the consumer debt when there is a currency crisis or collapse of the dollar. In particular, what happens to the mortgage, credit card and auto loan debts?
Hello Paul,
I will walk you through this quickly. But you will have to take it from there because I don't have all day.
Let's start with ANOTHER and the idea of a new gold standard...
Date: Wed Feb 04 1998 20:24
ANOTHER (THOUGHTS!) ID#60253:
What are your "THOUGHTS" regarding the major currencies being backed by PM's?
Mr. Junior,
Any nation/state can put its economy/currency on a gold standard. They only have two requirements. Own a stockpile of gold and raise the price very high!..."
Now I know you asked about the US initiating Freegold, but that would be impossible because it would have to kill the paper gold market which would kill Wall Street which would kill the dollar. They are all interconnected.
So let's just look at what Alek proposed earlier. The Fed revaluing gold. How would it be done? Well, it would be done similar to what ANOTHER said. "Own a stockpile of gold and raise the price very high!"
Here's the problem: What price? The price of paper gold? Or the price of physical gold? Obviously it can't be the price of physical because it would have to destroy itself to do so, as I said in the Freegold example. So the Fed would have to revalue paper gold. And how does it do that?
The only way to do that is the same way the BIS will do it with the Freegold physical market once the dollar moves into hyperinflation. By offering a bid/ask spread at a target price. The Fed would then be DEFENDING that price in the same way it defends interest rates.
And since it is the price of paper gold it is defending, we'll have a very interesting experience with Gresham's Law. Say the Fed sets the price at $10,000. In order to defend this price for PAPER GOLD, it will have to buy any and all paper gold offered at $10,000. But in order to defend the CREDIBILITY of paper gold, it will also have to SELL physical at the same price (or slightly higher given the spread).
This will very quickly replace all physical gold with paper gold in Fort Knox. It would not be unlike the Bland-Allison Act of 1878 which was replaced in 1890 by the Sherman Silver Purchase Act. It forced the Treasury to purchase silver at twice its market value. Everyone quickly exchanged silver for gold at the Treasury which caused a massive run on US gold and helped spark the panic of 1893. Grover Cleveland repealed the Act in 1893 to prevent the complete depletion of the US gold reserves, but then had to take a gold loan from J.P. Morgan himself to save the country from bankruptcy.
Sound like a good plan?
No, the dollar cannot do what the euro can, once the dollar is gone.
Sincerely,
FOFOA
@Daniel
"what happens with the consumer debt when there is a currency crisis"
Unpredictable I would say. Any debt backed by an asset would be a worry. If the usual standards of law still applied, and you couldn't get access to inflated fiat to pay it off, it could get repossessed.
If laws breakdown, who knows might turn up at your door with the deeds. Best to try and pay it down and get the deeds in your own sticky hand either prior, or post crisis using revalued gold.
Tricky timing though, at what point do the deeds disappear into the chaos?
@FOFOA
Understood that the Fed cannot do it by revaluing the price of paper gold. I meant true Freegold, revaluing the physical price, and cutting COMEX, LBMA et al adrift.
I guess the question is whether this would consequently kill Wall Street and the dollar. Wall Street I'm sure you're right.
But maybe, maybe gold soaks up the hyperinflation, and the dollar staggers through as a greatly debauched transaction only currency. After all, they have put all that effort into the $100 bill gold makeover. Would be a shame to waste it ;)
However, what I have just described is hyperinflation in all but name I guess.
Hello Texan,
Storage of value is a time relative role. If you look at my Freegold Monetary Quadrangle diagram you will see the little t at the bottom. For short periods of time, fiat most definitely has value, and it even stores value well for the short run. And in the short run, it is extremely liquid and convenient. But it tends to fail in this store of value role on longer timelines.
Would you say that purchasing gold in 2009 was a good move? How about 2010? How about 2001? If you answered yes to any of these, then you must think that fiat to gold was a positive exchange, not a neutral one.
Was selling physical gold in 2001 a good move, say, if you wanted to deploy your wealth into the stock market? If you answered no, then you must think that gold to fiat was a negative exchange in 2001, not a neutral one.
As you get deeper into this subject you'll find that it is the extra savings held in fiat that actually causes the fiat volatility that ultimately punishes the saver. And that separating the functions will surprisingly lead to relative stability. This will bring the exchange calculation into equalibrium, a neutral experience that is only dependent on your personal time preference.
By the way, as good as that John Law article is, it must be read selectively. It was written in 2006 and it is about the remonetization of gold into ALL monetary roles when the dollar collapses. It also does not differentiate between physical and paper. In fact it praises the ETF's. It is not about Freegold.
Sincerely,
FOFOA
Texan,
http://fofoa.blogspot.com/2010/03/synthesis.html
is a must read.
You should also read ALL of ANOTHER, FOA, and FOFOA's posts. They are all top quality. I'd tell you to read ever single comment as well but I realize it may not be possible at least not in the immediate future but if you want a true understanding of what is discussed on this blog and what is coming down the pipe then you should try to catch up as soon as possible. Get reading and then come back in 3 weeks and tell us what you've learned from following the gold trail!!
One question I haven't seen addressed much anywhere is how other currencies (i.e non Euro, non USD) are going to be affected by the changes coming.
Is the whole thing basically as simple as let the value of the USD go to zero, see what is left and divide through?
Actually FOFOA has explained Freegold in all details and could now shut down his blog. He is convincing and there is no other way out due to debt.
All other readings are irritating and driving us away from understanding Freegold. I found many of his posts difficult to understand as they are very complex analogies and I am not someone with deep knowledge into monetary systems, finance or economy.
But his patient answers to us (uneducated) readers are much easier to understand.
We all read plenty of stuff in internet, maybe also MSM so that we get distracted from Freegold. Where we all might have a problem is when looking at this matter of confidence!
All people around irrespective if Europe or the US seem not to care what happens around. I speak to many people and all say, yes, our euros have less purchasing power, our debts are gigantic, we have lost our future pensions but there it ends. They see that gold is bought everywhere but they don't care. Everyone is spending his money as before, I know nobody to have liquidated his paper assets, but however, I hnow four people invested in gold, one is a numismatician.
They've bought modest amounts, put it aside, they know almost nothing about debt, economy, politics and are not very worried about these things.
I think what we are waiting for are REAL SYMPTOMS for loss of confidence. We see some but we are not quite able to understand their true impact.
Moreover it's quite incredible for how long the governments can push the can down the road! Therefore we see it can go on for longer and longer. I wonder what A/FOA think when they see the whole evolution! Whether they've expected it to take so long? Some of us are afraid of the consequences of this delaying and bserve the gigantic proportions of deceit, ergo Mad Max scenarios. As for Europe I'm sure there will be none. All people I know are sedated.
It has been quite a rant, sorry FOFOA.
In case it suits you, I believe we all need a better representation for the symptoms of loss of confidence as they happen before we fabricate all kind of distorting interpretation. We need to SEE the true symptoms of deterioration of confidence until the oil countries stop selling their oil for fiat ;)...as by then we will know.
@Fofoa,
"I read Desperado similar to Denninger"? Denninger? Thats a low blow! How about comparing me to Tyler Durden, or better yet Marla. She's my hero.
But seriously, I have been living freegold for a couple of years now here in Switzerland. My wife still has the gold vreneli's that her aunt and grandmother gave her. The majority of each of my childrens inheritance from my father is stored in gold in a steel lockbox in a safe deposit box at a Swiss Cantonal Bank. I have gold and silver in a safe deposit boxes at the same bank. When I want to change the PM content of my savings, I can go buy or sell gold bars at the gold window and take them from/to my safe deposit box without ever having to leave the bank. I prefer the smaller gold bars over coins because they are sealed in a plastic housing with a hologram certificate with the bar number and a barcode, and they can be exchanged withourt question at the gold window. In Switzerland, there is no VAT on gold sales, there are no capital gains on paper profits from gold price increases, and there is no inheritance tax. My children, and hopefully grand children too, will get their inheritance in the form of gold. The SNB values it's gold reserves at the current market rates, Switzerland stays strictly neutral but maintains a strong militia, it runs trade and budget surpluses, and it's citizens have the right to overturn any law enacted by the parliment through referendum. So all across the entire spectrum of wealth and government, I already live in a free gold world, and if it weren't for you Fofoa, I probably wouldn't even know. Thank you for this.
When I look at the US, where my siblings and their children live, they are still very far from freegold, also psycologically. I see how the US government has completely jumped the shark and has as good as abolished the constituion. So I worry and wonder how they can get there. As Churchill said, "The Americans will always do the right thing.......... after they`ve exhausted all the alternatives". So I think the road to freegold in the US will be long and arduous.
So Fofoa, when you say that I think "the middle class will throw their gold in the streets while the poor people eat like kings on government dole", I do think that it is possible. I am convinced that the governement will try rationing. In order to ration, they will have to allocate certain amounts of resources and food to certain people. I know the US government well enough to realize that this will be highly politicized. I am convinced that there will be any number of people including the government trying to scam anyone holding gold out of their precious "hoard". So I try to peer into the future and try to get an idea of how it might possibly unfold. I am interested in any and all opinions on how this might unfold, even Denninger.
Finally, I would like to close with this observation.
As important as following the path to freegold is, one of the main reasons to strive for this is that gold is freedom. This is why I often tell people to their astonishment, that it is every American's duty to sell all their treasury and other government debt and to buy gold. Because the easiest way to end this charade of government is for the people to refuse to hold their debt-based currency.
More on my 'precious metals bubble':
If it is to happen, it must be a bubble in paper metal, because the effect must be to encourage continued participation in the monetary plane. So it really could be a continued, steady, increase in the price of gold, similar to what we've seen for the past 10 years, only now with the participation of the whole population.
This game would not be played with physical, and physical gold holders will be sorely tempted to cash in and play the paper game, thus freeing up more gold for physical trade to the 'externals', 'giants', and oil interests. Official policy might even punish physical gold profits at this time, via taxation etc., to further incentivize the paper bubble.
Still to figure out:
- What would a paper gold bubble do to exchange rate relationships, especially between the dollar and the euro?
- Would the oil interests be able to continue accumulating physical gold, without raising oil's dollar price substantially?
Fauvi,
I cannot speak for FOFOA but I believe the only confidence that matters is that of the Giants. I view the rising price of gold as an indicator, but you may not see a major dislocation preceding Freegold. FOFOA is on record as saying the revaluation will come like lightning. When lightning strikes there is no time to run.
Jeff, you might be right, but I keep hoping people can force the transition, too.
In Germany we had a real run on gold in May. If more people simply bought all disposable PMs - this would come out! Instead they are spending it on bullshit, even if they have the money. Sad.
They see that gold is bought everywhere but they don't care. Everyone is spending his money as before, I know nobody to have liquidated his paper assets, but however, I hnow four people invested in gold, one is a numismatician. They've bought modest amounts, put it aside, they know almost nothing about debt, economy, politics and are not very worried about these things.
I only know a few people that are transferring wealth from paper money to gold. The current population in the USA has no monetary experience beyond the US$ supremacy one and they generally accept that this "will never change". We shall see.
Its funny you mention Karl Denninger. Has anybody in the blogosphere been more wrong than this guy Denninger? I am certain he does NOT trade with real moeny (as he claims he does) or he would be bleeding heaps and would have tanked faster than the false flag op titanic. To the contrary, one would have made untold riches if one had the foresight to trade the opposite of his views. But I guess what can you expect from a software programmer turned self-professed economist? Not much.
To be completely honset, and as someone dear recently said, even a 5 year old with a pocket calculator can see what's going on here (and position accordingly). To the point that makes me wonder, do the pundits arguing relentlessly against rising gold actually believe their BS? Surely they must be disinfo agents of the mighty big bro? We can stop here, are we not in bat country?
@FOFOA "that would be impossible (US initiating Freegold) because it would have to kill the paper gold market which would kill Wall Street which would kill the dollar. They are all interconnected.
FOFOA, thank you for your detailed response above. While you may feel frustrated in explaining the FG thesis yet again, think how many people have recently discovered and are now visiting your site. I would guess the majority have never even considered the core underlying issues, much less seen them being discussed in such an open, matter of fact, manner.
For example, if one estimates that less than 1% of the US population even bothers to read the various financial blogs, how many of that small number is attracted to sites like Mish/Denninger, which still retain as an article of faith the maintenance of the $USD reserve system?
I mean, to jump into a discussion that assumes a post Fed, post $USD reserve system and floating gold price is a huge, huge jump. And this is where you get the bifurcation - those who do consider those options are more likely to be end-of-the world survivalists. You bridge the finance-survival gap by rationally discussing what you see as an eventuality from a financial perspective.
My one observation is that, at least to me, any discussion of what the Fed, Wall St, the TBTF, et al wish and/or desire is really a moot point. They had their two years to try and fix what they broke in the first place - the jig is up. Regardless of one's position on gold, it might be wise to start thinking about what it's going to be like in a post $USD reserve world.
It may not happen as a result of the Nov 2010 elections, but as it becomes apparent to all that this thing is not going to get turned around, then the wheels will begin to come off as we ride the down slope towards ?
FOFOA,
Im sure you discussed this but do you think Fort Knox's gold is still there? I would think so but there seem to be plenty of people that doubt it. Gold leasing, swapping, arbing, tranching may have had some effect but surely depleting such an amount as stated by conventional means is bit of a stretch, ain't it?
Also you claim the Euro, among currencies, will be less bad, but is it because of Europe's stated gold reserves? In other words, if say, you think Fort Knox has only I.O.U.s what makes you think Europe has anything but I.O.U.s? Also where do you speculate said gold is, it must be somewhere or have the reptilians actually made good on their promise to come and repossess it to mend its own atmosphere?
Desperado you might be interested in Marc Faber's recent comments indicating the Swiss are likely to force government purchases of gold stored at banks. My gold is in CH too and this caught me off guard as I thought Switzerland was gold friendly. Considering Faber is Swiss and meets all the movers and shakers I think it's worth considering.
A question about empirical evidence.
There's a fair bit of talk here about how letting the paper gold market go would take the economy down. And defending it supposedly would empty Fort Knox in a heartbeat. Has anyone dug into the size of the paper gold market? I had a dig and all I could find was that the LMBA turns over 80 billion$ a day. Turnover, however is not indicative of outstanding liabilities. There are both long and short positions in the paper market. How many net tonnes of gold really stand for delivery? And are all those tonnes really only a US obligation? The Europeans are at it too.....
Sorry for being a pain in the ass, but the inability to support the paper gold market is a core tenet of the Freegold explosion scenario, and to assess its likelihood the empirical data deserve some attention.
miked
i remember a KWN interview with Adrian Douglas and the whistle blower and he mentioned its a 5T per year paper gold market and the biggest by far for all commodities as most people would guess oil first.
@miked, I spent the last 30 minutes looking for the Faber comments and couldn't find it. Do you have any more details (where you saw it)?
Faber sees to have some issue with Switzerland, I don't know what it is. It can be a very frustrating land to live in.
My guess is that he was talking about the SNB buying gold from the Swiss banks to try to depreciate the Franc, and that would be fine with me. Far better than buying Euro's and Dollars and adding them to reserves.
I suspect that the CB's of the major economies have a "gentlemans agreement" or are perhaps cooerced into not buying gold on the open market because that would bring Bretton Woods II down very quickly. As Fofoa has discussed in the past, there may well be 2 different prices of gold, the "public" one and the CB price. If this is so, then the best place the SNB can buy gold and rapidly pump Francs into the market is through gold purchases from the banks.
@desperado
"SNB buying gold from the Swiss banks to try to depreciate the Franc"
They bought at 1.20 and got out at 1.38ish I believe....was it not then just a good currency trading move to make some money on the SNB's part!!??!
When I go to page 2 of the last posts (part 3) comments, it's completely blank under comments 201-226?? A few days ago I could see 201-207 but now nothing. Any ideas about how to remedy this???
Thanks,
Wendy
So my point about the numbers I posted about changing CHF and then being able to buy more gold in Euros than £ or $, shows your theory of
"because the price of gold will be relatively stable in Freegold. But sales taxes only raise the price of a good in your zone, which, only in the case of gold, weakens the currency you print. The lower the price of gold in your zone, the more purchasing power your currency will have internationally (and domestically)"
Is already working?
Mike wrote:
"A new credit bubble is needed. Can gold be made the next bubble? It has been rising in price, so only a bit of marketing and some financing (a crucial component of parabolic bubble phases) could put it well into bubble territory. Or silver/platinum/palladium, if playing with the gold market is too dangerous."
First, a few prefacing comments.
A new bubble is the last thing needed. Quite frankly, if they had any sense, "they" need to cease and desist for their own good, not that I am terribly interested in their on going health and safety.
No marketing will be required to cause a mania into gold related products.The realization is beginning to dawn on money managers where the best returns have been for many years-see the performance of Tocqueville gold over the last year- The fact that mining shares have taken off recently ought to do the trick. The mistake that the retail crowd will make will be that they seek ownership of gold primarily through shares and not via the physical metal.
At the moment the idea that some hold that gold is in a bubble is sheer idiocy for a variety of reasons, not the least of which is that gold is not even close to being widely held.
@ Edwardo:
Let me try to clarify my earlier statements:
"A new credit bubble is needed (in order to continue to expand credit and preserve the existing dollar system). Can gold be made the next bubble? It has been rising in price, so only a bit of marketing ... (in order to involve the masses in the mania, and to keep the mania in a 'paper gold', 'western wealth' track) could put it well into bubble territory."
I am not trying to advocate a new bubble or say that it would be good for society. My position is that, without a new bubble, the dollar is toast.
My goal is to try to see if there is any way at all that the dollar can hang on longer than we expect. The dollar was expected to die in the 70's, the 80's, the 90's, and the 00's. Maybe now it will finally perish, but it seems to have an uncanny ability to persevere if there is any breathing room left at all.
And I completely agree that gold is not currently in a bubble.
Hello Desperado
Unfortunately Faber wasn't speaking of voluntary purchases. Here is the source. Maybe you can find a video upload of the event.
http://www.marketwatch.com/story/dr-doom-still-bullish-on-gold-2010-09-17
Hi Mike
Annual turnover doesn't say much about holdings. I read a 20 trillion $ a year figure just for the LMBA but it doesn't say much about the magnitude of exposure to a delivery event. Gold is bought and sold 20 times a day by some traders and all positions closed out by the end of the day. With the leverage you can get these days even a small player can create huge daily turnover without leaving any exposure behind. My point is that even if 80 billion dollars is traded every day nearly all those trades would be closed out within a few days.
Of course there is a also real futures market which supports the mining industry but those guys are only going to hedge their real production. I don't think there is any problem with delivery in that area.
To be a serious threat to the world markets would require hundreds of billions of dollars of uncovered exposure in the casino markets. US gold alone at Fort Knox is worth 400 billion dollars at today's paper price.
I'm not hinting at anything. Just trying to establish real ground to stand on.
Michael, I understood that you were not personally advocating another bubble. I'm simply offering my view that another bubble-the inevitable popping of which- will simply speed us towards the dissolution of the dollar. Having said that, it is obvious that "their" levers do but one thing, create bubbles. The monetization has simply furthered a bond bubble, even as they are trying to resuscitate the equity bubble. The tens of billions, not to say trillions of dollars of largesse will not, can not, for very good reasons, be deployed into productive use, which of course guarantees an abject and ignominious failure to these bubble juggling acts.
And though I wouldn't presume to speak for FOFOA, I imagine that, were he to choose to respond to your following statement,
"but it (The Dollar) seems to have an uncanny ability to persevere if there is any breathing room left at all."
he might offer that the dollar isn't so much persevering as it is hanging on (excruciatingly so) in the terminally ill ward.
miked
ya i agree, i was just saying what Adrian's answer was.
i dont know how big the gold market is but what i do know is there isn't enough available now to go around to everyone at these prices.
Hello Miked,
It seems to me that you are using a snapshot view of a complex dynamic system to justify your view that it cannot fail. Or at least, to say that at any given moment a failure could be patched up and retracted by TPTB with their gold. Unfortunately for them, it doesn't work that way. Here are a few problems I have with your simplistic view.
You cannot simply compare stock to flow as they have different units. Flow is measured in units/time and stock is just units. They do not compare. The only meaningful relationship they have is as a ratio. Stock:Flow, or units/(units/time), which = time. This yields a time value in which the flow will deplete the stock.
Gold has the largest stock to flow ratio of any commodity, which is why it is so unique. This means a very high time value for the depletion of gold stocks. In fact, it is an infinite time value since gold is not consumed, it is just shuffled around until it ends up with those who value it most. This appears to be part of your argument. But in this particular case that you are looking at, we need to think of stock as registered gold and flow as delivery demands. And in this case it is a dynamic system complicated by many factors.
One such complication is that physical and paper exist as "stock" at par with each other inside this dynamic system. And the flow of paper happens prior to the flow of physical. In other words, price is discovered in paper and then delivery comes later. Price is not discovered at the physical delivery window. In fact, whether there is any physical at that window when you finally show up with your paper depends on several dynamics that happened days earlier.
The point is, this extremely complex system cannot be analyzed within the snapshot parameters you suggest. As the paper flow precedes the physical flow the supply and demand dynamics can change very fast, perhaps even so fast as to appear to travel back through time and originate in the past! As demand increases and registered gold is deregistered one of two things must happen. Either the price must skyrocket or the supply of paper must explode to take up the slack.
Continued...
And as either of these things happen or they both happen together we end up with a self-sustaining regression spiral. Where today's demand is determined by yesterday's performance. This applies to both physical gold and paper gold, and the spiral will have separate effects on each portion of the market. It will be the cause of the separation and the result will be a flood of paper and no registered gold to service the delivery demand portion of it.
Ultimately the stock to flow ratio of physical gold is going to go inverse to that of paper gold. Infinite flow demand against zero registered stock. Zero time until physical depletion, infinite time until paper depletion. At that point price must go infinite and paper supply will separate as no parity will exist.
At this point, who is going to step in and dump enough (infinite?) physical gold to keep it going? And why? Do you think the Fed and the US Treasury will? Do you think they can? Do you think it would work? Do you think that EVEN IF they stepped in with all the US gold that it would repair the paper gold market's (and dollar's) credibility at this point? Would it bring the price of gold back down? Would it even be a smart move? I'm not quite sure what you are imagining. But I can tell you there is not an end run around this thing. For every action there is an equal and opposite reaction by the market.
Whenever you think you fixed something, the market will simply compensate for your fix and continue on its merry way. It's like FOA's river analogy. If you stand on a mountain top you can clearly see where the river is flowing. If you are standing right at the banks of the river you will be exposed to turbulence and swirling waters. You may be standing beside an eddy and your view may be that water can flow upstream. But in reality, the river only flows in one direction. Your perpetual motion machine is still just as impossible as it was in 1971.
Sincerely,
FOFOA
Pardon my pedantry, FOFOA, but use of the word unique does not allow for a modifier such as "very" because the definition of unique is one of a kind.
Touché Edwardo,
But I would argue that there is a qualitative difference between the use of "so" (which I used) and "very" (which you used) when placed before "unique."
The term "so unique" is a common phrasing while "very unique" is not as common. "What is so unique about that?" "Why is it so unique?"
Again, I used "so unique," not "very unique," but just for kicks, I think you will enjoy this web page. ;)
Self-Aggrandizement.com
very unique
Filed Tuesday, April 30 2002.
Every so often, some poor sap will use the phrase 'very unique' in conversation. And every self-appointed grammatician within a two hundred foot radius will pounce. "You can't say that," they whine. "You can't use unique with an adverbial modifier."
I hate these people. They're smarmy, irritating, and self-righteous. And, most importantly, they're wrong. They need to pick up a copy of the venerable Oxford English Dictionary, to peruse the listing for 'unique.' They'd note that 'unique' is a word with several possible meanings. One meaning, 'being the sole example of something,' probably can't be modified. A second, 'unusual or esoteric,' certainly can be. (By substituting the second meaning, we arrive at 'very unusual,' an uncontestedly grammatic phrase.)
Further, even if 'unique' didn't have the second meaning, 'very' and other adverbial modifiers wouldn't necessarily be ruled out. Consider the similar case of 'perfect:' while most people consider the word unmodifiable, few would object to the preamble of the US Constitution, which begins 'We the People of the United States, in order to form a more perfect union.'
So, in short, next time you hear someone objecting to 'very unique,' punch them in the mouth. The Founding Fathers have your back.
Sincerely,
FOFOA :)
Yes, FOFOA you did use so, not very. But, of course, both the use of so and very in conjunction with unique are wrong, very wrong. So there!
Word has it that a few of The Founding Fathers tried to have
"more perfect union" removed from The Declaration of Independence, but it had already gone to the printer.
Now that it is Saturday morning (early!) I would like to toss out some thoughts re personal action we can take into our Forum.
1) I have a really dismal record of predicting the future (ask my family and friends). I need more time to better get Freegold completely understood, but, I accept a Freegold world as very possible. But, not guaranteed. I have, myself, resolved such not knowing what the future brings by diversification. I have diversified my physical holdings into silver and platinum along with my gold. Yes, I did read here that gold is king (as it is held by the Giants and CBs, the others are less pure as wealth preservers), but what do I KNOW? I do not KNOW much... Still, the bulk of my PM wealth is in gold, babiez!
2) Until recently, it had always been my goal to bulk up on buying American 1 oz Gold Eagles only, as they are most liquid here (USA). Recently, however, I have discovered the power of buying the fractionals (esp. the 1/10th oz Eagles). Desperado and FOFOA above mention the small wafers available in Europe. Yes, the 1/10th oz Eagles have a higher premium, but small chunks of gold may go a long way, in an uncertain future. They make nice stocking-stuffers as well! I am looking at other gold options as well: 1 kg bars!
3) While I agree with FOFOA's logic re rational governments eventually wanting their citizens to hold gold, I do not believe that will happen anytime soon. Instead, as our system lurches on the edge of and then falls into the abyss, I entertain the possibility of a stupid .gov trying to snatch the gold or tax it. Solution for me: hold some overseas (I have a nice hidey-hole "over there"). If the USA were to go uber-Fascist, well at least something cannot be seized or taxed here (and yes I do recognize that enforcing a gold recall would be difficult and might kick off a rebellion among our rather well-armed citizenry).
...
Alertness, diversification and flexibility will all be key to each of us if / when the chips all fall down.
I also would like to know your take on whether there is still any gold left in fort knox.
FOFOA, Are U in San Diego?
I am still thinking about how the dollar has lasted through this decade. Some more ideas:
6. 'Browns Bottom', selling the UKs gold hoard, essentially bailing out the gold industry and allowing paper prices to begin to rise without the unraveling of the system that A / FOA expected when the Euro came online in 2001.
7. China supporting the US dollar financial system, to keep said system intact while China hollowed out the US manufacturing base.
I realize that these are speculations. But something must have changed in 2001 to keep the dollar afloat, and it seems like something might be changing now as well.
FOFOA, if you have any writings or resources that cover the period 2001 - 2008 I would much appreciate links.
@ Michael H
"I am still thinking about how the dollar has lasted through this decade."
What you proposed sounds right, also consider that they used naked shorting of physical via the paper markets, by hiding dollar debasement in the real estate and derivative markets, and by gaming the economic indicators (CPI, unemployment, etc.).
"I realize that these are speculations. But something must have changed in 2001 to keep the dollar afloat, and it seems like something might be changing now as well."
There's rank speculation, speculation, and then there's reasoned speculation, and I think yours is the latter (IOW, likely). I think what changed in 2001 is two years before there was the Gramm–Leach–Bliley Act
http://en.wikipedia.org/wiki/Gramm%E2%80%93Leach%E2%80%93Bliley_Act
which repealed the last of Glass Stegall.
Pretty sure the derivatives explosion began about the same time, allowing rampant debtmoney creation in such a fashion it didn't show up in the rest of the economy until, well... Soon.
@ Michael,
As to what's breaking down now, pretty sure it's the USD.
They appear to be "seeding the market" so the administration's supporters will accept it.
http://krugman.blogs.nytimes.com/2010/09/25/default-is-in-our-stars/?src=twt&twt=NytimesKrugman
It's just that everyone hasn't caught on to exactly what that means yet, or if they have, they haven't *PANIC!ked*...
...Yet.
Great site. Just found Another's full truth. Armed with this knowledge and everything else I know about the world, I am now able spot buffoons (Niall Ferguson, total shill- anti EU-anti CHina -paper bug extraordinaire) on TV a mile away now! Most importantly, I can see what they're up to! The paper bugs!
Can't wait for this system to collapse.
Gold=Freedom!
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