I have sensed some consternation about the Irish bailout and how it relates to the 10 year old USAGold archives written by Another and FOA. The theme goes something like this: A/FOA didn't foresee what is happening today, therefore the Freegold they did foresee is now in jeopardy... Malarkey!
Europe is presently operating under the $IMFS (that's the dollar international monetary and financial system) and has been since WWII. Europe has supported this system, kept it alive, and bought into it for the last 30 years. The foundation of the $IMFS is the use of contracts obligating someone's, anyone's debt as everyone else's savings, their security for later years, their nest eggs, their pensions, 401K's and IRA's. The tradable value of these "investments" is the very lifeblood of the $IMFS. When that value fails, so will the system.
The system will never voluntarily bleed out as long as it can print money to bail out the value of those paper promises. In the case of underwater homeowners, the bailout goes not to the homeowner, but to buy up the trading price of the debt contracts. In the case of sovereign debt, the bailout goes to the debtor government to drive down the interest rate and maintain the value of debt held in savings.
This is the very essence of the system we have today. It is not a system that was forced upon us. It is a system that was demanded BY us, all of us. But it is a flawed system that is collapsing. And that is why they made the euro the way they did. So that the collapse of the $IMFS would not take down global economic trade continuity with it, whenever it came.
14 months ago, in Say Goodbye to Wall Street, I wrote:
And with the recent bailout of the banks, it is repelling to think that we are responsible. It is true. We are all, as a society, responsible for the actions taken. It was a foregone conclusion a long time ago. That if losses ever loomed large enough to bring down the system, society at large would end up covering the losses. This is the very nature of the system we have built as a society. A system that sprung up from man's desire to borrow, not from man's desire to lend or steal.
Europe is part of this same $IMFS system. And it will be, until the system implodes under its own weight from the mountain of debt (systemic lifeblood) that must be nominally preserved. The dollar will be the primary victim of that implosion in a hyperinflationary fire. But the euro will also suffer inflation. Back in 2001, before even the launch of euro currency, FOA wrote:
… even Euro inflation, that ECB people openly admit must be a part of a dollar to Euro transition.
Here is the context of that statement, only because it is oh so fun to post controversial (yet true) statements by FOA:
Who has the gold?
I do and so should anyone that wishes to participate in the next currency system. Only, don't expect your gold to become money, it won't! It will become the most valuable wealth asset in your portfolio,,,,, by a long shot. For the simple thinker; gold is good. That's all we need to know. For the man with a question: Gold must rise in value many many times just to regain its wealth barter asset value. Perhaps $10,000 to start. Then, it will run with any and all dollar inflation,,,,, even Euro inflation that ECB people openly admit must be a part of a dollar to Euro transition.
The EuroLand Central Banks have every bit of gold in their vaults their accounts say they do. For that matter, so does the USA (for now!). So what if they or we swapped it out on paper? It means nothing because the gold never moved. Remember, EuroLand is playing a dollar gold market game for now. If we walk, and they know we must walk first, they will simply opt out of the dollar bullion paper system. Period! Why do you think England it trying so hard to enter the Euro fold? Think: saving their bullion liabilities by opting onto the other side!
Hell, pre 1971 the US swapped its entire vault of gold to foreign interest by issuing dollars overseas. In a news flash, some seemed to have missed, we killed that arrangement by simply keeping the gold! Today, because the ECB would love to see the entire dollar gold market fail, I cannot imagine them shipping gold to support it if we default on shipments. Well, perhaps gold bugs would think this appropriate because it saves their leveraged futures, options and mine investments?
No,,,, most of these theories about missing gold are extrapolations that attempt to explain how the industrial / physical gold market is meeting demand. Hard money thinkers simply cannot believe that private Western gold holders have been unloading real gold for the paper variety and filling the physical demand void in the process.
There is no right or wrong, good or evil here, monetarily speaking. There is only gravity, which tugs in one direction: Freegold. If bailouts are not done millions of people's retirement promises (from the system) will simply vanish. Did you really expect the system to endorse this gravitational implosion denouement while it could just print the money? By the way, austerity requirements (which force cutbacks, higher taxes and put the burden of interest payments on the taxpayers) are kind of like monetary fingers crossed behind your back, hoping that the money actually remains valuable.
Unfortunately (for the system) it cannot print value. So one day soon, while you are all watching the price of your physical gold rise, it will suddenly skyrocket. On that day you will thank me.
I'll leave you with a couple gems. The first, from the OECD way back in 2002. Hat tip to Mortymer.
"All that is not only necessary for our euro zone, for our national economies. It is also important if we want to see an increased international use of the euro, which requires certain elements to be in place. Otherwise we cannot one day be in a stronger position vis-à-vis the other major international currencies. We do not want to replace them – that has never been the goal of Europe – but we want to have a strong currency equal to the other important international currencies. The euro is a strong political symbol of European integration. It must become an internationally used, strong currency. That will take time, but as we are discussing the future of money I’m talking many years ahead. Nevertheless I hope one day to see the euro used as an international reserve currency, as a currency used in international transactions. I also hope one day to see the euro used to pay the bills for the petrol that we import in the European Union. That would put us in a much less uncomfortable situation than we were in the past months."
And the second, an old USAGold post from Smeagol. Hat tip to Ragnarok (who may or may not be related to Smeagol?)
"So far, I did not get an appropriate response about why not an honest Goldstandard. I knew this hit the core, but tell Ari never to propose an honest fiat! To be clear, an honest fiat is probably as good as an honest Goldstandard. I have learned that its human to wax endlessly about the systems and its merits, out of opportunism and lazyness as one can circumvent the "what is MY duty". Because in the end its more important, no, essential, that the participants (especially the leaders! thats why they are LEADERS) adhere to the moral principles. Even in communism there were good places to live (in the family, community), where the people stuck to their human duties. On the other hand, in so called freemarkets, no personal freedom could be reached because of moral decadence (and vice versa)."
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A fine Post that was! (And others since regarding the topic) Got us seriously thinking yess it did… ssss... thank you all! We will have a crack at part of it, precious, and throw in our two cents worth (now devalued to $1.90 and climbing)... but we will have to get Ragnarok the tutor to help uss craft our thoughts sstraight and clear sso we can write it nice and pretty for you O yess...
[Okay, Smeagol, let's do it.....]
This is all IMHO and FWIW, of course.
A true gold standard would require gold to be an absolute reference which is determined, agreed upon and then forever disconnected from further influence. The meter and the gram are examples of this kind of standard. They are international, knowing no borders. Their definitions are not open to debate, nor are they subject to political wills or the whim of the markets or anyone's opinion. Things are measured against them; they themselves do not change. Rather, they can be trusted NOT to change over one's lifetime (very much like death, taxes and a certain pretty yellow metal we are all familiar with (grin)). How can we get this kind of impervious honesty in a gold standard? What a Question!
Anybody with at least one eye open knows gold is a standard of wealth of sorts, yet no one living has ever known its ‘reference’ value; the past and present struggles surrounding gold have distorted its true worth. Today gold resembles a meter-stick seen through a thick lens - the proportions of the meter-stick are apparently the same, but compressed to a fraction of what they would be if you could see the meter-stick itself. And all the while, the shape of the lens itself (and the meter-stick image along with it) is constantly being fought over and manipulated! Now, why would anybody want to do that?
To become a standard comparable to the meter and the gram, gold would have to be moved from the economic/political arena to the scientific, openly and unanimously declared world-wide as THE sole true-wealth reference against which all other wealth is compared, and once and for all disconnected from economic and political influence and control of any kind, just like any other scientific standard. Only then would the relative values of currencies and monetary policies become transparent and resolve in proper perspective with each other and with goods and services.
While I don't wish to sound pessimistic, I believe we may never see gold achieve the status of a scientific standard until all of society (and political will) takes a miraculous collective leap in understanding concerning it. Good luck!
Scientific standards are internationally accepted, uniform, uncomplicated, not profit motivated, do not affect what they measure, and everyone can use them if and when they have need. There is no reason for anyone to want to avoid them - they render consistency and stability to our knowledge of the world and as such are desirable. Standards serve blindly with impartial justice, giving no one any edge over anybody else. They are not subject to greed. They give no political advantage. Morally they are nonexistent, and perhaps most problematic for our purposes - they are not tangible!
In gold we seek an unassailable wealth measurement standard, but at the same time we must deal with its tangibility. Chew on this paradox awhile.
Is this possible? Can an impartial metric for measuring wealth be established? Can wealth be defined as a unit, a constant? If not, there can never be a standard; only changing frames of reference of variable duration (see History).
In the other hand, if a wealth metric and a unit of wealth can be designed, and actually established, what will be the reaction of those suddenly confronted with the real measure of their ‘wealth’ constructs versus how they look through custom-made rose colored lenses?
Compare the mundane manner in which the meter and the gram are perceived and utilized every day, versus the formidable money/fiat/central bank/bond/stock/carry trade/swap/X/derivative/political cyclone howling around an obscured pile of gold somewhere and you can see we likely have a very rough road ahead. An impartial scientific standard of wealth is anathema in the current climate, but anything less is doomed to fail the test of Time.
I'm no expert by several kilometers, and while this may be too simplistic (I hate legalese, and a standard should be a simple thing), if I were given the task of submitting for consideration a proposal for a scientific wealth standard it might include something like the following…
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(1.) True wealth is defined and established as elemental gold, and
(2.) the unit of true wealth, Au, is defined and established as one gram of true wealth, and
(3.) is not subject to law, regulation, tax, fee, duty, or any obligation or liability whatsoever, and
(4.) monetary unit values extant on shaped or unshaped true wealth and its alloys are null, and
(5.) a publicly verifiable mass of true wealth may reference a monetary unit of account through a wealth quotient, where
(6.) the wealth quotient, wq, of the monetary unit so referenced is defined as the Au of said mass divided by the sum of the existing monetary units of account.
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…the intent being that every thing tangible (and intangible) other than elemental gold may be wealth, but not true wealth, which is reserved exclusively to elemental gold so that ‘normal’ everyday wealth in any form can then be measured (and fluctuate) against it without prejudice. There can be no speculation on a unit of measurement; gold-referenced currencies would exchange with each other at their wealth quotient ratios – which mean the true-wealth value of a thing is constant world-wide, no matter what currency you use (unless you can get more for it, or have to accept less, as the instant situation dictates). If a country or money authority printed more currency, loan or issue more debt, or added or subtracted gold from its reserves it would become instantly apparent in the currency's value quotient.
There could be omplicarions or flaws I can't see or have not anticipated based on my limitations; this is just a gold Thought experiment that has bugged me for three days, and I'm placing it on the Table Round for analysis (or shredding!) and comment.
Thank you all for the great posts lately – excellent reading, and intriguing. Things are definitely getting interesting!
Smeagol
I may also post a couple more videos below. I have a few submissions for "open forum videos" but I have not yet watched them all. So check back.
And Happy Thanksgiving to you all. Here in America it is a time to give thanks for what you have in front of you!
Happy Black Friday to all! (I will be sleeping in)
Wikipedia: Black Friday is the day following Thanksgiving Day in the United States, traditionally the beginning of the Christmas shopping season. On this day many U.S. retailers open very early, often at 5 a.m., and offer promotional sales to kick off the shopping season.
Also thanks to Tyrone and "MrJohnbrown56" for this short FOFOA advertisement:
Somewhere out there, FOA is walking this trail alone. He told us as much: "I will walk this trail in silence." :( <--That's me sad.
FOA (11/12/01; 16:31:28MT - usagold.com msg#132) There comes a time
There comes a time in all things when one must do nothing and simply wait. This is an ages old truth that crosses all the boundaries of life's endeavors; for everything is not always in the doing, but also in the watching. Any good farmer knows that he does not grow a crop; he only prepares his field so the growing he knows is coming can take nature's course.
My friends, we have crossed time and space, while plowing these fields of understanding, and the unfolding drama before us must now sprout its own life. For now, it is my time to watch the trail and let the crop develop. Indeed, it will and it will do so for all to see.
Enough has been said to prove our reasoning is true, especially when the fields become full and in a shade of physical green only our seeds will produce. And planted them, we did, by hand, one at a time, over many years.
Enough has also been said about myself as this story was never about me; perhaps too much untruth was also said by others?
I am going to travel for a while and watch the trail from a distance. It won't be long before the rains come and the ground begins to open; in that time I will return. Until then; this farmer will rest from this work.
Thank you USAGOLD and all the fine people that make this media the best gold site in the world! Another time, we WILL hike again.
Sir Douglas Your Trail Guide
FOA was the master at answering people's questions. And I often see the same questions and comments today that he was getting back in early 2001. It's almost as if we've been held in a state of limbo since then and little has changed. But much has changed. The euro has risen 60% against the dollar and gold has rocketed an astounding 425% since the posts below were written.
Also, today we can view the clash of currency styling in stark relief, which Costata illuminated in this comment:
In one sentence: "Bondholders will discover burden-sharing. Debt relief will be enforced, either by interest holidays or haircuts on the value of the bonds. Investors will pay the price for failing to grasp the mechanical and obvious point that currency unions do not eliminate risk: they switch it from exchange risk to default risk."
FOA: "Basically, this is the direction the Euro group is taking us. This concept was born with little regard for the economic health of Europe. In the future, any countries money or economy can totally fail and the world currency operation will continue. What is being built is a new currency system, built on a world market price for gold."
IMO the key word in the AEP article is "mechanical". This is why the ECB politics are a "sideshow" (Another). This is the effect of severing the Euro's "ties to the nation state" (Duisenberg) and marking gold to market. A mechanism will now perform its sole function.
Stability (the sole mandate of the ECB) isn't a "fixed" price target. If the exchange rate of a currency is too high (demand exceeds supply) then more currency can be issued. Conversely currency can be withdrawn if the exchange rate is too low (supply exceeds demand).
The Euro Freegold architecture isn't a Utopian dream. It's a Grandfather clock. Tick tock!
I wish we had FOA (Trail Guide) here to answer a few questions today. But since we don't, I thought it would be fun to repost some of his answers from 2001 that are, perhaps, as timely today as they were when they were written. I can see that some of "auspec's" questions are still on the minds of many today.
It should be interesting to watch the comments that will follow. We should easily be able to distinguish between those who are only here to discredit FOA, and those who are able to glimpse the very deep wisdom that he shared with the help of his friend, Another.
I can tell you that, for me, it was only after reading the archives all the way through TWICE that I was able to go back a third time and see deep enough to find the "infinite resolution" that has powered this blog for two years now. Following the train of thoughts present in these posts, through the different links to which they lead, takes a lot of effort. Hopefully this post turns out to be a small capsule of one such train of thought.
In any case, it should spur an interesting conversation for us all to read this same excerpt at the same time. The archives contain thousands of pages and are always enlightening to read. But one can easily get lost, walking alone through the past. So let's do it together and see if there's anything in these 9 ½ year old posts that is still relevant today. Actually, that's the way I like to read them: as if they were written today. Please tell me what you think…
auspec (4/19/01; 08:48:52MT - usagold.com msg#: 52175) ANOTHER And FOA
Thank you, wise men, for your trail illuminations, much appreciated! Please forgive my persistent questions in posts #s 51479, 51935, and 51992 and this summary of these questions, once again. Little in my life has been accomplished without an uncommon level of persistence so I must "return to my roots" and give the maximum effort, as it is all I know. Still hoping and trusting that these perspectives will be addressed by you. Thanks in advance!
From USAGOLD post #51479 {with a few additions} "In Defense of the DOLLAR"
This is your humble correspondent, trying to make sense of our rapidly changing currency world. Please bear with me as explanations for the "end game" scenario are sought. Am I really going to defend the US Dollar? Only relatively speaking, because I can't see the hyperinflation script coming to pass that we so readily toss about on this Forum. No problem whatsoever in visioning the rise of the EURO, just in what degree of demise of the dollar. The USD will get its "just desserts", the EURO is clearly a "comer". FOA, your 3-10-01 piece, "On the Road", is classic excellence so I would like to take excerpts from it as this "Defense of the Dollar" takes format. My questions/comments are surrounded by *s.
Trail Guide: Well,,,,,,, things are not as before,,,, are they? (smile)
In my last post USAGOLD Forum post (#48858) we noted that the paper gold game was reaching its limits. The BOE was almost asking "what do you want us to do"? The answer came as plain as day as the paper price was driven a little lower in return for a gold sale reduction. Yes, clear as a mountain stream,,,, the unwinding has begun! It will continue until the big event when the gold rules are officially changed. Not much different than when the dollar hit its credibility limit in 1971. As Randy has often pointed out; the US printed gold contracts back then until they (dollars on the gold exchange standard) lost their mathematical ability to be converted into gold.
Auspec: *If the dollar's status is now so similar to what it was in 1971, why would we see the Brazil type hyperinflation now as opposed to the simple ongoing degradation of fiat that we have all come to know and hate? Why the extreme portrayal of the dollar? It's clear the dollar is an old toad and there are young stallions waiting in the wings, but it's hard to see this as an all-or-none issue where the dollar {banana} goes from being the world's reserve currency to being "nada". Where's the middle ground with dual and competing reserve currencies in common use?*
Trail Guide: What's in process now??:
The Washington Agreement placed in context where the Euro system is going with gold. That pronouncement drove home the fact that our Dollar gold pricing system was going to die with the dollar reserve function. The WA placed us "on the road" to high priced physical gold and low priced contract gold. It could have been the end of the LBMA pricing structure, right then and there, except that it would have clocked the global financial structure too fast.
Indeed, our Euro friends helped the system out by giving it some more of the same poison, more paper gold inflation. Yes, all the while since the WA, people have been falling all over each other trying to explain why so much new European gold has entered the market through lending. Yet, all that was mostly lent was more paper credits built upon a failing dollar gold pricing system. You see, they left the maintaining of system credibility [supplying token amounts of physical] to the dollar faction. Kind of strange how gold keeps showing up as part of the US trade deficit? Even if it's only a trickle.
Gold bugs cry that the paper market is not free because government endorsed inflation in this arena is killing its price structure. Almost as if they want fiat gold that less inflated? Well, that's great if your "gold" money is in our modern gold producing industry that's hip deep in committing its product to satisfy these same paper contracts. Yes, this mistake of "hard money" allocation by Western savers is the result of ignoring history and how currency systems evolve. Gold industry investments work if the current fiat system is remaining "in use" but showing price inflation. However, when currency systems fall "out of use" while moving into super price inflation,,,,, the next competing system will side with physical gold! It doesn't happen often, but when it does real wealth in one's hand becomes worth many times investments in "almost gold". Truly, the dollar price of physical gold is going higher than anyone expects. END
*Comments: Again it is easy to see the dollar as losing a large piece of the action, but hard to see its total demise or its falling out of use. The US as the largest military force in the world certainly has its overriding benefits. The US has enormous resources; physical, financial, and spiritual. American creativity and "know how" has changed the world. This country will not turn over and simply give in! Let's look forward to the next 5 years and place probabilities on what is likely to happen as far as the dollar/euro is concerned. I will rank these various scenarios in what I see as their most likely odds of happening:
1} Ongoing MODERATE debasement of US Dollar. {Brisker} Business as {than} usual.
2} Gold and/or Oil breaks away from the dollar.
3} Dual and competing reserve currencies. "Co-Currencies" in Reserves. The currency war that is in clear sight {thanks to ANOTHER and FOA}.
4} Status quo.
5} All-out war that distracts/rescues the dollar and extends its life. Wag the dollar.
6} Dollar merged with euro/backed by euro.
7} Brazillian or Weimar style hyperinflation of the USD, the Big Banana, or the 'little banana'.
What ranking would you give these possible scenarios? And yes, we all know the DEBT is a monster lurking closer and closer! Debt is designed for default as fiats are for debasement. Looking for a catalyst to get the EURO kick started a bit? All that is necessary is for ECB to get rid of a % of dollar reserves about the time the common coinage comes into play. Ouch! But still, "death" of the USD?? At $30,000 POG the US as we know it will be no more, agreed?
Another question comes to mind: What advantage would it be to the Power Elite to destroy the dollar. Yes, a one world government and currency would suffice as a legitimate reason, but the old guy likely has many deeds yet to perform. Do you respond to questions in regards to mentioning the "Power Elite"? Some won't "go there" and that is their free choice, no problema.
The dollar has defaulted twice to date, yet chugs along. What "history lessons" best show us the endline that awaits the dollar? The end of a currency's lifetime always ends in gold debasement? By "super price inflation" are you referring to something much worse than the US in the 1970's? You must be, as that fiasco was "successfully" negotiated. The 13% mortgage wasn't a world stopper. Are we looking for a low probability event that has only happened a few times in history, or a high probability event that has happened EVERY time in history as a currency reserve ages? Odds or the END?
As per gold "industry" investments, they will do just fine at your $360 POG from today's level [gold was at $260/oz. when this was written]. The Romanian deposit that contains 8-10 million ounces should fare well regardless of what currency is "reserve". You stated: "Gold industry investments work if the current fiat system is remaining "in use", but showing price inflation." Are you talking all or none with the dollar as reserve currency of the entire world or reserve currency of none? The dollar will remain in use, imho, until there is a one world currency, even Brazil "uses" their currency of old. So we have the dollar and we have the inflation, and we get gold stock appreciation. Yes, a gold stock is a problem if it must sell gold in dollars and the dollars are TOTALLY worthless, but I'll take those odds, thank you. Please don't misunderstand me, as I have a greater current appreciation for physical {thanks to the brain trust of this fine establishment} than stocks, but just can't see this as 'all or none'.
Maybe a lesson is needed in "how currency systems evolve". The waiter replies: "Sorry sir, we're out of the hyperinflation, but there is ALWAYS plenty of inflation available in the kitchen."
There are many on the Forum that struggle to see a USD "cataclysm" as a high probability event and it does seem to be a KEY question to address if you would. These questions are, or possibly ought to be, in the minds of all of us as we make our financial decisions.
Thanks, ANOTHER & Trail Guide, for your many and fine efforts. I remain, on the trail.*
I thought it would be a good idea to make some clear comments and replies regarding my perceptions. Using some questions and thoughts from the main forum will also help. This may make it easier for us all as we "follow in the footsteps"!
Auspec makes several points and contention for me to address. Please read his complete post first (and all the others I'll address). Hello auspec, you write in reference to my hike #61 here on the trail:
auspec (4/19/01; 08:48:52MT - usagold.com msg#: 52175) -------*If the dollar's status is now so similar to what it was in 1971, why would we see the Brazil type hyperinflation now as opposed to the simple ongoing degradation of fiat that we have all come to know and hate? Why the extreme portrayal of the dollar? It's clear the dollar is an old toad and there are young stallions waiting in the wings, but it's hard to see this as an all-or-none issue where the dollar {banana} goes from being the world's reserve currency to being "nada". Where's the middle ground with dual and competing reserve currencies in common use?* --------------------
Well sir, I'm going to try and reply in context to the way you asked these questions. Considering well all your prefacing stated before asking for info.
Using the 1971 dollar incident is a perfect way to engage common ground thinking about our contract gold market today. No it's not a perfect analogy, but it's real, real close, and sharpens our understanding and ability to see the subject clearly. Especially considering the tremendous number of different hard money people that read this Centennial Forum. But we must not confuse the point by thinking a similar break today will cause the coming price inflation we speak of.
Yes, after the 71 dollar gold break, we did see some good price inflation. But was that caused by the wholesale cancellation of international dollar convertibility into gold? No! That price inflation was not gold backing related because we had already, years before, been printing dollars far beyond our stated gold to dollar conversion ratio. That spell of price run ups was the result of too many dollars being printed before and after the 71 gold breaking event.
Sure, the gold price run up after that didn't help the dollar's image. But, by then it didn't make any difference what the gold price was. Even if it went back to $10/oz. we were never going back to governing the volume of dollars in supply. Not by using gold, not by silver, not in any way that would fix or slow the presses! We couldn't. Any long term slowdown, then or now, in such an established fiat was well past the politically survivable stage. This is the way fiats work, whether gold backed or not, they always break from strict printing discipline. The history behind us says so and the future before us says so. As an example in dollar terms, look at any five year average of money supply growth from 71 till now. Truly, we were and are printing our way towards the end time of dollar use. The only question was how long would the world keep using dollars? How much longer would the timeline extend?
Some hard money people thought that the world would simply convert to gold itself, in place of dollars. But, the simple fact, as I and most especially Another have said so often, is that the modern world must use a fiat form of currency to operate. And, considering that point, after the 71 gold break, there was no other strong, fluid currency for us to revert to. It wasn't until the end part of the 70s that the Europeans started down the long road of creating something else.
There were times when our foreign trading partners were thinking of breaking away. This is when the US spiked rates. Again, we confuse this action with stopping the inflation presses. Quite the contrary, the killing rise in rates was just a signal that we would not go completely hyper. On our side, the only reason we could afford to take this economy-killing gamble was because oil was still priced and settled in dollars. But that is a whole Another book.
The prestige of many international dollar holders took a real bath because they held dollars in place of gold. When they tried to initially bid for gold, the US and London made sure the price rose fast enough to tell a story to these dollar converters. That is; "bid for gold and it will soar" cutting off your conversion. Sure the US made all sorts of noise about how awful and incorrect the rising gold price was. Even showed their hand at managing the price a little so it didn't go up too fast. All the while saying they were fighting for all they were worth to keep it down! Truly, the last decade shows naive Gold Bugs just how much in control they were and are of this so called "free commodity market in gold". Oh well, back to your point. ---------
You see, the dollar is going to fail now because a good alternative is available now. All this has something to do with the coming new gold valuation, but that new price level is not related so much to gold backing a currency again. (more on that in a min). The dollar is toast because most of the world doesn't like the management policy. They didn't like it in 71, but tolerated it because gold was supposed to keep flowing in repatriation payments. And if they didn't like it back then, they god awful hate it now!
We like to think that the dollar is what it is because we are so good. (smile) But the truth is that for over a two decade period +, none of our economic policy, our trade financing policy, our defense policy or our internal lifestyle policy has pleased anyone outside these borders. We managed the dollar for us (U.S.) and the rest could just follow along.
Our fiat currency has survived all these years because others have supported our dollar flow in a way that kept it from crashing its exchange rate. We talk and think like we are winning the tug-of-war when, in fact, they just aren't pulling to hard. Waiting for their own system to form up.
Truly, most of the world likes the most conspicuous aspect of the euro that we describe as its biggest weakness; its management by several varied nation states. All supporting different thoughts, cultures, backgrounds and perceptions of government policy. Some compare it to the many nationalities in the US, but it's much more competitive than that. It's thought that this mixture will produce a "more good for all" management of a Euro world reserve currency. Truly, because gold plays no part in today's dollar management or the Euro, then political styling is all that's left.
My friends, a national fiat in our modern world only functions if the whole world uses and supports its flow and most importantly likes its management (political styling is the catch word). This support and use of our dollar can and will change faster than many think possible once the Euro is finished. Our dollar is not going to become a "banana" or "nada" in the future, as auspec notes. It already is and has carried this trait for some time now as does every fiat today. The only thing that keeps them from cascading away is world support and use.
Point: When most of the major players that styled the Euro decide to swing even 1/2 support toward that new money, the exchange rate for our dollar will plunge to its true worth! That dollar value is there now, you just don't see it yet. The price inflation that many (auspec) don't / can't see happening, will be the result of our currency management changing to confront the nature of all the above. The world economic financing, pricing, saving, settlement and opinion is shifting toward the Euro. As this happens the US will have to raise rates ever higher, even as it massively prints more currency to support our internal economy. Our entire economy will slow and fail as this price inflating process moves on. Some will call it stag / flation, but will change that description as it becomes more of a crash / hyperinflation.
Right now, the actions of our fed is telling this truth. We must inflate while we watch the Eurozone enjoy its basically internal trade economy. As other nation blocks embrace that zone, they will pull economic function from us.
You write: ------
*Comments: Again it is easy to see the dollar as losing a large piece of the action, but hard to see its total demise or its falling out of use. The US as the largest military force in the world certainly has its overriding benefits. The US has enormous resources; physical, financial, and spiritual. American creativity and "know how" has changed the world. This country will not turn over and simply give in! Let's look forward to the next 5 years and place probabilities on what is likely to happen as far as the dollar/euro is concerned. I will rank these various scenarios in what I see as their most likely odds of happening:
-------------------
Auspec, before I list your most likely odds, I would like to comment on your above.
We must not confuse a currency's "total demise" or "falling out of use" with a "loss of identity". In our time there have been few major moneys that went away. Today, we have a whole world of national fiats "in use" and "not demised" that still carry their nation's identity. They lose value at an incredible rate, are mismanaged to the highest degree, are laughed at and despised. But, still they are "in use" as they function for their governments and economies. Usually, they function alongside whatever major reserve currency is in vogue. Today the dollar, tomorrow the Euro. Make no mistake, the entire internal US sector can and will function as its currency runs a price inflation just like these third world countries. We will adapt as they have by dropping our living standard accordingly and adopting the Euro as our second money. Also:
The prestige that we have the largest military force in the world does not help our money problem. We talk as if we will let any country die that does not use our money or support our currency. I point out that the British also made such comments and it didn't stop their downfall. Nor the Russians. Also:
I point out that many, many other countries also have the same "enormous resources; physical, financial, and spiritual" that we have. But the degrading of our economic trading unit, the dollar, places the good use of these attributes in peril. Besides, the issue beyond these items is our current lifestyle. We buy far more than we sell, a trade deficit. Collectively, net / net, using our own attributes and requiring the use of other nation's as well. Not unlike Black Blade's Kalifornians sucking up their neighbor's energy supplies (smile). We cannot place your issues up as example of our worth to other nations unless we crash our lifestyle to a level that will allow their export! Something our currency management policy will confront with dollar printing to avert. Also:
NO, "this country will not turn over and simply give in" as you state. But, we will give up on our currency! Come now, let's take reason in grasp. Our American society's worth is not its currency system. Around the world and over decades other fine people states have adopted dollars as their second money, only to see their society and economy improve. Even though we see only their failing first tier money. What changes is the recognition of what we do produce for ourselves and what we require from others to maintain our current standard of living. In the US this function will be a reverse example from these others. We will come to know just how "above" our capabilities we have been living. Receiving free support by way of an overvalued dollar that we spent without the pain of work. --------
Your "various scenarios" with mine notes added :
1} Ongoing MODERATE debasement of US Dollar. {Brisker} Business as {than} usual.
----Near term, yes.-----
2} Gold and/or Oil breaks away from the dollar.
---- Oil is already doing so for a year now. The gold market is in the process of self-inflating its paper side of the function. The first minor lease rate signals are already behind us. [March 9, 2001] The ECB and BIS are coming more in control as the dollar faction must either sell its gold also or begin to fold. If they want the game to continue a little longer, the US must not put its gold on the market or the BIS and ECB would bid it with their dollar reserves. Ending it all then and there.------
3} Dual and competing reserve currencies. "Co-Currencies" in Reserves. The currency war that is in clear sight {thanks to ANOTHER and FOA}.
----- I would add that the vision of co-currencies is just a passing function as we get from here, dollar reserve, to there, Euro reserve.-----
4} Status quo.
----- We have not been here in our life times (smile).--
5} All-out war that distracts/rescues the dollar and extends its life. Wag the dollar.
------ As we enter the down side of our economic function (like we are doing now) the massive money printing by the Fed will risk the dollar's slow slide to becoming a super slide if a war breaks out. People run to the best managed world money in a war, not just the one with the current best exchange rate value. In the past the dollar was the one, today the Euro would receive the flow. The US would be risking killing its last bit of dollar timeline with any war today. [unless, perhaps, A) it wasn't an "all-out war" and B) it has the backing of Europe and the Saudis in pursuing the war?]---------
6} Dollar merged with euro/backed by euro.
------ I know a few people that made a lot of sudden money wealth and gave almost all of it to the church (or charity). Others are much more smarter and support the church (or charity) for the rest of their life. Retaining some control over how the charity is used. This is how the EuroZone would handle us. Actually, it's the same way we handled them after the war. We didn't just merge our checkbook into theirs, did we? Net / Net, they will have the wealth to be offered, not us.-----
7} Brazillian or Weimar style hyperinflation of the USD, the Big Banana, or the 'little banana'?
------- Full on, wide open, in your seat, flat out! It's in the pipeline!------
You write and I comment:
Debt is designed for default as fiats are for debasement.
--- My friend, debt is the very essence of fiat. As debt defaults, fiat is destroyed. This is where all these deflationist get their direction. Not seeing that hyperinflation is the process of saving debt at all costs, even buying it outright for cash. Deflation is impossible in today's dollar terms because policy will allow the printing of cash, if necessary, to cover every last bit of debt and dumping it on your front lawn! (smile) Worthless dollars, of course, but no deflation in dollar terms! (bigger smile)
What advantage would it be to the Power Elite to destroy the dollar.
-------- Wrong context. What advantage does the Power Elite gain by expending assets to save an already failed currency. Better to do what major players have done for centuries and are doing now, buy gold and evolve your power base to use the next reserve.-----------
The end of a currency's lifetime always ends in gold debasement?
---- In almost every case. Sometimes in the open, sometimes hidden.------
Ok, this is going overtime (smile). I will try to cover more (and others) in a day or so. Also, the question of Another at his keyboard? I reword things from him quite a bit for bare readability. But, his delivery is pure. I don't always pretend to understand it. Then, that's a whole other story (smile)
The above reference to ANOTHER was because he resurfaced with a series of comments just prior to FOA's post. Here are those comments…
ANOTHER (THOUGHTS!) (04/14/01; 18:08:54MT - usagold.com msg#: 51887) Thoughts!
To this USAGOLD Forum and Mr. Kosares, good evening.
Thank you FOA for your time and work.
We talk once again my friends. This forum, it grows strong for all ages and nature of peoples. Read they do, from all places on earth. I read and see the knowledge as written, but it be the knowledge we still must see that speaks with greater strength.
Walk the gold trails of my good friend, do I. On my feet are "strong sole" of thick leather, purchased with much knowledge of physical gold. These shoes not go bare before our journey is done. On trail I see your "thin sole" gold investments cast aside and scavenged by beasts. Their owners walk no more as these investments took not this hard road of dollar transition. Many more will wear paper gold wealth thin before this walk be done. Only physical gold will see sun after this storm.
Some say dollar strong and holds much value still. It bends not and is strong and worthy. I say their vision is limited to see only post supporting roof. Not what on roof already or what must be placed on roof. When new Euro currency is done, full weight of dollars will return as your wet snow. In that day, we check curve of this good post, not before.
Some say dollar buys much gold and is strong in metal. I say, paper gold be not metal! We have more dollars than gold in world. As long as your system works, you sell gold to gain real dollars and we sell dollars to gain real gold. All be well in your world and mine, yes? Soon, dollar return in bank and Euro return in bank be equal, no? More later, dollar return become even less than Euro. Tell me about your paper gold value then, my friend. Perhaps, dollar then seen strong in this lesser gold only. You think long and hard on this before end of year?
I think Euro buy much more oil then. We shall see. I will return often now. Discuss our future then.
We watch this new gold market together, yes?
Thank You Another
ANOTHER (THOUGHTS!) (04/15/01; 18:58:39MT - usagold.com msg#: 51943) Mr Gresham
Welcome Mr. Gresham. We talk for a time, yes?
You write:
"We who read here generally buy the coins, one ounce and less. The "Giants" you speak of are usually buying the large bars (100 ounce?), yes?"
I ask you, how many of your bars in tonne? This is the small purchase size.
"Is there a limited supply for them to get, and only through the large brokers with their "private wealth management" programs?"
I would say the BIS is best broker, always. It best to sell dollars for gold when gold is offered.
"I am trying to understand why this knowledge you bring is not being acted upon by some others with "deep pockets", such that the markets would be moved, or shortages occur, even before the dollar is seen in weakness."
My friend, you see the gold with "Western eyes". In mind, it be always, "how much currency does my gold bring". In this world of much paper gold, it bring not much dollars yes. In such matter, your currency makers do make your wealth lay low. This dream of much dollar currency for gold is the illusion in the "Western Mind". Your men of "deep pockets" do probe for shortages, however, their wish for low supply is not to be found. Their pockets are full with "credit gold" and sad are they at currency price this brings. It is the fools game to corner paper gold printing press, no? Sir, I stand with no fools!
Days and nights do pass and one morning will bring a dollar price for gold you have never known. In that day, I will cast this currency down and walk with real wealth. In this day, the gold will trade in Euros and no bribe of credit gold will be needed to mark this new money.
Today, I my world it be how much gold does dollar currency bring. A difference in understanding from yours, I think. Today, amount of bullion available for dollars no longer the reflection of bullion dollar exchange, it be now the most terrible bribe for world dollar use. An acceptable deal in most of world, such is real world outside your laws, no?
But, it is here, in act of making extra credit gold, where the "shortage" you speak of, is measured my friend. A good man with one eye does see this time as of but few years and short days. Aside from our Euro political changes, history alone does show all great currencies end with this overselling of credit gold as last of era. This paper gold credit is always for the fools first and last. It value is later reduced to same as currency, along with holders of no gold.
It be our good fortune (and yours) that bullion is offered still. For the simple man, such as I, this wealth is that for kings but more so for his people. For all peoples, gold will be again the wealth of ages.
In this day, at end of dollar era, all do see real bullion sold for sake of market credibility, only. Perhaps too, bank credibility, I think. In this world, the lower this dollar paper price, the more bullion becomes available for credibility sake. It is the good thing for men of "small pockets" and the curse against traders and fools.
I bid you the good fortune of "small pockets" with much physical gold! We watch this new gold market together, yes?
Thank You Another
ANOTHER (THOUGHTS!) (04/18/01; 06:19:54MT - usagold.com msg#: 52086) Reply
----- I would also like to take this opportunity to welcome Another back to this Table. The circle is now joined in continuity again -- all around. Already I have added to my own file of vintage "Another (Thoughts!)" with this shrewd observation:
"This dream of much dollar currency for gold is the illusion in the "Western Mind". Your men of "deep pockets" do probe for shortages, however, their wish for low supply is not to be found. Their pockets are full with "credit gold" and sad are they at currency price this brings. It is the fools game to corner paper gold printing press, no? Sir, I stand with no fools!"
The smile of recognition returns to my face as this point is made in these few, short sentences better than I have seen it made in entire articles on the subject. Welcome back, my friend. --------
Mr. Kosares,
Thank you for your welcome and acknowledgment. I add that within this circle many feet have walked and the prints of the Kosares show most lasting impression. I see the stature of this man as American, however no Western mind is found within him. One day all will rush and follow your path before strong tide washes the deepest heal mark from sand.
It be true, my friend, in history no man does corner printing press. Many have taken this path before. Even declare themselves "leaders" of "financial knowledge" and "sophistication", do they. The Gresham does make wonder about such things and asks for reason no one does claim gold from printer?
Such demand be as 100 men with contract asking Spanish farmer for 100 basket of olives where clear examination in field display only 10 basket. Such good reasoning have these men, demand delivery and illusion of wealth to others be none! None ask full collection for fear of illusion to become reality, no? Perhaps, take what offered and wait next year. Better, sell claims for olives to Western investors with little eyes and clean shoes? Perhaps financial knowledge and sophistication of these paper sellers is more considerable than average fool. In the days that come,
"better one olive in house than six blooms on tree"!
We watch this new gold market together, yes?
Thank You Another
ANOTHER (THOUGHTS!) (04/18/01; 06:41:33MT - usagold.com msg#: 52088) Reply
Mr Gresham (04/17/01; 10:33:51MT - usagold.com msg#: 52041) ANOTHER: WA, BIS Was the Washington Agreement the most significant event in gold since you were last posting in 1998? Do you have any reflections on those events?
Mr. Gresham,
One must weigh the mind of this Randy. It be heavy, yes? Do read the thoughts of the BIS for these same are printed review as #52046. Hold a mirror to these events for reflection. Such descriptions I discuss come next day.
Thank You Another
[And here are Mr. Gresham's and Randy's posts referenced by ANOTHER]
Was the Washington Agreement the most significant event in gold since you were last posting in 1998? Do you have any reflections on those events?
Who were the players that made the price spike upward so quickly in 1999, and how was it managed back down? (How were so many "fearless" shorts recruited so quickly?)
What is the BIS' role in the "currency war"? Is it somewhat trying to walk the middle of the road? Did the US members take their seats recently as an attempt to manage BIS' involvement, or does this express any measure of US control over BIS?
Randy (@ The Tower) (04/17/01; 13:37:02MT - usagold.com msg#: 52046) Mr Gresham, nice question
--- "Was the Washington Agreement the most significant event in gold since you were last posting in 1998?"---
If I may be so bold, let me anticipate ANOTHER's answer with an answer of my own.
The most significant event in gold since the dollar's gold default in 1971 has been the successful launch in 1999 of a long-awaited new currency system built upon neutral (meaning, multi-national) management and, more importantly, a floating gold reserve structure that finally abandoned the now obsolete "fixed" gold legacy of the failed Bretton Woods structure.
With this new reserve structure, the prevailing institutional incentive, from '71 to the end of the millennium, need no longer be one of "price suppression" for the perceived market value of gold.
In this light, the most significant element of the Washington Agreement is seen to be NOT the amount of pre-announced gold sales, but rather, the self-imposed curb on gold lending operations by these European central banks. And if you think about it, this action with the Washington Agreement was nearly just a predictable inevitability from the moment the eurosystem committed to provide for freely floating gold reserves. The "tools" of the prior suppression are on the outs. Believe it. The WA simply announced the foregone conclusion in a package suitable for newspaper headlines.
Just as the value of the post-'71 paper dollar has long been propped by the international yet artificial "mandate" to hold these dollars almost exclusively as reserves (acting in tandem with the dollar settlement for oil and the overhanging debts of the "Third World"), through this new currency structure gold (and its price/value!) has now been "officially" set free to replace these dollar reserves (savings).
The reason this full transition has not already occurred is that institutional interest still exists to foster the smoothest practicable transition until that unknowable moment where the final remaining *SNAP* in the adjustment occurs.
Speaking for The Tower and personally, I continue to buy gold with excess funds because I prefer the real wealth of gold over managed paper (and digital) contract currency. As a bonus, the real wealth value of same gold will provide a pleasant benefit upon full completion of the transition in world currencies' reserve structures. (An understatement, to be sure.)
End Sidebar _______________________________________________________
FOA (04/21/01; 21:12:52MT - usagold.com msg#66) Of Money and Men
Hello again!
Continuing along with our discussion, clarifying some points and positions, we once again offer some straight talk. Elwood has some points in his Elwood (04/19/01msg#: 52225). Sir, you referenced our last full hike on the GoldTrail #64, quoting first this portion:
FOA: "Many hard money philosophers have pointed their finger at others for the fiat situation we use today. It was the bankers and governments, the kings and cohorts, big business and robber barons or some communist manifesto that forced us to use this type of money. Well, you may not like the process and consider yourself above or apart from it all. You may even declare all of them evil. But, in the end, one fact remains; society may govern itself in many ways over thousands of years, but it has never stopped the evolution that corrupts the use of real money as official money."
Then you write:
------ Thank you, sir, for sharing your deep thoughts. True, your words are, but why is this a reason to abandon the fight for sound money? Surely you must be aware of the massive inefficiencies that will accompany a system with two moneys. There will be two prices for every good, one stable, the other not. Would not the timeline of such a system be extremely short compared to that of a system of sound money even though the sound money eventually becomes corrupted? How is this system better (or even different) than what we have today?---------
Hello Elwood (smile),
The fight for sound money is not dissimilar from the ages old fight for peace in the world. Mankind has been striving for peace over our entire existence and still it does not come. Countless lives and fortunes have been lost and the same battle continues. Perhaps we should reexamine our collective needs and try something different. Truly, what is to be lost? This is the same mind set our new political styling is shooting for. It's a good effort because history is on their side.
Yes, it's a noble effort to try and get the world on a sound money program, but after failing at it for centuries, a little side trip cannot hurt. (smile) Most people, like yourself, say sound money and think sound currency. Usually it's some form of gold backing that makes the currency sound. The trouble is it cannot be maintained. The logic in my words above are evident and the last part of the statement demonstrates the self-replicating nature of our dealings with "sound money". Again, in a restructured form:
""""Society has never stopped the evolution that corrupts the use of real wealth (gold) as it strives to use it as official money""""
Elwood, I don't care if all of it is legal or illegal, moral or not, right or wrong, because the larger issue overwhelms these arguments. That being; we have never been able to control our power structures in a way that disciplines the printing of currency. The Romans alloyed other metals into their gold in a form of modern day paper printing. Even in the so called wonderful days of the various gold standards, be they actual coins or paper substitutes, the world debased the system from the start. Also you write:
----Surely you must be aware of the massive inefficiencies that will accompany a system with two moneys. There will be two prices for every good, one stable, the other not.-----
We never intend to have two moneys. The concept is better seen as the Euro and a wealth reserve. Still, to defend against your thrust, what do we have now? Travel the world, my friend, and mingle in the world of currency. In almost every country of the planet there are several prices for every good sold! All depending on what nation's currency you choose to use. Today's system is working with perhaps hundreds of moneys!
------Would not the timeline of such a system be extremely short compared to that of a system of sound money even though the sound money eventually becomes corrupted? -------
My goodness, we have used a dollar system that has been debased and on the way out for 40+ years. Well before our 1971 gold break, this country was printing IOUs as if they were currency. Yet, the thinkers of our time, the same ones that employ two week trades on the stock markets, all ask for guarantees of decades before considering a new currency? Planners simply cannot employ the logic of a group that trades options, futures, strips and swaps, then asks for longevity before the fact.
-----How is this system [euro-Freegold] better (or even different) than what we have today?---------
The real issue is our misunderstanding and misuse of the term "sound money". That thought has been bantered around for hundreds of years. Truly it does not exist except in the minds of men.
Money, the term, the idea, perhaps the ideal,,,,,,, is something we dreamed up to apply to one of our chosen units of tradable wealth. Usually gold. We could take almost every item in the world and use it in this same "money fashion". Still, this form of trading real for real is just exchanging wealth. It isn't exchanging money as we understand money.
Gold is no different than anything else you possess as your wealth, it just so happened to be the most perfect type of tradable wealth in the world. So it evolved to be used the most and eventually labeled in the same function of what we consider to be "sound money".
Now, consider that all wealth is represented in and of itself. You cannot reproduce wealth through substitution, like giving someone five pieces of copper for one piece of gold and then have them think they now have five pieces of gold! This is the process we try to perform within the realm of man's money ideals. We have always debased trading wealth by duplicating it into other forms and calling all of it, collectively, "our money".
This duplicating, this replicating, this debasement is the result of taking the concept of a credit / contract function (paying in the future) and combining it with the concept of completing a trade at the moment. Think about that for a moment.
As an example, I'll give you a paper contract to pay you later for some oranges and you give me the basket of oranges. Better said, I just gave you modern man's actual concept of money.
Or… I trade you a basket of apples (or gold) for those same oranges and the deal is finished, done! We have been taught to think that this is also the concept of money trade.
The first uses what our currency system has evolved into, what is really money in our mind. Where the second uses no credit form at all and is more comparable to trading real wealth as the ancients traded using gold.
Contemporary thought has always blurred these two notion; saying that these two methods of trading are one in the same and both forms use the same idea of what we think money is.
Further refined; we evolved our money ideals into a perception that credits and contract payments can be used as if they contain the same value in payment as trading real wealth. They could and can if managed correctly. But we have never managed credit money to match the same proportions as existing real wealth (gold). We have tried to manage this combination of wealth trading and money credit for as long as we have been seeking "peace"!
So: We use, today, many forms of wealth holdings, all standing right beside our dollar use. Many of these wealth items have and do perform much better than our fiat currency. One has but to use one stock holdings as an example.
You may have $5,000 in cash in hand and in a checking account, while also owning $200,000 of, say, Microsoft? Obviously, the stock is a competing, dual form of currency wealth. Its value rise has overshadowed the gain on your fiat. But, is it driving your currency out of circulation? Seen anyone recently using this superior form of competing wealth to pay for a fill up at the station? No?
We all need and must use some form of fiat currency to operate in this modern world. It makes little difference if MSFT went to $10 or $10-billion, you would still use the currency system in trade as a more efficient form of modern trade. Society now uses these "money" systems without any form of gold backing, not because they are "strong" or "stable", but because they work more than they fail.
Still, over the last several decades, we now have come to expect an attempt at "political styling" our fiat money that benefits more than one nation block. Further, we expect a wealth asset to not so much stand behind the system but to measure its speed of failure or success. Knowing full well we will accept and expect some loss of value as payment for this use convince of Fiat Euro.
This is the road ahead. A fiat no different from the dollar in function, yet a universe away in management. A wealth asset that also stands beside this money, yet has no modern label or official connection as money. In this way modern society can circle the earth, to once again begin where we started. Having learned that the concept of wealth money and man's money were never the same. We shall see.
Thanks TrailGuide
FOA, you need not walk alone any longer. From where I sit, it sure seems like the rains have come and the ground is beginning to open. I, and many others here, would give anything for you to share your latest thoughts in proper posts or simple comments. You can email me at fofoamail@gmail.com if you want. How wonderful that would be. :) <--That's me happy!
Sincerely, FOFOA
(All emphases and [brackets] in the above posts are mine)
Since my last post we have had the announcement that $600 billion new dollars will be printed over the next six months. A day later we heard from the ROW (the rest of the world):
China, Brazil and Germany on Thursday criticised the Fed’s action…
the Brazilian finance minister who was the first to warn of a “currency war”, said: “Everybody wants the US economy to recover, but it does no good at all to just throw dollars from a helicopter.”
… the Chinese central bank called unbridled printing of dollars the biggest risk to the global economy…
So in keeping with the theme of Monday's post, "the network effect," I thought it would be interesting to explore what might happen to all those "homeless dollars" if "the effect's" feedback loop were to turn sharply negative. In looking at this I will let others do the writing for me, posting excerpts of my choosing with the credit and date at the bottom of each excerpt. This should keep the lively discussion going. Beginning here, it is no longer me writing...
The "Chartalists" (and their useful idiots everywhere) claim that the Federal Government simply spends money into existence, and thus they can do this all they want. Well, technically true - you can print all the money you want. However, you cannot control its value except through relative scarcity!
The Bond Market, rather than being a monetary tool as these people claim, is in fact a fiscal discipline enforcement device.
This is what The Fed with its QE and now QE2 has destroyed.
When Ben Bernanke said "we will not monetize the debt" what he was saying is that he would not permit that fiscal discipline device to be removed from the scales of financial balance. He lied - he not only removed it with QE1, he has now ratified that this discipline function will remain removed via QE2.
QE is effectively naked emission of currency into the economy by government spending.
Eventually The Fed ends up being, for all intents and purposes, the entire government bond market.
At that point the issuance of credit money is no longer backed by anything at all - it is simply emitted raw, and for every dollar emitted in this fashion you have both a 100% transmission into prices and a premium applied on your threat to do more of it.
That's Weimar Germany folks - it is exactly what happened there, and exactly what will happen here unless Bernanke stops this crap. Since he won't stop on his own volition it is up to Congress and the people to stop him.
Karl Denninger 11/4/10
How does the Fed print money? It’s easy; they simply buy bonds from the market and credit the seller’s bank account with electronic cash that comes out of thin air.
How risky is the Fed’s program of bond purchases? Very.
If inflation takes off, the Fed will have to choose between holding bonds and letting inflation get worse or selling bonds and going bankrupt in the process. Since no entity goes down without a fight, the Fed will naturally hold the bonds and let inflation take off.
His point being, only Americans and those in contracts governed by American law have to use dollars. The real deal is international trade and the settlement and clearing of trade flows among central banks. Right now most of that is done via the dollar.
Jim Rickards is suggesting that current policy (creating base reserves to pay over market price for crap and then burying said crap on the balance sheet at mark-to-fantasy valuation till term, or playing a game of hide the ball) may lead to that no longer being the case. Which isn't good for the FED, because they really just have dollars. If nobody wants what you have, you're broke.
JR 11/5/10
People who worry about the dollar's international primacy are confused about how exactly currencies are used, as well as exaggerating by how much the US economy benefits from oil sales between, say, Kazakhstan and South Korea being denominated in dollars.
Yes, international oil trade is generally conducted in US dollars, as is much other trade in commodities and goods, and the dollar's use in international transactions is larger than the US economy's share of world trade. But, then, so is the Swiss franc's share. All that tells you is that most companies and countries prefer to do business in some currencies (dollars, Swiss francs, euros) than others.
Open any reputable economics textbook and you will find a chapter on the role of money. They pretty much all say the same thing: money is a unit of account, a store of value and a medium of exchange. The US dollar is regarded a reliable store of value - in the same way that gold, sterling or Swiss francs are - because of the strength of the US economy and the stability of its institutional support.
But the "medium of exchange" and "unit of account" elements are just functions of liquidity and convenience. If South Korea buys oil from Kazakhstan by converting Korean won into US dollars, then Kazakhstan can either keep the payment in dollars or convert it into Kazakh tenge for domestic use. In any case, all that happens is a transfer from one bank account outside the US to another one.
For all three reasons of value, exchange and account, the world's central banks tend to hold large proportions of their foreign exchange reserves in US dollars - in part because, as in the Kazakhstan example, that's what they receive a lot of in the first place.
So what does the US gain from the dollar's international role? In theory it means the US can borrow money more cheaply, receiving a lower interest rate for dollar-denominated loans or bonds than would otherwise be the case, because those dollars have to go somewhere. Unfortunately, there is no evidence that US interest rates would be higher if the dollar were not a widely held reserve currency - for many years Germany paid lower interest rates on its bonds than the US, despite the German mark not being internationally as popular.
The only tangible benefit comes from forgone interest that would have been paid on US currency - actual notes - held outside the US. According to the Federal Reserve, about $300bn in hard cash circulates outside the boundaries of the US, with much of it held by criminals and black-economy participants.
The US economy does gain a benefit from this, but it is only a tiny benefit. If this hoard were kept in interest-bearing assets, the US economy would be paying out about $10bn a year in one way or another. Instead, the US economy is subsidised to that extent. In an economy the size of the US, that is chicken-feed - the equivalent of £25 a year to an average full-time wage earner in Britain.
Let's be clear what this does not mean. Just because Kazakhstan has a US dollar-denominated bank account in London or Basle does not mean that it is in hock to the US, or that it is forced to buy American assets or exports. Nor is Kazakhstan subsidising the US economy, at least not to any appreciable extent.
It certainly does not mean the US somehow gets to import oil for "free" because it pays for it in dollars - it can't simply print money to pay for barrels of black stuff. Or, to be theoretically correct, it could do so but not for long - the value of the US dollar would sink on foreign exchange markets as a result, and cost the US economy far more.
Why does this article by Richard Adams worry me? Has he got it right or wrong?
I thought that if oil was paid for in Euros, say, instead of dollars, then that would encourage most countries to divest themselves of an appropriate number of "dollar asset reserves" in favour of "Euro asset reserves", thereby reducing the demand for dollars and lowering its "value", and increasing the demand for the Euro and raising its value.
...and in his last paragraph, I thought that the US HAS been "simply printing money" - maybe not to "get oil for nothing" directly, but to support US asset prices…
Any other opinions out there?
Sundeck (5/5/03; 03:56:35MT - usagold.com msg#: 102354) Dollars for oil - how important is it?
Like Sundeck, I was surprised at the Guardian author's blunt dismissal of the importance of the dollar's being a reserve currency. Don't get me wrong: I am not for a moment suggesting that preserving reserve status is the ONLY factor in deciding US foreign policy; but I do believe that losing reserve status would knock the US quantity of money wildly out of balance and that the US Treasury knows this.
His argument about the unimportance of oil's being priced in dollars is then expressed as: '... the "medium of exchange" and "unit of account" elements are just functions of liquidity and convenience. If South Korea buys oil from Kazakhstan by converting Korean won into US dollars, then Kazakhstan can either keep the payment in dollars or convert it into Kazakh tenge for domestic use.'
It's an argument I've seen before: if I have dollars, and oil is priced in euros, then this makes no difference -- I can "convert" my dollars to euros before I buy the oil. And to me, his use of the word "convert" seems to confuse the "medium of exchange" and "unit of account" uses of money.
Let me explain what I mean. There are some transactions which are much the same whether they are carried out by me or by the United States ... give or take an extra eight zeros on the numbers involved. But there are others where the large transaction is different in kind from the small.
If I want to buy an ounce of gold, I can go into any coin dealer in the High Street and buy a Krugerrand for a few per cent over the intrinsic metal value.
If I want to buy 200 times as much, 200 Krugerrands, I can telephone Centennial, where I'll pay a smaller percentage premium because of the quantity I am buying.
If I want to buy 200 times as much again, 40,000 ounces, then everything changes. "Economies of scale" become less important than "supply and demand." I am probably buying most of the available physical gold in the market and need to compete against other major buyers of physical gold. My purchase will take time and cost more.
If I want to buy 200 times as much again, 8,000,000 ounces, then probably nobody anywhere has that much on sale. This is 10% of the gold mined worldwide in a year.
Much the same holds for "converting" from one currency to another for the purposes of exchange. As a unit of account, I can just use multiplication: "Your account at present stands at 1,000 pounds sterling, John, which is the equivalent of 1,500 US dollars." But if I want to use those dollars as a medium of exchange -- to buy something with them -- I first have to use my pounds to buy the dollars.
If I want to buy 1,000 pounds-worth of dollars, then first I must come out of the coin dealer in the High Street -- or I shall wind up with 1,500 Sacagawea golden dollar coins -- and go into any bank, which will give me Federal Reserve notes in exchange for Bank of England notes, at the tourist rate. I can "convert" the currency easily.
If I want to buy a thousand times as much -- 1,000,000 pounds-worth of dollars -- then I can still convert the currency easily. In foreign exchange terms, a million pounds is a very modest amount, though large enough for me to get the forex (rather than the tourist) exchange rate. My own bank will have an account with USD 1,500,000 in it, which it can withdraw and pay into a dollar account in my name; at the same time deducting GBP 1,000,000 from my sterling account. (I should perhaps point out that I have never actually done this!)
If I want to buy a thousand times as much again -- 1,000,000,000 pounds-worth of dollars -- then it becomes clear that I am buying dollars, rather than converting pounds to dollars. The extra demand for dollars that I have created will increase the price of a dollar. My bank, however, will have no great difficulty finding that many dollars. The reason for this is that there is a huge quantity of dollars in the London foreign exchange market ... because the US dollar is the principal reserve currency. These are the dollars that European oil users buy so that they can buy oil, and which the oil producers later use to buy euros so that they can buy the things they need from the Eurozone. These dollars are, in practice, never taken back to the US and spent there.
It is this need to find dollars -- in practice, to find banks which have large dollar deposits which they are willing to sell to me -- that makes the big difference between a "medium of exchange" and a "unit of account". And it affects the monetary policy of the owner of the reserve currency. If there was no longer a demand in London for US dollars to buy oil, then the banks in London would no longer need large dollar deposits. Where can these dollars be spent if they cannot be spent on oil? In the United States.
This is what I meant when I wrote that losing reserve status would knock the US quantity of money wildly out of balance. The repatriation of the petrodollars would considerably increase the quantity of money available for spending in the US ... with an immediate inflationary effect.
How much of an effect, I don't know. Does any of the Folk of the Forum know?
John the Jute (05/05/03; 16:04:12MT - usagold.com msg#: 102381)
Enjoyed your post John the Jute - thanks for painting the circumstances surrounding "medium of exchange" so clearly. You've got me thinking about repatriation of dollars now.
From first principles, I suspect that the net global "float" of petrodollars is related to the cumulative total-dollar-expenditure on oil by all countries per unit time, and to the time-rate at which the dollars are recycled. On top of this will be the "oil-portion" of dollar-reserves set aside by all countries to buffer their balance of payments at any give time. Do away with the dollar-oil symbiosis and both the "whirlpool" of circulating dollars and the oil-portion of reserves will look for another home...back in the U.S of A.
Probably heaps been written about this here and elsewhere in the past, but how to find a definitive and succinct treatise???
Good post, John the Jute! Very nice way of explaining the relativeness of scale.
Regarding your musings re: dollar repatriation, it can be a tough one to answer. The obvious take is of course as you express, that without use for dollars, they would simply find their way back to US shores, and help drive (hyper-)inflationary pressure. Yet, if you will permit me also to think out loud for a moment ;->, perhaps we can take a look at this currency as the derivative instrument it effectively is, and then try to figure out its ultimate fate. Let's view it specifically as a kind of call option; one that commands a premium as a price paid for its exercise-ability at any time for any of the goods or investment media that exchange in the currency's universe (or the settlement of debts). This amounts effectively to a liquidity premium.
This premium gives it a trade value in its own right, and as such, as long as there is a market that believes in the currency's stability, the currency itself trades on its own merits. Not unlike futures and options. And just as many of these contract instruments get exercised for whatever underlying asset they represent, most are simply exchanged among speculators and hedgers trying to benefit from movements in the contract price, never actually intending to exercise or take delivery. The paper remains viable so long as the holder is confident that the next guy believes the contract is generally good.
While many holders of a currency intend to "exercise" the currency for real things, especially those in the currency's principal use domain, most of these currency units are likewise exchanged among speculators and hedgers (including all those private individuals, who own dollar denominated savings and investment accounts overseas), who are only trying to profit (speculate) from the currency's movement, or preserve (hedge) their own currency's seemingly endless trek of depreciation vis-a-vis this US dollar. Most of these have no intention whatsoever of "taking delivery" of things with these currency instruments.
So, what happens to the dollars they sell? For these average citizen types, the banks that held their accounts buy them. They then either sell them to another institution or may enter the foreign exchange markets themselves (depending on how they are regulated). They also may hold some back, depending on how they wish to balance their own portfolio. So, now these dollars that have not ended up remaining in reserves at these banks have entered the foreign exchange markets putting upward pressure on the currency of the seller, and downward pressure on the dollar.
Historically, the paradigm was to do as little of this as was necessary in order to keep the seller's currency "competitively" weak (among other reasons). As the influence of export to the US wanes (tapped out US consumer + growing size and sophistication of other markets), the need to keep one's currency weak vs. the USD, so as to compete for this market also wanes. Instead the stabilizing and strengthening of one's currency becomes more important (thereby encouraging borrowing in the local capital markets), and allowing local workers to enjoy a bit more the fruit of their labors, instead of always helplessly watching the value of their labors get sucked into the vortex of a dollar-dominant currency paradigm.
So, do these orphaned dollars eventually come home to roost in the US domestic markets? We will be told that. The media will wring their hands over anecdotal wake-up stories like Arabs buying up vast tracts of property, and how "they" will soon "own" the country... (This has been going on for ages in the U.K., as you're aware... every other lovely English manor is seemingly owned by some Saudi mogul...) We experienced the same with the Japanese in the 80's (Rockefeller Center...). Hence part of the political response will be to enact capital flow restrictions. But anecdote amounts to chump change, in a purely financial evaluation.
The really big holders of dollars are the central banks. What they do with their reserves will make or break. Their influence over other banks and financial institutions will also largely dictate the destiny of these dollars. In the gold standard, the currency acted as something of a title deed for a specific good at a specific price. Central Banks could and did take these "receipts" and claim gold from each other. In this day, there is nothing for CBs to "claim," as these dollars are no longer "title deeds." Rather, they are like non-expiring calls for things on demand, at the variable and going price. CBs are likely to neither a) dump them on the forex markets, as this would simply devastate the currency, and risk dreaded instability globally -- something banks are NOT prone to do; or b) race to our markets to try and buy things (like gold), as this would also be fruitless, since a market revaluation for this action would instantly make gold unpriceable, and it would not even be offered. Again, why engender the instability?
Without a certain weapon in the arsenal of the euro's design, the foreign CBs would indeed be over a barrel. Previously they were forced to evermore be on a dollar standard, since they would realistically only opt for this as the lesser of two evils. The alternative of saying no to the dollar at that time, would only have meant a return to a gold standard, and the politically unacceptable bone-crushing depression that would follow (as well as instability). In 1979, the European CBs began marking their gold reserves to market. This one act demonstrated immense foresight, and would provide the escape valve from the rock-and-hard-place no-win choices between eternal dollar support, or global depression.
Quietly, the euro-system banks have been divesting themselves of dollars. Collectively they retain something like 211 bn. currently. (This is not a large amount relatively speaking, but consider fractional reserve lending, and quickly we perceive the immesity of euro-dollar infestation.) This decline in dollar holdings is desired to take place concurrently with a rise in the price of gold to offset this. Spoonfeeding dollars into the system won't crash it, as well a slow commensurate rise in gold. The discipline that they have thus far maintained is indicative of the tectonic movement of the geopolitical strata. Ideally there will be no rash or even discernible activity. The perfect result is to simply keep shifting these plates until we wake up one day and the world has been remapped. Reality of course is that there are points of friction that cause tremors of unpredictable frequency and proportion all along the way. At some point critical mass will be reached, and the dollar contract markets for gold will no longer be able to contain its price as market perception on a large enough scale discounts paper parity with the real metal accordingly. It is at this juncture that the gold reserves of the CBs will provide immense expansionary leeway, as they are for a season revalued constantly upward. This bona fide liabilityless reserve base will make the ECB member banks the premier lending institutions to fuel the economic growth of the euro zone, and those align themselves with it.
In this respect it is important to curry the cooperation of the more maverick dollar holders, like China and Russia, as their track record of unpredictablility, may lead them to use their dollars as weapons... (And don't think that their dollar debt is of much concern to them, as they know all too well that those totals can be reduced in real terms to pocket change, if such a hyper-inflation were to manifest.) Indeed as far as the books are concerned, this one use for these dollars overseas -- the repayment of dollar debts -- would actually provide a contractionary effect as these receivables are cleared from the balance sheet... One reason why Goldendome's sought after interest rate hikes can't happen... (gotta keep expanding..., and making it more expensive to borrow, isn't gonna help matters...) [Goldendome, there is much to this discussion, and I would like to provide my opinion in response to you -- as I used to think exactly the same... I likely won't have time, but the Trail provides some excellent discussion along these lines...]
The strategy of the level-headed is to slowly remap the globe financially. This involves as much as possible a SLOW transformation from one currency paradigm to Another. These dollars en masse will not return home. They were born in exile and will die in exile. We will hyperinflate ourselves, and won't need help from overseas...
Gosh, what a thorough response, miner! You've clearly thought about this matter in considerable detail. Thank you for sharing the results of your thoughts with me.
John
John the Jute (05/06/03; 11:25:50MT - usagold.com msg#: 102432) miner49er @ 102429 -- Homeless Dollars
Miner-man,
As I read your post I was held in rapt admiration. So many folks stubbornly live in the past, but when a few guys like you (y'all know who you are) can lay it out so clearly for general consumption, surely the future for everyone is brought forward by *at least* a few days. :-D
Thanks for your contribution toward making the world, in aggregate, a more rational place one post at a time.
"*Money* in its purest form is a mental association of values in trade...a concept IN MEMORY...NOT A REAL ITEM!!! Understand money and you understand Gold!" --- Belgian
Amen. And further:
"The exhorbitant growing confetti-creation, policies... NEED TO BECOME DETERMINED BY WEALTH *OUTSIDE* THIS OFFICIAL MONEY REALM!" --- Belgian
Amen. Hence the primary universal function of global physical Gold comes into view -- an asset for savings that lets its owner know the true size and shape of his wealth.
True Wealth. Get you some. --- Ari
Aristotle (05/07/03; 20:44:46MT - usagold.com msg#: 102502) omegaman -- money is also known as a time value judgment
Sure!
The key point to recognize is that it's the multitude of goods prices that we're exposed to along with our various wage-level associations that we hold in our minds which gives money a functional *unit valueness* even though it's not a standard weight or measure of any single physical thing. Physicality be damned. As a *nominal* (mental value) measuring unit it serves perfectly as the lubricating *unit of account* in the ever-adjusting network of purchase orders, loan contracts and labor agreements which all form the backbone of our economy and monetary system.
To deny ourselves that pure nominal form for our monetary system is to deny that we are human with warts and all. Although Gold has no right place *IN* the monetary system, it is by natural selection the nearest neighbor living in the real *OUTSIDE* world that can act as a universal translator to judge and announce *without bias(!!)* the temporal values of the many monetary pricing units being wiggled and jiggled around *inside* the "gamey" system.
Only if and when *observed* by Gold like this can we begin to call it a *perfect* monetary System for our admittedly imperfect world. Don't worry, we'll get there from here on that vehicle -- even if only by default as every other sort of vehicle will break down during the journey.
Gold. Rolling rolling rolling along like a song. --- Ari
Aristotle (05/07/03; 21:10:04MT - usagold.com msg#: 102506) steady -- it's VERY good to know the true size and shape of your wealth
I was deep in your vest pocket up until you offered this extreme:
"gold [...] is constant . [...] its value doesnt ever change all that is changing is the amount of fiat one gets for it."
Wellllllll,,,, I suppooooose we *could* accept Gold as the fixed-value center of the relative value universe. But what's wrong with accepting that its value in human affairs could in fact climb even higher than it is relative to other real things like butter and bread and eggs as we put it to this special modern (ancient!!) usage we're describing?
You went onward to ask and bemoan:
"isnt it unfair that some group of bankers can meet and make your life worthless by devaluing your capital? That simply is not fair, not honest, most importantly not cool."
Take heart! If we can finally rid ourselves of the paperGold games that are played in parallel with money games, they can then only make your life worthless if you let them. That is, if you hold your primary savings in the form of money instead of Gold.
It doesn't take much training to fall into the excellent rhythm of Gold savings as the harmony to accompany your monetary melody of earnings and spendings. Billions of little easterlings and southrons are in graceful step even as we westerners only begin to hearken to the distant hum.
