Wednesday, December 1, 2010

The Value of Gold


The concept of value can be a bit tricky. Value is one of those words that is tossed around as if there were universal agreement on its meaning. There is not. Often in such cases I simply use a different word, just to be sure we are on the same page. Years ago Town Crier did this with "value", substituting in the word "dearness":

TownCrier (8/24/2000; 18:08:49MT - usagold.com msg#: 35476)
Nice table, Sir Mitchell:

Column 1 = Year
Column 2 = Avg. annual nominal price of gold
Column 3 = Avg. annual price of gold in 1999 US dollars
Column 4 = Avg. annual price of gold in 1970 US dollars

1970 35.94 158.75 35.94
1971 40.80 170.18 38.53
1972 58.16 232.59 52.66
1973 97.32 376.76 85.29
1974 159.26 580.57 131.44
1975 161.02 528.81 119.72
1976 124.84 375.79 85.08
1977 147.71 420.26 95.14
1978 193.22 516.19 116.86
1979 306.68 761.43 172.38
1980 612.56 1,364.05 308.79
1981 460.03 902.53 204.30
1982 375.67 668.20 151.28
1983 424.35 710.70 160.91
1984 360.48 585.02 132.44
1985 317.26 493.66 111.77
1986 367.66 552.19 125.00
1987 446.46 658.04 148.98
1988 436.94 621.63 140.74
1989 381.44 521.31 118.02
1990 383.51 500.14 113.21
1991 362.11 448.04 101.43
1992 343.82 408.25 92.42
1993 359.77 414.74 93.90
1994 384.00 429.77 97.31
1995 384.17 419.09 94.89
1996 387.77 412.70 93.41
1997 330.98 342.00 77.42
1998 294.24 298.95 67.68
1999 278.88 278.88 63.14

The third column (representing prices based on the purchasing power of 1999 dollars) clearly shows that gold is currently at the best bargain for buyers since way back in 1972.

Meanwhile, the fourth column (representing the equivalent prices in terms of the 1970 dollar which was itself officially defined as one-thirtyfifth ounce of gold) clearly shows that despite the massive mining effort and flood of derivatives since that time, the "dearness" of gold has still managed to almost double; otherwise, we must all admit, the price of an ounce today as represented in "1970 dollars" would still be $35. It isn't. One ounce as of 1999 is as dear as 63.14 of those "gold-backed" dollars, or put another way, despite production and derivatives, one ounce today is as dear as 1.8 ounces then. All things considered, that's not bad performance for an item that many are content to view as a neutral "insurance" asset.

Now just imagine how much dearer an ounce might become in the event of a derivatives bust...

(I have used the term "dear" in deference to the recent disputes on the meaning of "price" and of "value". To say "dearness" is my attempt at splitting the middle so that the message reaches both sides of this debate.)


Quite clever that was. But value is a vital concept to understand. So here we will explore some misconceptions associated with this most dear and valuable word.

Probably the most common misconception is that price and value are the same thing. They are not. They are related but different. Price can be precisely known, but true value can only be estimated or guessed. And because price changes, price is always wrong while true value is always right, even though it is unknown. So price and value are always different. Value is always either higher or lower than price.

There is a little trick to knowing whether value is higher or lower than price. This trick will reveal the direction of value, but not the magnitude of the disparity. The trick is to look at which direction the government wants to influence any price. If the government is attempting to manage a price upward, then it is a safe bet that the value is lower than the price. And if the government would like to keep a price down, then you can be pretty sure the value is higher than the price.

It is certainly fair play to place your bets on the ability of government to overpower the gravitational pull of value. But when you do, you should be aware that you have just purchased the opposite of real value. And to understand why this may be detrimental to our financial wellbeing, we must first understand the concept of value.

A Brief History of Value Theory

The concept of value is primary and central to the study of all human society. Economics is just one branch of study that uses this concept. And value theory is fundamental to all schools of economic thought.

At the most basic level value theory reveals the concept of "the good." This concept can refer to either people or objects. When referring to people (or the conduct of people) we talk about "the moral good." And when referring to an object we call it "a natural good." Value Theory could also be called "Goodness Theory," and it covers two branches of study: Ethics, which deals mostly with "moral goods," and Economics, which focuses primarily on "natural goods."

Plato

Plato wrote about value 2,400 years ago in "The Republic" where he distinguished "instrumental value" and "intrinsic value." Something with "instrumental value" is worth having only as a means to get something else. It is not an ends-in-itself but merely a means to an end, a medium. An object with "intrinsic value" is regarded as an end or end-in-itself. It is a thing worth having for itself, not as a means to something else. COMEX gold futures versus physical gold is an example of instrumental versus intrinsic value. In fact, the dollar itself (or any medium of exchange for that matter) is a good example of something with instrumental value.

The Modern Era

Because this is a "brief" (and extremely generalized) history of value, we will now leap forward through time 2,251 years from 380 BC to 1871 AD when the economics branch of value theory itself branched off in two directions. We are now traveling down the economics branch, so we are dealing with "natural goods" which are non-moral goods (and services), like houses, cars, hamburgers and gold.

The study of economics grew throughout the Renaissance period of transition from the Middle Ages into the Modern Era. Notable figures during this transitional period are Sir Thomas Gresham (1519–1579), John Locke (1632–1704) and John Law (1671–1729). And the era of Modern Economics (also called Classical Economics) began in 1776 with Adam Smith's (1723–1790) "The Wealth of Nations."

Adam Smith

95 years later a new branch, sometimes called Neo-Classical Economics, emerged from the old school of Classical Economics branch. Classical Economics held that value should be donor-derived or determined by the cost to supply a good to market rather than the demand for the good from the market. This is generally called the Labor Theory of Value. Neo-Classical Economics grew out of the realization that it is the utility of a good that matters more to its value than how much labor it took to produce.

Karl or Carl?

The Labor Theory of Value (LTV) was the mainstream and widely accepted value theory prior to the 1870's, culminating in the controversial economic theories of Karl Marx (1818–1883). Then, in 1867, a young journalist named Carl Menger (1840–1921) noticed a discrepancy between what the classical economics he had been taught in school said about price determination, and what real world market participants were paying for goods. Stirred by this observation, Menger left journalism to spend the next four years studying "political economy" which, at the time, was basically the study of capitalism, or the relationship between markets and government.

Carl Menger

In 1871 Menger published "Principles of Economics" (Grundsätze der Volkswirtschaftslehre), thus becoming the father of the Austrian School of economic thought. It was in this work that Menger challenged the classical cost-based theories of value with his own marginal utility theory of value.

From what I can tell, the basic difference between the approach of Marx versus Menger is that of activist versus observer. The Marxian Labor Theory of Value tells you what something's value should be, while marginal utility observes what it actually is, and then attempts to explain the observation.

Karl Marx

Someone here recently asked, How can an ounce of gold ever be more valuable than a new BMW since the BMW embodies a vast amount of energy, human capital expenditure and significant utility in the real world?

I found this question to be quite valuable, embodying significant utility for this blog. The implication in the question is that an ounce of gold cannot be more valuable than a new BMW for two stated reasons:

1. The Marxian LTV tells us that the cost to produce a BMW is much higher than the cost to produce an ounce of gold, and,
2. The BMW is "significantly" more useful to mankind than an ounce of gold.

These two "value fallacies" cover almost all of the arguments against the sustainability of the unfolding Freegold revaluation. So let's take a look at them one at a time.


1. Marx's LTV view suggests that market actors pay more attention to what an item cost the seller of that item in determining the price they, the buyer, are willing to pay, rather than to how useful the item will be to them, the buyer. It goes even further, though, in suggesting the supplier's cost is the true value and therefore should be reflected in the price. Any price above that cost or "labor value" is considered to be exploitation, super profit, or unjust benefit as far as the Marxist activist is concerned, and therefore should be controlled through communal enforcement.

But clearly, commodities do not follow this labor value theory in a free market. Especially in globally fungible commodities, where price is the same all over the world yet production costs vary vastly from region to region. Oil is a good example. In fact, the production of oil is impossible in many regions lacking viable reserves. Menger writes in "Principles of Economics":

"There is no necessary and direct connection between the value of a good and whether, or in what quantities, labor and other goods of higher order were applied to its production. A non-economic good (a quantity of timber in a virgin forest, for example) does not attain value for men since large quantities of labor or other economic goods were not applied to its production. Whether a diamond was found accidentally or was obtained from a diamond pit with the employment of a thousand days of labor is completely irrelevant for its value. In general, no one in practical life asks for the history of the origin of a good in estimating its value, but considers solely the services that the good will render him and which he would have to forgo if he did not have it at his command...The quantities of labor or of other means of production applied to its production cannot, therefore, be the determining factor in the value of a good. Comparison of the value of a good with the value of the means of production employed in its production does, of course, show whether and to what extent its production, an act of past human activity, was appropriate or economic. But the quantities of goods employed in the production of a good have neither a necessary nor a directly determining influence on its value." (Menger)

Timber in a virgin forest has some value separate from labor, just like gold known to be deep in the hillside of your property has value, even though it has never been touched by mankind. So even in a Marxian view of value, applying the value of the raw material (the land with gold underground) to the labor involved to dig it up, we could easily put an ounce of gold higher than the value of a new BMW.

Imagine that physical gold is trading for $55,000 per ounce. If you own a hill with 100 ounces of gold underground, that hill must have a value somewhere south of $5.5 million, assuming you are legally allowed to remove the gold. Now imagine the labor and production cost of removing that gold from your hill and having it refined into tradable ingots comes to $300,000. For your small lot, that works out to a cost of $3,000 per ounce (not economically viable until recently), and it puts the value of your virgin hill somewhere under $5.2 million.

So in our exercise here, your input costs would be <$5.2 million plus $300,000 and your output would be $5.5 million. In fact, it doesn't matter if you bought the hill last week for $5.2 million or if your great grandfather bought it in 1920 for $1,500. All that matters is the present value of that hill. So in this scenario, your total energy and human capital expenditure for each ounce of gold dug up from your hill is equal to $55,000, or more than a new BMW (some models excluded). The Marxist, however, would say that the gold in your hill is the property of the collective (common ownership of the means of production). He might still let you dig it out at a cost of $3,000 per ounce, but then he would tax you $50,000 per ounce for the privileged of digging on communal land and removing (privatizing) communal gold. And of course this government action would do nothing to either the $55,000 price of an ounce of gold or to the >1:1 BMW:gold value ratio.

Gold in the ground would be the raw material or the "means of production" for producing gold, the global (private) commodity. The former is communally owned while the latter is privately owned, which transfers value from the latter to the former and its owner, the commune at large.

So as we can see, the free market does not follow the LTV rules that Marx proposed, and even Marxist communal enforcement and elimination of the "exploitation, super profit and unjust benefit" of producing new gold will have no effect on the price or value of private, physical, above-ground gold. It may, however, have a deleterious effect on the price and value of gold mines. But that's a subject for another day.

2. Part 1 of my look at the question above focused on how and why the Labor Theory of Value will not prevent a high value for gold. But it did little to explain how the price will get from here to there. That's what part 2 is about. The marginal utility of physical gold.

What is the utility of a BMW? According to the above question is it "significantly" greater than gold "in the real world." So what is this significant, real world utility?

Well, you can drive a BMW around. Can't do that with gold! It will even get you to work. Gold won't get you to work and back home. And a BMW will do these things in comfort, style and safety! In fact, a BMW may even improve the image of your status in society. I suppose gold could be useful in this regard if you are Mr. T. But then someone might steal it from you. A BMW is harder to steal than loose gold because it has redundant locking mechanisms and carries a visible registration number that can be tracked by a vast police force. Gold in your pocket or around your neck doesn't have these "real world" features.

And what is the utility of gold? Well, it used to be a medium of exchange and a unit of account. But today it is neither of those things. And yes, it does have a few industrial uses, but not many, and certainly not very many when compared to other industrial commodities. So what is gold's utility?

Gold's utility is that for thousands of years it has held its value relatively well. And because it is not used for many things other than mere hoarding, the act of hoarding gold is not an infringement on the natural rights of others to enjoy the utility value of "real world" things like BMW's and oil and wheat and pork bellies. If one were to corner, say, the copper market or the chocolate market, there would likely be repercussions as those industries fought back through the power of the collective that likes to consume chocolate and copper. But with gold there is no such worry.

Can you imagine if central banks hoarded 20% of the world's wheat in giant CB silos while millions of people went hungry? Or how about if the old money aristocrats accumulated and hoarded 20% of the lumber produced every year, preventing it from being used to build shelter? Do you think there might be cries of outrage and a wholly justified uprising against the CB's and the rich?

Thankfully we have a commodity that is mostly used for hoarding, and little else. Like Warren Buffet said, we dig it up and then bury it again in a vault. And all it does is one little thing: it maintains its value over thousands of years. That's gold's utility.

So now that we have looked at the utility of BMW's and gold, let's look at the marginal utility of each, that which gives value to an item. But first, what is "marginal" utility?

In this use, the term marginal refers to the effects of small changes in the consumption of any commodity we possess or are considering buying. It is a measurement of relative values because in order to increase our consumption of one commodity, it is thought that we must forgo another. Or perhaps we must work more hours, forgoing an equal amount of leisure time.

For example, if you didn't have a refrigerator you might be willing to forgo something quite significant in order to obtain your first fridge. But once you have one refrigerator, the second one you buy has less use value to you, because most people only have room specifically designated for one fridge. And someone who already has an extra fridge in the garage and a small beer fridge in the laundry room is unlikely to give up anything else for another refrigerator. It has no use to him. With each subsequent fridge he bought, the utility dropped. This is the law of diminishing marginal utility, or diminishing returns on expanded consumption.

Think about the bare necessities of life: Food, water, shelter and air to breathe. If you didn't have one of these things, you would pay any price to obtain your first unit of it. But once you have what you need to survive, the marginal utility of additional units drops off a cliff. So the bare necessities of life actually have very low marginal utility, or very high diminishing marginal utility. For this reason, their prices stand right near where Marx's LTV would put them.

A BMW also has low marginal utility. After you have bought so many BMW's, how many more can you possibly need? Imagine a man with a "disposable" $1.5 million. He may buy a $50,000 BMW. He may even buy two! If he buys one, the utility of that BMW could be said to be 30 days of "speed, comfort, style and safety" use per month. If he buys two and uses them equally, then the utility of his marginal (most recent) purchase could be said to be half that of his first purchase, or 15 days of use per month.

Now imagine that he disposed of his whole $1.5 million into $50,000 BMW's. He would have one for every day of the month! And if we include his newfound need for a very large garage, it could be said that the marginal utility of additional BMW purchases, for him, had diminished to well below 1/30th of the first BMW he bought. So while the price of another BMW would still be $50,000, the value, to him, might be less than a thousand bucks.

This concept of diminishing marginal utility can even be found as far back as the fourth century BC, in Aristotle's "Politics", in which he wrote, "external goods have a limit, like any other instrument, and all things useful are of such a nature that where there is too much of them they must either do harm, or at any rate be of no use."

There is more to this story, but before we proceed, let's take a quick look at the marginal utility of gold as a store of value. Take the man above with $1.5 million in disposable cash. Say he buys himself one $50,000 BMW and one $55,000 gold eagle coin. He has just obtained the full utility of a fine automobile as well as the value preservation of that same purchasing power, for up to thousands of years if he should so choose.

Now say he buys one more $55,000 gold eagle coin, and then another, and another, and so on until all his cash is gone. In the end he will have 26 gold coins. And here's the question: Will that 26th gold coin purchase provide the same utility or diminished (less) utility than the first? Remember, the only utility of gold coins is that they retain their value for thousands of years. That's all they do. And hoarding them doesn't interfere with any other economic activity, at least not when they are not "official money."

The answer is "the same utility," because unlike ANYTHING else, (yes, even silver), gold has INFINITE marginal utility in this particular role.
___________________________________________________________
Sidebar:

Back when gold was "official money," the hoarding of gold to store value actually did interfere with economic activity as it put a deflationary squeeze on the global monetary system. Here is a paper that discusses this subject:

Did France cause the Great Depression?

Abstract:

The gold standard was a key factor behind the Great Depression, but why did it produce such an intense worldwide deflation and associated economic contraction? While the tightening of U.S. monetary policy in 1928 is often blamed for having initiated the downturn, France increased its share of world gold reserves from 7 percent to 27 percent between 1927 and 1932 and effectively sterilized most of this accumulation. This “gold hoarding” created an artificial shortage of reserves and put other countries under enormous deflationary pressure. Counterfactual simulations indicate that world prices would have increased slightly between 1929 and 1933, instead of declining calamitously, if the historical relationship between world gold reserves and world prices had continued. The results indicate that France was somewhat more to blame than the United States for the worldwide deflation of 1929-33. The deflation could have been avoided if central banks had simply maintained their 1928 cover ratios.
___________________________________________________________

The introduction of the concept of "marginal utility" to the study of economics in the 1870's created a revolution in economics, called The Marginal Revolution.[1] All modern schools of economic thought (except for Marxism and those related to Marxism) grew out of this Marginal Revolution. As I said earlier, the theory of value is fundamental to the study of economics, and all human society for that matter, making any shift in this theory a "revolution."

In modern economics, the idea of marginal utility has led to "marginal rates of substitution" and "indifference curves" which are used in "consumer preference theory" in modern applications. The focus today is on choice and substitution. And this sets gold apart from not only BMW's, but from everything else in the physical world today.

In 1918, Silvio Gesell, a "free money" (easy money) economist with many radical ideas, wrote:

"And it is clear that money cannot be simultaneously the medium of exchange and the medium of saving - simultaneously spur and brake."

"I therefore propose a complete separation of the medium of exchange from the medium of saving. All the commodities of the world are at the disposal of those who wish to save, so why should they make their savings in the form of money? Money was not made to be saved!"


Silvio Gesell

While Gesell's "free money, free land, social equality for all, full employment, shorter work weeks for all and economic growth on demand" ideas appear quite impossible and dangerously utopian to this blogger, he was certainly on to SOMETHING of value in the above quotes. But while those selected quotes sound an awful lot like Freegold, can you spot the one problem in them?

That's right, he suggested that "all commodities of the world" could serve relatively equally as stores of value outside the monetary plane. This suggestion ignores the difference in marginal utility between the one commodity used ONLY as a store of value and all the rest that rely on their other uses for value.

Substitution, indifference and preference do not apply only to consumer products and food. They also apply to industrial commodities.

In applications of marginal utility, it is often assumed that commodities are continuously divisible. And as you divide a commodity (which you might do as the price rises) you reduce its consumption and increase the likelihood of substitution. For example, a consumer who previously enjoyed 1 lb. steaks may face a substitution dilemma if the price of steak doubles. He may have to choose between a ½ lb. steak and 2 lbs. of ground beef. Steak is divisible but dividing that steak reduces its utility.


This is true for all commodities on Earth in their "real world" uses… except gold!

Say gold doubles in price just like the steak. It is also divisible, just like the steak. Prior to doubling you could have gotten an ounce of gold for $25,000. After the doubling, you can only get ½ ounce for $25,000. Like the steak, you are only getting half as much. Or are you?

Unlike the steak, the utility of the ½ ounce of gold has not diminished. If anything, it actually INCREASED! How? Well, this ½ ounce will protect your present purchasing power of $25,000 for thousands of years just as well as a full ounce, but it will only require half the storage space and expense! (Keep in mind that the utility of gold is protecting your purchasing power, not increasing it. The fact that the price and value of gold have an extremely wide disparity right now is a separate issue.)

As any other commodity used in industry or consumption rises in price, the necessary division reduces its utility and encourages substitution. So all other commodities have this value-limiting characteristic. But not gold. Gold becomes MORE useful at higher prices while industrial commodities become less useful and subsequently get swapped out.

Now let's take a closer look at gold's highest and best (most valuable) use and compare to gold's present utility. But first, we must get one fallacy out of the way. Is gold's value derived from its industrial uses? Of course not. There, I'm glad that's out of the way. Gold is not just another commodity like all others. Got it?

So what is gold's highest and best (most valuable) use? I'm sure a lot of you said "money!" And by "money," I'm sure you meant currency, or at least base money as it was during the gold standard. As the mysterious blogger Mencius Moldbug (one of my favs btw) and his even more mysterious alter-ego John Law points out:

"Money is always fundamentally overvalued. Its purchasing power is independent of its direct physical usefulness to anyone. This is obvious for paper money, but true even for gold and silver."

And he goes on to show that "precious metals" will at some point be spontaneously remonetized (overvalued), which is why you should buy gold and silver today.

He is right about official money being overvalued. Even Karl Marx agrees with that statement:

"The function of gold as coin becomes completely independent of the metallic value of that gold. Therefore things that are relatively without value, such as paper notes, can serve as coins in its place."
(Das Kapital, Vol 1, Part 1, Section 2)


And Robert Mundell, Nobel laureate economist and "father of the euro" tells us how ancient rulers profited by overvaluing gold and stamping it into coins:

"The introduction of overvalued coinage provided a strong economic motive for the cultivation of a mystique. From its very beginning, probably in Lydia in the 7th century B.C., coinage was overvalued; one could say that was its very purpose.

"The earliest function of coinage was therefore profit. Coinage not only helped to market the [gold and silver] found in the Patroclus but the markup on them generated a substantial profit, helping these kings to achieve their dynasty's ambition of extending the Lydian Empire throughout Asia Minor. Accepted at face value as if they had a high gold content, the Lydian staters started out with a high proportion of gold but got progressively smaller, increasing the markup and the revenue for the fiscal authorities."


Robert Mundell

But then he goes on to tell us what ultimately happens:

"Coins cannot of course remain overvalued in a free market. Gyges and his successors were no libertarians. Overvalued coinage implies artificial scarcity, a monopoly and government control."


So the face (fiat) value stamped onto the coins ultimately falls from *above* the value of the metal to *below* the value of the metal, without fail. It did in the 600's BC Lydia, the 200's AD Rome, and again in the 1960's AD United States. Prior to 1964, the silver metal minted into a quarter was worth less than 25 cents. The quarter was overvalued, "inked" silver metal.

After 1964 they had to eliminate silver from the coins because people were starting to hoard that particular form of money for its greater melt value, putting a certain "squeeze" on the money supply and inverting the profit or "seigniorage" the government derives from making coins. Today a 1964 U.S. quarter is valued at $5 while the metal content of a 2010 quarter is only worth five cents!

So is money (currency) the best and highest (most valuable) use for gold? I think not. Is it the likely "next" use of gold in our near future? Not a chance! Another, FOA, FOFOA and the computer literate reincarnation of Aristotle all agree. And as a bonus, we can see clearly that the best, highest and most valuable use for gold is ALSO the most likely use of gold in our future!

Please read the following post carefully as Aristotle describes a pendulum with "gold money idealists" on one side and "easy money idealists" on the other. Notice that while he calls Freegold the "perfect bottom," he also points out that it is the most pragmatic and realistic point in an arc between two opposing idealisms:

Aristotle (8/25/2000; 4:02:42MT - usagold.com msg#: 35502)
The evolution and confessions of an unrepentant Gold advocate

There was a time I gave very little thought to the nature of the money I earned and spent and saved. But as certain thoughts drew me years ago to investigate Gold, as a result of my reckless nature I listened too attentively to the standard Goldbug rhetoric of others and was not well-served regarding the influence it had on my pursuit of clearer monetary understanding or on my discussions with others on this subject. Fortunately I had no investment commitments during that period of tainted perspective, so only my perception of monetary affairs was temporarily damaged, not my meager savings at the time.

Fortunately, my mother raised me right, and I still possessed the capacity to think for myself despite the heavy influences of the Goldbug dogma I had eagerly absorbed with gusto. As I came to realize how many pieces of their puzzle didn't fit, I came to see that the explanation was owing to the well-intentioned reason that much of the "standard Goldbug rhetoric" was based on idealism. Well, that's fine and all, and something worthy to strive for, but in the end, we all must live in a pragmatic world. Happily for the buggiest Goldbugs, this same pragmatism also renders equally null and void the successful implementations of any notions of an idealistic paper-only world as seen in the wildest dreams of Keynesians, governments, and many bankers. As things are, Gold has a very important role squarely in the middle of a pragmatic world, yet too few people give much "theoretical thought" to this middle ground. Arguments are always made from the merits of the lofty points on opposite ends of a pendulum's arc. Pointless for making meaningful progress, to be sure, but God bless the idealists, anyway. (For the record, the Goldbug (Goldheart!) idealism--however unworkable it happens to be--is at least noble in the "eyes" of the individual human spirit, whereas the paper idealism is not.)

After a period of slower talking and deeper thinking, I arrived at a position with a realistic eye on the middle ground giving me clearer monetary understanding as it works in the real world, and also how it COULD in fact (and should) be made to work immeasurably better. Simply put, my thoughts had evolved from their starting point, and I became comfortable with my own concepts of a unique kind of monetary idealism that existed at the nadir--the bottom of the pendulum's arc. Despite reservations about beginning to share such radical monetary thoughts at this Goldbug-infested forum, in truth, it happens to be the finest economics discussion forum to be found anywhere on the web, and the credit goes to the good hosts (MK and TC) along with the high quality of those individuals who "infest" it. And to my delight, there are in fact some here, past and present, (I won't name them because it is obvious to them who they are) who also have grappled this monetary pendulum at the "perfect bottom" at the risk of receiving slings and arrows from those feeling ill-tempered on any given day who occupy the "perfect top" on either side--although given the Golden nature of this forum, our position at the bottom center surely looks like the opposite paper side due to the complete absence of those folks making their case here. In their presence, I have been further nurtured and heartened in my convictions that the international monetary system could and seemingly IS evolving toward this position.

Such has been my evolution toward monetary "enlightenment," and such is my position here--as a pilgrim, not a teacher--at the very bottom and on the fringe of the admirable and idealistic gentlemen who gather here to share their thoughts and visions of a better world and a better monetary system. I certainly didn't come here as perhaps some of the traders have--after having gotten themselves into an investment hole, hoping to argue, defend, and justify their way out of it. I don't feel stressed or defensive in any degree because my investment strategy has not put me on the ropes as others perhaps are. I have maintained a savings/investment position that is consistent with my understanding of how the world works, and to that end, I hold physical Gold at this time in such a large percentage of my net worth that most Gold bugs would tarnish green with envy, or else think ME to be the idealistic one.

Believe it or not, Gold within the system I endeavor to describe during my time here, though my views are unpopular, will be far more valuable (yes, and priced accordingly) than Gold ever could be in the more popular Gold-standard system. Such a radical vision? It promises vast wealth (for current Gold owners) AND international monetary stability (for everyone), whereas the Gold-standard vision won't propel your physical Gold near as high in value and has already shown itself in the past to fail under natural worldly pressures. Which system (and outcome) would YOU rather wish upon yourself and also leave to your children?

Keynes didn't call Gold itself a "barbarous relic," but he rightly called the Gold STANDARD a "barbarous relic," which is also precisely what the system of Gold derivatives and bullion banking of today has become--a relic of a clever scheme originally to offer life-support to a failing dollar-based international system at a time when the world had no other option. This patchwork scheme is no longer needed. On the other hand, freemarket physical Gold, as the pure and essential reserve/savings asset (unlent with no derivatives) is desperately needed in the modern world to indiscriminately bolster each of us alongside modern currencies which are now a permanent feature in the financial landscape. Simply put, Freemarket Gold is the only way for a man to safely coexist with his currency.

Gold. Get you some. ---Aristotle


Somewhere above I said that while the present price of something can be known with precision and certainty, value can only be estimated or guessed at until it is finally revealed. I have explained how paper gold and dollars have "instrumental value" while physical gold has "intrinsic value." I have described how value flows from the use of, or the marginal utility of any commodity rather than from its cost.

I have often alluded to the separation of the monetary functions of medium of exchange and store of value unfolding within our global monetary system today. And I have frequently inferred that gold will not only be most valuable in the monetary role of store of value par excellence, but that once it is, as Aristotle stated, even our purely symbolic medium of exchange will reveal a new stability not seen in decades. I have also touched on the importance of choice, preference and substitution in determining value. And with a little thought about some of the paper alternative stores of value in competition with gold today, you may just discover for yourself a little A-HA moment. (Those are always fun!)

Now I will estimate and guess at gold's value in different roles. The present price, as you know, is $1,390 per ounce. But that price is not gold's value. That price does not reflect any particular use or role for gold. What it reflects is today's position in the journey along the Gold Trail, because gold's use is in the process of transition right now. Gold's use is changing, and so is its value, tugging like gravity (or Jim Sinclair's magnetic angels) on its price.

If gold was only an industrial commodity its true value would be relatively close to its LTV price because of the limited industrial uses for gold, or somewhere around $500 per ounce. (Think of central banks and "giants" as the REAL commercial users of gold.) If gold were returning to its past role as base money in a fractionally reserved dollar-gold standard, its value would probably be around Jim Rickard's low estimate of $5,000. If gold were to take a more prominent role, as say an international currency, it would probably be closer to Rickard's high estimate of $11,000.

And as the international CB reserve asset (NOT currency) standard designed into the Eurosystem quarterly MTM reserve concept, gold's value is probably around $55,000 per ounce. And lastly, if all fiat money caves in like a house of cards and oil is forced to bid directly for gold, we're looking at a value closer to $100,000 per ounce. But that scenario would be relatively short until a new super sovereign currency was resourced. Aristotle wrote, "I discovered that we absolutely NEEDED fiat currency in order to set Gold free." And this includes an international trade currency like the SDR or the euro.

Of course these values are mere guesses on my part. But I'll tell you that the Eurosystem MTM Freegold concept looks to be most probable by a longshot. And perhaps somewhat imminent as well.

If you still cannot see how a wealth reserve ASSET can be more valuable than a currency, look no further than the $IMFS. Look at the total value of currency versus the total value of wealth reserve assets denominated in currency. It is something like 10 to 1. Not dissimilar to my 55,000:5,000 ratio above! And for more on this train of thought, as you read FOA's post below, think about how a PHYSICAL wealth reserve asset in FINITE supply will hold REAL value differently than the currency-denominated paper assets of today.

Now here's the FOA comment that seeded this post. The above is just my long-winded intro. ;) It is a comment about value (obviously) and a checklist for the unfolding of Freegold. FOA had wanted to post this on the Gold Trail, but it never made it due to technical difficulties. It only appeared as a link a week later. So some of you may never have read this before. A few final words by me are at the bottom. Enjoy!

Trail Guide (8/26/2000; 19:16:31MT - usagold.com msg#: 35569)
Couldn't post this on the Gold Trail? Something Wrong?

Hello Cavan Man!

In your post of ---- Cavan Man (08/21/00; 19:49:05MT - usagold.com msg#: 35278)---- you asked for more detail. Something like a grocery list to check off as events move along (smile). The exact question came as: ----"What are some of the impediments to moving ahead with your "freegold" scenario?"----

Well, Cavan Man, one of the toughest problems investors have with following the Gold Trail stems from their perception of how our modern dollar money values things in the market place. I, we, all of us have discussed this extensively. Often from a somewhat different view than mine.

From my interaction with people of various far reaching world backgrounds, one thing is clear: Investors and regular workers with a Western slant do not grasp what wealth is. Overwhelmingly they see their currency and paper investment portfolios on an equal footing in value with the same "real things" that raise our living standards. Yet, in real life, they cannot be equal because these paper assets are only an exercisable future claim on our "real things in life".

Take my debate "Against" Goldhunter as an explanation example. His perception is typical in that the ---"prices bid for futures contracts are the market value of gold"---- (see msg#: 35427). These future contracts serve no more purpose in setting pricing function than do all modern paper assets we today hold as wealth.

In this larger sense, after rereading my post to him,,,,, one can see where the entire dollar world itself has become a "futures pricing arena" that "undervalues" almost every real usable item we function with in daily life. The dollar asset system, as we know it today is used as a value setting tool even though it,,,, like gold futures,,,, does not entail the removal of real goods from circulation.

But wait, you say,,, of course it does,,,, we buy and sell for our life's needs every day using dollars! Yes, this is true, Cavan Man but in that process we as an economic society only use a tiny fraction of this paper asset wealth to do that physical trading. As an example:

Look at the daily trading of gold futures and gold future "look-alikes" in London as they trade in a huge volume multiple of the actual physical market. As this lopsided trading is a comparison valuation that understates the value of gold,,,,, so too does the collective acceptance that dollar assets are held as equal to life's physical needs,,,,,, also understates the real value of all things in our lives.

You see, a futures system that functions as our currency or currency contracts, values physical assets without taking these assets into our lives and by extension taking the assets out of the market. This is the current money world we live in. The dollar in your pocket is part of a much larger paper wealth system that has evolved into today's money system. A reserve system that is not tested against real "supply and demand" values. With these money futures we may leverage our perceived wealth by thinking we actually control "real assets" just by holding contracts or dollar denominated paper assets. In reality we only own claims on each other's ability to produce,,,,, just as a futures contract holder only holds a claim on another to produce physical. Expand this function to a level where today's dollar world is and we can grasp what others see in the real value of gold.

This is the reality of perception that Another speaks of when he said -----"your wealth, it not what your currency say it is"-----.

Truly, this statement was larger than life to anyone that could understand its implications then and correctly act on it today! Unfortunately, most readers just went out and brought more paper denominated dollar gold assets. Many have lost a bundle thinking they were hedging when they were just playing the same dollar game.

This takes us back to your initial question:

Western society and Western influenced investors cannot grasp gold's value because they mentally must denominate it into currency first. To do this they turn to the "market place" as the undisputed tester of values. But, as shown above, our market place uses a currency system that is entering the end of its timeline and therefore can no longer measure "things" on a simple supply and demand value basis.

Some of the things on our "grocery list" are being checked off as we walk this Golden Trail.

==========
This currency systems and the evolving nature of our current society that created this system is in the process of radically changing its paper wealth structure. The government, as an extension of that society begins to support and maintain the asset value of almost everything. This is the engine that drives an eventual hyperinflation. Not a typical business expansion inflation we are used to, rather an all-consuming, ending inflation that does not stop. At this point the concept of sound money takes a back seat to maintaining majority asset holdings on a permanent plateau. By extension, the official stance is moved to promote all paper assets as "national money". Stocks, bonds, business function and even general welfare is elevated to an equal footing with the need for a good sound money in your pocket. The mood becomes one of "what good is a sound dollar if we are deflating"? Check that one off your list because we are well on that road.

============
The international value of major currencies become more a function of "who can manipulate them the best" rather than their soundness. Forget the trade deficits, asset price bubbles, debt overflows or interest rates,,,,, it's who is best at controlling currency derivative function. Traders buy using "official control" as their determining value fundamentals. Truly, at this stage the prospects of a price deflation and its opposing currency hardness are a distant joke. The US has now moved to using measures once reserved for third world systems when it comes to playing the money game. Example: "our national debt is being paid off"! Or the CPI rising .01%! Check this one off your list, it's happening now.

===============
Those with power outside this game are seen making long term preparations for the day when the US dollar inflates away. They see where the dollar value is only a function of trade flow manipulations. Not real economic progress. They see where throwing ones entire economic system wide open to "bubble expansion" policy in a "come and get it while you can" experience,,,,, can only end one way. So they play the game while there is time and they play to win with gold! As USAGOLD poster Henri put it today in msg#: 35547:

---- " If one considers wealth to be the accumulation of unencumbered assets of enduring value, then the pursuit of fiat profit to be converted to real wealth makes sense.-----

(nice post Henri)

The unanswered question that "no one" could ever understand was "outside the other CBs, who has been buying all this gold over these years?" Check this one off your list my friend.

================
The Washington Agreement has placed us "on the road" to one of the most exciting changes for our current physical gold market in its short 25 year history. This part of the world reserve currency system was about to radically evolve with respect to the world dollar gold values. To date, the ongoing dramatic fall off of LBMA trading from its (also) short public life is leading to an eventual official evaporation of dollar based paper gold banking.

Someone in Another's group pointed to that spike in paper trading long before most had ever heard of LBMA,,,, and did so by saying that a drop below $360 would cause it. That ensuing round of massive paper playing was but a backstop to maintain the dollar reputation with low paper prices prior to Euro presentation.

I point this out because many new watchers of our gold wars have no knowledge of this important play on the political currency chess board.

This paper game got out of hand before the Euro was born and the BIS was ready to hold the gold line at $280 if needed. But, the Euro was born and is now a functioning currency. Today our paper gold game has come full circle and most of the players that know anything are shaking at the prospect of a pure physical market that will stand next to the Euro.

Forget the gross volumes of derivatives on the books of majors, they don't mean a thing. They can keep writing contracts all they want but with trading volume falling away, eventually there will be no market to value these assets.

If this process is allowed to mature fully, major pain is coming to paper hard money investors worldwide. They have hitched their wagon to assets that require an operating paper system to sell into. Outside the private markets for existing and circulating bullion and coins, the entire industry will shutter to a halt as the mess is worked out. Investors will be kicking themselves as bullion soars while an extended workout phase brings their asset values to almost zero. Sure, something will give,,,, maybe? Maybe we are at the paper price lows now?

But most "regular" hard money people that read these Thoughts are in the game for asset preservation during a world currency crisis and or inflation. Ten ounces of French gold coins and $60,000 in mining stocks and derivatives will make them sick during such a paper work out. Other proud hard paper asset holders proclaim they have millions in the industry and are not the least worried. They also said the Euro would never happen, oil will never see $30 without $600 gold and $280 gold would mean a major US depression! Well,,,, Don't check this one off yet. It's still playing out.

=======================
Then there is oil. I will repost my recent and now "edited" post to oldgold:

Trail Guide (8/25/2000; 8:55:32MT - usagold.com msg#: 35512) Comment

oldgold (8/25/2000; 8:12:54MT - usagold.com msg#: 35510)
Energy and Gold

Hello Oldgold,

I know you have held a forceful opinion for some time that the US can and is still controlling oil producers. Your thinking was no doubt rightfully influenced by our last ten to twenty years of experience with the political world of oil.

What has been changing for the last number of years was our realization that a new currency would be available to the world. True, this Euro is nothing to write home about now but we as a Western thinking group tend to underweight its strategic importance as an "available alternative" to the dollar if needed. This subtle fact has shifted the playing field considerably when viewing the US ability to control oil flow.

Edited note: this next item is where we should watch for the dollar to be impacted by an increase in oil prices. For oil prices to be this high after all the political favors we are owed,,,, something must be countering that leverage. The US must be endorsing the move?

---------- Today, oil flow has moved from playing a fundamental game of pricing "use value" with supply and demand to pricing its "monetary value" in supporting any major currency block. Concessions are now there for the taking by oil producers. Dollar prices for oil can rise considerably higher with the US giving behind the scene support for this action. In addition, the world paper gold markets can and are being dismantled as a further concession to retain dollar settlement of oil. -------------

Strangely, the coming surge in physical prices are now a 180 degree shift from keeping them low in support of oil flow.

Edited note: This next was the purpose for the short history of the LBMA high volume. Its use is now behind us.

In the future, rising physical bullion stores (and dollar prices) will play an important role in playing a failing inflationary dollar against an ever likely increasing shift towards Euro oil settlement. No matter how this eventually plays, our dollar paper gold markets will dissolve as free priced bullion supports the EBS / Euro system.

Oldgold, Your posted article goes a long way to seeing the mental shift some Western thinkers are only just now grasping. It seems even Goldman has printed a paper calling for 50 oil! It will be very interesting to see how their stock price is valued as they try to ride the middle ground between a short gold position vs. long oil. In the end their much vaulted paper gold game should make them a ton of money, but without a market available to realize those gains? The more GATA talks, the more the paper world sweats. Not from a short squeeze, but from their market being officially evaporated. I know you, oldgold must also (smile) as I do at that thought!

=========================
Cavan Man, check off rising oil prices.

We are on the road to "Freegold"!

thanks
Trail Guide



A Final Word

Many have asked about an eventual exit from gold after the Freegold (physical gold market) one-time revaluation is complete. Aside from the obvious answer of using your wealth in ways that will rebuild a broken economy, this is a complicated question about value storage to which I will now give a grossly simple answer, only because it pertains to the subject of this post. And it's probably not what you'd expect.

It is an extremely small group of people that followed ANOTHER's advice 13 years ago and sunk their retirement nest egg entirely into physical gold. And the following is my personal opinion only as it pertains to this extremely small group.

The whole point of an over-sized position in physical gold now, like Aristotle described above, and as explained by ANOTHER, is to let your wealth ride out this inevitable earthquake in the one asset that will benefit the most. Once the earthquake has passed, such a large position will not be as necessary.

Giants don't go "all in" to gold. And they won't exit their positions for reasons I have explained in other posts. CB's are different, they don't collect non-monetary assets. They also won't exit their gold positions. And most average gold investors will be lucky to retain their present purchasing power. They won't exit their gold positions until they need the money for expenses.

So the "exit" of this extremely small group I am talking about will be inconsequential to the Freegold price of gold. In fact, there will still be a rush INTO physical gold while ANOTHER's followers quietly exit a portion of their over-sized position in favor of other wealth assets that can be a little more enjoyable in everyday life than gold hidden away in a vault.

During normal times there are many valuable, non-essential, non-industrial, non-economic physical assets other than gold that protect your purchasing power just as well as gold. And they can also be enjoyed more openly in your home and your life. These are what Richard Maybury calls "endurables". They include: Real estate, fine art, antique furniture, rare collectibles, ancient artifacts, fine gemstones, fine jewelry and rare classic cars. None of these items will do well in the brief gold revaluation as ANOTHER explained. But other than that one, historic, brief burst in time, they do quite well.

Sincerely,
FOFOA

[1] While Carl Menger is considered the father of Austrian economics, he was not the only "father" of marginalism. Per Wikipedia there were three: Jevons in England, Menger in Austria, and Walras in Switzerland, followed by many more in "the second generation."

251 comments:

1 – 200 of 251   Newer›   Newest»
Greyfox "It's the Debt, Stupid" said...

FOFOA said: Once the earthquake has passed, such a large position will not be as necessary.

Is this when we should buy our BMW's with our fractional gold coins?

Tyrone said...

Where have I seen that steak, before? Hmmmmmm... you know, there was a time when I thought... oh, never mind.

Saul said...

Yet another stand out piece! Great work.

For an alternative and slightly whimsical perspective -- see this post of mine on the value of an ounce of gold in comparison to ... well, best to just read it.

(Edit : Tried to get Link to open in new window, couldn't work out how. TARGET attribute rejected, oh well! Right click on the link and do it that way....)

DP said...

I am once again in awe of you, FOFOA. You have quietly stood back and let everyone else discuss their concerns and questions, and sucked them all up, deliberated on them, and produced yet another quality response to everything that has been raised earlier (that I can recall at least). You're an inspiration.

This just happens to be the finest economics discussion forum to be found anywhere on the web, and the credit goes to the good host along with the high quality of those individuals who "infest" it.

It is a great pleasure for me to call this place "home". Thank you.

whatever said...

Stunning. I read often. I post rarely. But this post was simply one of your best.

Fauvi said...

FOFOA,
did you enjoy Trichet (Trickser) press conference?
Price stability – authority – non- standard activities= EQE to infinity
Where is the euro better than the FRN, huh?
Just because is marked to market?????
How long can that go on and how long will you maintain your, A/FOA stance?
Who gives a damn if some gold comes into action some years ahead if the suffering of our society will go on?
And for those who smoke something special, please come to Europe and ask the people what stability the euro has brought us. The prices have doubled, whether you believe it or not. We all hate the system, the euro, the EU bank and politicians oligarchy.

And now stone me and say how stupid I am! I will restrain myself in expressing my sincere opinions. Actually I don’t even expect you, FOFOA, to come down to this level of discussion.

DP said...

I will, Fauvi. I too am from the gutter and will call a spade a spade. :-)

"There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved." - Ludwig von Mises


Europe : voluntary abandonment now

US : final and total catastrophe later

UK: indecision, hoping to put off the inevitable but beginning to accept abandonment might be the better course of action.

You're getting there early and will get all the good seats.

DP said...

You might also like (or hate?) this, Fauvi

What is the targetted 2% inflation rate going to do to your purchasing power?

S said...

@DP
"UK: indecision, hoping to put off the inevitable but beginning to accept abandonment might be the better course of action."

What is curious is that Asasange is in the UK (making no judgement on what the Wikileaks dump is or isnt). Who knows what to make of the Foundation X discussion, but the UK, being at this a lot longer than the US, must know that the Fed will not hesitate to torch the GBP, notwithstanding the gold sales. As such your point about indecision seems absolutely spot on.

DP said...

"Foundation X" in my mind surely has to be either the Saudis or the Rothschilds.

Assange is probably here at Cameron's invitation to get some kind of honour for services to the country. Perhaps not releasing the some gems on HSBC, Barclays, RBS and Lloyds.

DP said...

Actually S, RE: "Foundation X", we could really use some help with this credit problem we've blown up, couldn't we.

How big of a debt mountain has the UK got to climb...

Fauvi said...

DP, you think I haven't noticed that before?
BTW, before we had the euro the price of a roll was the same in pf. as now in cents, same goes with books and almost everything. My vacations in Europe were dirt cheap. Now they aren't any longer. How is that price stability of 2%???? The PP of my fixed income is diminishing year to year and EVERYBODY has noticed it.
First I thought I can withstand it, but some years ago I understood only the higher middle class can.For the time being I have two alternatives: reduce my living standard if I still want to save in hard money or spend!
That means for me less food, no vacations - as it goes without saying the rest of the items aren't even taken into consideration.
And it's long ago I've stopped being a spender, which I never was. We are not big Black Friday adepts here!!!

DP said...

Interesting plan from Mish, that could easy stick a spoke in the wheel...

ECB Offers "Unlimited Cash" for 3 Months at 1%, Buys Government Bonds to Fight Acute Tensions; Ireland, Take the Money and Buy Gold


Mish: Take the Money and Buy Gold

If Ireland wants to get creative, it should take Trichet up on the offer right now for "unlimited cash" at 1%, and put the whole shebang on gold.

In a few of months when the payment is due, Ireland can tell the ECB that it will keep the gold to start a new gold-backed currency and the ECB can keep the IOUs. That would get the ECB and IMF talking about haircuts in short order.


DP: OK, but what are Ireland going to pledge as their collateral for this additional loan? They just had to negotiate to 5.8% for a loan of a specific size, if they could really have as much money as they want for nothing in return, why haven't they just been given a bail-out at 1% like this..? There must be stipulations about what you have to pledge.

DP said...

@Fauvi, I hear you loud and clear. I hear you in stereo because I have the same music playing out of my own personal left speaker as you're playing out of my right just a moment ago. ;-)

As I said earlier, I think in the Eurozone you are getting in ahead of the rest of us. When we arrive you will be already seated and in relative(!) comfort, ready to watch the remainder of the show (which you will then start to enjoy a lot better). There won't be chairs for all of us I suspect.

A stitch in time, saves nine.

DP said...

BTW forgot to add, vacations aren't in the CPI. But rolls are!

I know well this doesn't make it any easier to take, just an observation that felt relevant.

Patrick said...

you can't argue with this one
http://www.motorauthority.com/blog/1023219_golden-rolls-royce-phantom-drophead-coupe-lands-in-abu-dhabi

Michael H said...

Great post, FOFOA. Much to think about.

1. Here's a way to turn the "how can an oz of gold be worth more than a BMW?" question on its head:

How can 6,000 printed pieces of paper be worth more than a new BMW? How can electronic digits be worth more than a new BMW?

Similar to your responses to the question of "how can anyone afford $50k/oz gold"?


2. I think the biggest problem with the LTV is that it takes only labor into account. Once energy becomes commonly used in production, the use of energy leverages labor (so that it takes fewer man-hours to produce a good), but in the process irreversibly consumes natural resources. Now the mental calculus of value becomes more complicated -- how do determine what the relative value is between human labor and the (permanent) depletion of natural resources that the economy depends on? Resources can be energy but also basic materials.


3. The idea that 'hoarding would be channeled into gold' actually puts gold in about the position of the stock market and other paper 'investments' over the past 30 years.

From 'Dying of Money: Lessons of the Great German and American Inflations' by Jens O. Parsson (1974):

"In truth, speculation in paper investment serves not to cause but for the time being to help ameliorate price inflation. Stock market speculation is a principal relief valve concealing latent inflation pressure. Booming stock market prices are themselves a form of price inflation, normally the most inflated of all, but never thought of as such. The stock market in America harbored a large portion of the latent inflation but no one disliked it because they were thinking of paper profits rather than the prices of real values. Floods of money which were kept busy inflating the stock market were diverted from inflating other prices. The stock market therefore relieved pressure temporarily from inflation elsewhere. The government had artificial devices for locking money into investment, such as its growing supplies of government debt and the tax inducements drawing money (about a tenth of the national wealth) into pension funds, and these government dikes around investment markets stored up inflationary potential in great brimming reservoirs and out of harm’s way." (MH: note that there were even more 'dikes' added after this was written)

This idea actually closely mirrors FOA's statement that "... we buy and sell for our life's needs every day using dollars! Yes, this is true, Cavan Man but in that process we as an economic society only use a tiny fraction of this paper asset wealth to do that physical trading."

Replace 'dollars' with 'gold' in the above quote -- in a freegold scenario, would we would only use a tiny fraction of the world gold hoards for settlement purposes? Would gold be 'overvalued' so as to maintain the under-valuation of 'real things'? By 'real things' here I mean productive assets and goods with use value, including food.

Michael H said...

4. The concept of 'preserving $XXk amount of purchasing power' borders on the nonsensical to me. It seems to be used as a shorthand for a more nuanced concept of value. I call it non-sense because it seems akin to preserving a house built on quicksand -- the $XXk in purchasing power is a moving target, not an absolute.

Regardless of the dollar-denomination, I am having trouble even with the concept of 'preserving purchasing power' in undenominated terms.

In times of economic expansion, there will be surplus goods and services, and 'savers' will buy gold to hoard their wealth. The exchange rate stuff:gold will rise. But in times of economic contraction, there will not be enough goods to satisfy everyone's needs, and those that had saved will try to cash in, and the ratio stuff:gold will decrease.

Following this train of thought, the way to build a large gold hoard in this cyclical economic freegold climate is to dis-hoard gold during an economic expansion in order to acquire productive assets, then use the productive assets during an economic contraction to supply scarce goods in exchange for 'cheaper' gold.

Michael H said...

Finally some musings:

How long did it take for the power of the landed aristocracy to be eclipsed? Because freegold seems to be a transition of similar magnitude. Banks would go from being the seat of power and control to being public utilities. Who (or what) will replace banks as the power brokers of the world?

DP said...

Michael H: By 'real things' here I mean productive assets and goods with use value, including food.

And silver?

mortymer said...

Get fully aware for the infinite.
Experience in learning.
Too fast for most to even begin to sense,
To the express purpose of the knowers, constantly measuring this edging series of never ending movement.
Everchanging directions.
You have only to learn this... the slower you proceed, the more you see and learn.

Knowers know because they are the slowest and therefore see all, they know.
The knowers know... because they are the slowest and therefore sees all ... know.

(influenced by 4Hero)

sean said...

So let me see if I got this straight... the utility of gold is that it is not a utility.
I love this blog!
...seriously, keep up the good work! :)

mortymer said...

One funny for readers:
It seems that even WTO has a solid understanding in purpose of gold as it defines:

-> "...104 The statistics used relate to trade in goods (excluding gold held as a store of value), services and intellectual property rights as reported in the Balance of Payments"
M: What? Gold as a store of value? No way... Kidding, right? :o)
http://www.wto.org/english/thewto_e/acc_e/cbt_course_e/c4s9p1_e.htm
(+ also in other files if you search "gold held as a store of value")

So its also educational if you check this one:
"OVERVIEW OF DEVELOPMENTS IN THE INTERNATIONAL TRADING ENVIRONMENT" 2009

holdinmyown said...

@MichaelH
"Following this train of thought, the way to build a large gold hoard in this cyclical economic freegold climate is to dis-hoard gold during an economic expansion in order to acquire productive assets, then use the productive assets during an economic contraction to supply scarce goods in exchange for 'cheaper' gold."

Seems to me that assuming a cyclical freegold climate, during an economic expansion I would want to over-produce (super-produce) in order to acquire local fiat currency profits that I could then save in gold (currency bids for gold). During an economic contraction I would then dishoard my gold in order to buy cheap productive assets (when the stuff:gold ratio is low) which would set me up to produce even more stuff when the cycle turns again.

Dave Narby said...

Just getting in line so I can get comments via email...

Paul said...

MichaelH, Holdinmyown

I believe a big advantage of freegold would be its ability to mitigate against the economic cycle you describe. During expansion, more profit would flow into gold seeking capital gain, and less would seek return by creating additional excess capacity. Similarly during contraction, capital would flow out of gold and into production, seeking return on capital. In that sense freegold acts as ballast, or a shock absorber as someone said, to smooth out the bumps in the economic road. It’s a form of continuous clearing.

What we have now is the worst of all worlds. Since capital has no reliable way to insure itself against expansion induced inflation, it’s forced to try and insure itself by seeking return, thereby increasing the expansion. We get “positive” feedback, horrendous boom bust cycles, and mal-investment that results in the disgusting spectacle of Cyber Monday.

http://www.youtube.com/watch?v=fOshw4kIGR4

Wendy said...

FOFOA in my opinion this post is your very best work. I had a couple of WOW monents that still require untangeling in my head.
I'm scrolling up and reading the post again.

Thanks so much for hosting this blog, and the huge job you undertake on behalf of us all. (and NO, freegold has not become my religion ;)

Wendy

holdinmyown said...

@Paul
I admire your optimism regarding the effect that Freegold might have. I do not disagree that Freegold should help moderate the cycles that we all have come to expect. However I do not believe that Freegold or any other monetary/financial system that mankind can imagine will eliminate business cycles. I believe that these cycles are caused by the interference of the central banks (or in the absence of CBs, by the financial powers-that-be). Humans will always arrogantly believe that they can improve on free markets and that they have the answers to solve the problems created by economic scarcity. It is this interference that results in improper pricing signals that in turn lead to malinvestments and business cycles.

costata said...

Paul,

+100

The current system is pro-cyclical.

A friend sent me a link to this post by Steve Keen. It is SK's submission to the ongoing Australian Senate banking ask-no-serious-questions inquiry.

http://www.debtdeflation.com/blogs/2010/11/30/competition-is-not-a-panacea-in-banking/

Keen has identified a -0.82 correlation between debt and employment in Australia with a 3 month lag. When debt goes UP employment goes UP.

If debt is static or falling the trend for employment will be DOWN. Keen asserts that the correlation is equally applicable to the USA.

By inference it should also be relevant to any debt based economy. I can think of a few off the top of my head.

Would you like to buy a vowel?

W- -R- S-R-W-D!

Paul said...

Hi Costata

Thank god for people like Steve Keen. Even if TPTB don’t listen to him, which I’m sure they won’t, having a “proper” academic coming to the same conclusions on debt based economies as we all have is much needed positive confirmation. I don’t know about you, but I do wonder occasionally if we are all deluded, and actually there is nothing fundamentally wrong with our financial system. It can be hard sometimes not to be swayed by the endless “business as usual” bullshit spewed out by most commentators. I see its risk on again at the moment.

Museice said...

"Western society and Western influenced investors cannot grasp gold's value because they mentally must denominate it into currency first."

For any new readers out there this is a great place to start unlearning. And then read this piece again.

Great job FOFOA

Museice said...

Oh...

Did you know that there in no Wikipedia entry for FOFOA or Freegold?

Something should be done about this!

costata said...

Paul,

The game has changed. The online, all the time, (just about) everywhere net has broken the stranglehold of the MSM on the distribution of "news" and analysis.

IMHO one day any pundit who claims to be able to analyze economies, markets etc will have to display their track record. BS will not cut it. "Show me your archive" sums up what I am driving at.

If an expert's archive shows them to have been consistently wrong they will be discredited. Perhaps we will see the emergence of a true meritocracy.

costata said...

Muse,

Search "Yeti" in Wikipedia. FOFOA is there.

Jenn said...

|> Museice said...
|>
|> Oh...
|>
|> Did you know that there in no Wikipedia entry for FOFOA or Freegold?

You know Blondie, I really think this would be an opportune time for you to introduce the rest of the world to the concept of Freegold. I may be wrong here, but from my perspective you are uniquely qualified for the task.

Once upon a time you made an interesting post that outlined the three distinct functions of money.

Store of value
Medium of exchange
Unit of account

(the first being most germane to our discussion.)

What do you think? Shall you be the one to bring FOFOA into the world of Wikipedia? I am willing to help.

--Jenn

Motley Fool said...

Greetings FOFOA

I would like to start with the observation that an intellect such as yours is rare. It is a pleasure to have stumbled across your blog.

Given the long posts you create I assume you will not mind a long response. There are many things I would like to say, but I will restrict myself to only a few questions. I can say that I agree with the bulk of your post.

First a little background. I started my own education on economics about 18 months ago. As such, my knowledge is fairly new and incomplete. I hope that by restricting my questions to only a few, you will have the time to answer.

I would actually only like to ask one fundamental question, though I will ask it two ways. I see this as the fundamental lack of my understanding of your work.

Due to lack of a proper internet connection and lack of time, I have not had the chance to read through your whole blog. I assume that if I did this question would be answered, so I ask your forbearance in having to answer something you have probably already discussed, presuming you do of course.

One of the important corollaries of your Freegold concept seems to be that the medium of exchange (money) should not also be used for saving. Though I have seen you take this stance in the few posts of yours I have read, I do not understand why this is necessary, or indeed a problem.

So then my first question, why should the means of saving and means of spending not be the same thing?

Given that you have a link to the work of Prof. AE Fekete on your site, I presume you are familiar with his work.

My second question is thus, what problem you see with the extended Real Bills Doctrine as adapted by Prof. Fekete ?

Personally his concept makes perfect sense to me. Briefly, that the function of gold be split in two, one part fuelling consumption of goods used in a period not exceeding 91 days, backed by non-inflationary Real Bills, and the other being a medium of saving.

I am sure we are in agreement that a 100% gold standard is unworkable.

I am of the opinion that one of the fundamental problems with the old gold standard was that gold was of fixed value as opposed to variable.

The way I see it, in a free market capitalist economy, there will always be a drive and actualization towards higher productivity and efficiency. This means that items become cheaper to produce and acquire as time passes.

In a gold standard system, this leaves two options. Either the gold price is fixed and then the price of items must decrease over time, which is psychologically unpalatable. Or the price of gold must be allowed to spontaneously change, depending on market conditions, which will leave items to either have the same price (no increase in productivity and consumption preference) or increase.

I deducted that 100 years ago, having a price of gold changing continuously would have been hard to calculate without the use of computers and it would have been difficult to relay this information everywhere continuously. Today neither of these are problems anymore.

If in 1971, or prior, the US revalued their gold, continuously, to the real market rate, as opposed to leaving it at a fixed $35, I wonder if the closing of the gold window could not have been avoided. I should add that of course since the international bills market had been sabotaged, it is difficult for me to predict if this would have altered the overall result, except as delay.

I look forward to your response.

The Fool

DP said...

A little festive cheer I just came across, that I thought some of you might enjoy

Youtube: Hallelujah (Christmas Sucks)

DP said...

@MF: Less haste, more speed :->

DP said...

Yesterday I suggested "indecision" in the UK.

Today we have this article at The Telegraph, which I think backs that suggestion up fairly well.

Institute of Directors warns Government not to 'wobble' on austerity measures


Don't go wobbly, George.

DP said...

I think that article provides a good illustration of why externally-enforced fiscal responsibility from our politicians, for example as provided by the euro, is necessary and A Good Thing.

David said...

I have an off topic question for the "hive mind" here: Has any US citizens posting here considered moving out of the US before it implodes -- and then come back after the dust has settled?

Or... will those that hold Gold not need to leave this sinking ship because Freegold will be our life boat?

Thanks....

sean said...

@MF,
It may help if you start trying to look at things from the other direction. For example, you said "the problem gold standard was that gold was of fixed value [to the dollar]". But the problem was more that the value of the dollar was fixed to that of gold.

I would like to comment on your statement: "in a free market capitalist economy, there will always be a drive and actualization towards higher productivity and efficiency". I think this is a very optimistic view - in reality, what is driving profits is sales vs costs, so while there is an increase in product desirability (via advertising and some technological progress combined with novelty) there is a natural drive towards decreased quality (durability of a product is a disadvantage as it decreases subsequent sales), and increased worker exploitation. This trend is obvious in the past 30 years. A second source of profit is by skimming off the profits of others, and we have also seen an incredibly successful finance industry built on this "ideal". Its productivity is debatable though.

Lastly, FOFOAs posts are long, but highly readable. You won't understand freegold by picking out paragraphs here or there. I've been reading the archives for a while and I'm just starting to get my head around it (looking from the other direction). If you can, print out or save his entire recent post on the value of gold as it explains many things.

DP said...

@David: I am not a US citizen, but a UK citizen. I wanted to answer your question in spite of not being the target demographic though. I am seriously starting to consider whether my family and I might be better off across the Channel (and not just because of the snow!). If the wheels should fall off here, it could get very very ugly, very very quickly. I am thinking it might well get ugly in France, but less so. I was looking at what is available for sale in Lille just yesterday, given the ease of getting back from there to the UK, or indeed hopping instead to Belgium or Germany if circumstances were to indicate it might be wise.

My conclusion on this thought, so far at least because this is by no means a completed thought exercise for me, is perhaps Eurozone being brought into line already and UK still dithering and undecided, it appears likely that things will come down sooner in the Eurozone, but won't collapse as badly. Perhaps I am best served to wait, and hope to do something meaningful in the window between the two storms. Hmmm.

julian said...

Dear FOFOA,

Many Thanks for such an incredibly deep and insightful work.

This is exactly what we all needed, or at least it's exactly what I've been needing. Recently I've been getting into great debates with my cousin about gold vs. silver. It all hinges upon value, and this post of yours really opens things up for my understanding. So again, thanks for being aware of our intellectual needs, like a great educator!

I am especially happy to have seen the inclusion of Plato, who is my most favorite author ever.

My journey in contemplating Value started for serious just over a decade ago. During most of that time I have spent learning and contemplating the "people-based" Good. Only in recent years has my attention turned equally to "objects-based" Good.

Anyway, much health and wellness to you, for many many posts to come!

Motley Fool said...

Hello sean

For the purposes of this specific discussion, I would say you are nitpicking. In different discussions about gold, your viewpoint is valid.

Looking at the current broad economy, your comment on decreased durability seems valid. I am of the opinion however that it is due to the systemic faults of the current global economic system. As regards durability, there is for each individual a choice as regards affordability vs term of beneficial use. Some may choose a cheaper item, with the realization that it wont last long eg. cheap Chinese batteries. Others prefer paying more for greater durability eg. Duracell batteries. Each item has a ratio of cost versus useful lifetime; ratios that can be compared to compare value.

In a free market economy, each individual should be free to choose, for each item what he prefers. Both items will have utility for the target market and neither should affect, much, the production of the other, inasmuch as they will form a natural balance.

Increased worker exploitation is definitely a symptom of current economic policy. In a advanced economy worker exploitation is only possible to the extent that people allow it, in which case it is not truly exploitation but instead a agreed upon contract, and rates are based on availability of the workforce in relation to other industries. If you are referring to third world countries, the problem stems from fluctuating and manipulable currencies and first world socialistic policies of subsidies.

I read this whole post, not merely paragraphs. In total I think I have read only 5 or 6 of FOFOA's posts, but I did read them in their entirety. Printing is not feasible and time constraints means I wont get around to reading all his posts for quite some time, it is not my to do list though.

Regards

The Fool

ad said...

@MF

The medium which is saved in, should not be the same medium which is loaned out.

To simplify, if your savings in the bank are loaned out and the borrower defaults your savings are lost.

Motley Fool said...

Hi FOFOA

Firstly, my apologies for posting again without giving you time to reply to my previous comment.

It felt necessary.

The reason being that upon further reflection I have found that I have a huge problem with your Freegold concept. At this point I should mention that since, as previously stated, my exposure to your work is limited, my understanding of Freegold is very likely imperfect.

To help your reply, I will state that part of your idea, as I understand it, that I have a problem with.

From what I understand, under Freegold, all or most gold would be in the safe keeping of a institution, or several spread across the world. People would then be able to purchase shares of these gold pools, reflecting their respective wealth.

Whether these institutions are government run or privatized are irrelevant for the purposes of this discussion.

The problem I see is accountability. Any institution controlling such a large share of the worlds wealth would inevitably be the victim of corruption.

While they may initially allow inspections to verify that they actually have the amount of gold they claim, in time, say 20 years, their power obtained from controlling this much wealth would allow them to refuse inspections or pay princely sums to whoever does inspections so that they lie.

Especially taking into account the serious security that would be needed to protect such vast pools of gold, their control of those regions would be complete.

Huge benefits would be possible for them by fabricating the amount of gold they possess. For one they could simply sell such gold illegitimately on the black market, while keeping that gold on book.

Human fallibility and corruption, no matter how noble the intent, whilst controlling such vast wealth/power, makes me prefer a system where the populace controls the gold supply directly. If they choose to store it with a institution (bank) for a return, individually, then that is fine and the risk should be their own.

Even if, from these gold pools, people could call upon their physical allocated gold freely, several factors would make that insufficient supplies are withdrawn from these pools at any one time, to serve as a test to ensure that the bullion they say they have on hand, is actually there.

I look forward to your response.

Regards

The Fool

Motley Fool said...

Hi ad

Part and parcel of the concept of loans, is the concept of risk.

Whether you make a loan to someone from your personal wealth, or give it to a bank and they loan it out, risk exists.

One idea behind banks is that they are better able to scrutinise suchs risks and make better decisions. As such, implicity, they share your risk, and for this as well as their judgement service they share in your profits.

If the borrower defaults, someone has to take that loss.. that is the risk part. :P

We cant have a system whereby there are no losses from default, that is insane.

Sincerely

The Fool

Motley Fool said...

Hi sean

I did post a response. If it does not show up by tomorrow, I will repost.

TF

Fauvi said...

DP
I would go to Belgium, Flemish part. Conservative producers very entrepreneurial. Once they have a secession they are much better off.

ad said...

@MF

Yes if you want to partake in risk for ROI thats all well and good. But thats the point, not everyone wants to partake in risk when saving...but one has to - to maintain purchasing power when saving no?

A "savings account" in a bank is not a safe haven, the interest earned is your ROI as the money is loaned out.

We cant have a system whereby there are no losses from default, that is insane.

Who takes the loss? Borrowers or savers?

Motley Fool said...

Hey ad

In a paper monetary system, because it can be created at will, yes one has too.

In a system with gold as basis, no.

The person who should take the loss is the person who was willing to take the risk in order to realise a possible return, hence the saver should.

The borrower also takes a loss, a loss to credibility, making future loans very difficult to obtain.

TF

raptor said...

Graph: Reserve Bank Credit - Securities Held Outright (WSECOUT)

http://research.stlouisfed.org/fred2/graph/?chart_type=line&s[1][id]=WSECOUT&s[1][range]=5yrs

Blondie said...

ad, MF,

Everyone holding medium of exchange takes a loss, as they are all being diluted.

Jenn,

I'm not sure what it is that you see that makes me "uniquely qualified", but I am flattered nonetheless.

Other commenters may not share your feelings.

FOFOA may not be comfortable with the idea, being that he has stated, quite strongly, that Freegold cannot be "simplified". I am in agreement, in that like so many things, masses of detail must be understood for a simple description to find context and thereby meaning, which defeats the purpose of the simple description.

The simple "shortcut" is misunderstood, which only does disservice to all.

As you can no doubt appreciate, the ideas themselves are relatively "simple" and straightforward. All the effort to understand them actually goes into the removal of the old paradigm which stands in the way. This is the part that is subjective, and which is for most of us a work in progress rather than a finished process.

Wendy said...

FOFOA,

Wouldn't it be great if someday we could have a Freegold Convention, in some place like Vegas? :D

Exchange of ideas would be awesome, in addition you gotta love those discount outlet malls!!

Fauvi said...

I will never say that word again…. God, one (meL) is so manipulated !
One of the best vids of my life.

http://www.youtube.com/watch?v=DioQooFIcgE

Misthos said...

DP and Fauvi, I share your sentiments.

But one thing that is obvious about Europe right now is that there is absolutely NO LEADERSHIP. That's what worries me the most.

DP said...

@Fauvi: thanks for the Belgian suggestion, which I personally feel is an excellent one. Except alas my wife won't see it the same way you or I do ;-D She does, however, very much like France... so that at least seems achievable. To each according to his means eh? :-)

David said...

Wendy,

I've been thinking the same idea... sort of a Freegold brainstorm/mastermind gathering.

I would like to see this come to fruition.

DGY

Jenn said...

Hello Motley Fool-

"From what I understand, under Freegold, all or most gold would be in the safe keeping of a institution, or several spread across the world. People would then be able to purchase shares of these gold pools, reflecting their respective wealth."

I think you've gone a little off track here. It is true there are similar services today and some will continue to persist. Sprott Asset Management's PHYS is just such a service -- a fully allocated bullion trust and yes, you can take delivery given you have accumulated at least 400z. But the correct way to think about Freegold is a purely physical market. Gold in your hand is the key. You may choose to store that gold in places that have independent audits such as Goldmoney or PHYS, but what you are talking about sounds more along the lines of unallocated accounts.

"While they may initially allow inspections to verify that they actually have the amount of gold they claim, in time, say 20 years, their power obtained from controlling this much wealth would allow them to refuse inspections or pay princely sums to whoever does inspections so that they lie."

I think I can say with confidence that the moment GoldMoney and PHYS cease to conduct third party independent audits, they won't have any more customers.

"Especially taking into account the serious security that would be needed to protect such vast pools of gold, their control of those regions would be complete."

The amount of gold above ground both before and after Freegold is the same. How do you think all that gold is being protected today? Without serious security?

"Huge benefits would be possible for them by fabricating the amount of gold they possess. For one they could simply sell such gold illegitimately on the black market, while keeping that gold on book."

Now I see where you misconception lies. You are not describing Freegold, you are describing the very system in place today. Commercials banks are already keeping gold on their books they don't have, but they don't need a black market to sell anything. They are selling counterfeit (paper) gold in plain sight for the entire world to see.

"Human fallibility and corruption, no matter how noble the intent, whilst controlling such vast wealth/power, makes me prefer a system where the populace controls the gold supply directly."

Well I suggest you head down the street to your favorite dealer and get some. Freegold is coming whether you own it or not. Better to buy some now while it's still available and extremely undervalued.

You have a little more reading to do MF. You don't quite yet understand FOFOA's explanation of Freegold, but the fact you are trying is commendable.

@Blondie

I guess what I was trying to say is that I think you do a marvelous job of expressing FOFOA's Thoughts in a very clear, direct way. Perhaps you are not uniquely qualified, but you're up there on the list.

--Jenn

costata said...

Motley Fool,

Perhaps we can clear up a few points in advance of any reply that FOFOA makes to your questions.

Before plunging in I think it should be noted that A/FOA and FOFOA are/were not activists campaigning for the introduction of a new monetary system. They are describing a system (Euro Freegold) that has been developed over decades to replace the $IMFS when it fails.

Professor Fekete is promoting the re-introduction of the pre-WW 1 system. Excellent system IMHO but a radical departure from the existing system while the Euro Freegold architecture responds to evolutionary developments in the present system eg. floating currency exchange rates.

As you mention Freegold is not:

1. A gold standard (gold in circulation as currency).

2. A fixed gold exchange standard with a single reserve currency (fixed rate of exchange with one currency eg. US$).

3. A fixed gold exchange standard with multiple currencies.

Freegold is a label applied to a free market in physical gold where all currencies float against gold and are priced in gold.

Central Banks collectively hold around 30,000 m/t but the bulk of the remaining gold (around 130,000 m/t) is in private hands.

There is no need to aggregate this privately owned gold in pools in order for this system to work. It merely needs to trade freely without manipulation or interference.

There are inherent problems in attempting to make gold fulfill the dual roles of store of value and medium of exchange. Happy to discuss the reasons if you wish.

Pete said...

@ MF

It is quite clear that you need to read through the archives here. Even the last three months worth would be sufficient to answer your questions.

I know you have already disclaimed that you have no time to read - but that is what you need to do. You wouldn't ask a lawyer to summarise tax law would you? Or even ask Prof Fekete to summarise his concepts in a tailored response to you?

There's a reason this blog has more than one article. Many of the concepts are progressive, and require an understanding of previous concepts.

Pete said...

@ FOFOA

Another good article. I very much enjoyed the history lesson, and particularly the parts about marginal utility.

However, I do have some disputes:

"Somewhere above I said that while the present price of something can be known with precision and certainty, value can only be estimated or guessed at until it is finally revealed. I have explained how paper gold and dollars have "instrumental value" while physical gold has "intrinsic value." I have described how value flows from the use of, or the marginal utility of any commodity rather than from its cost."

How does gold have intrinsic value (value of itself) when it is ultimately converted to a medium of exchange (at some stage) when sold. I am probably being naive, but my point is that what is the point of having gold if it cannot be traded/exchanged? It wouldn't be a very good store of value if it had no actual exchange value. Perhaps I am misunderstanding 'intrinsic'.

(cotd)

Pete said...

(cotd)

Sorry to paste such a large chunk, but it provides context

"Imagine that physical gold is trading for $55,000 per ounce. If you own a hill with 100 ounces of gold underground, that hill must have a value somewhere south of $5.5 million, assuming you are legally allowed to remove the gold. Now imagine the labor and production cost of removing that gold from your hill and having it refined into tradable ingots comes to $300,000. For your small lot, that works out to a cost of $3,000 per ounce (not economically viable until recently), and it puts the value of your virgin hill somewhere under $5.2 million.

So in our exercise here, your input costs would be <$5.2 million plus $300,000 and your output would be $5.5 million. In fact, it doesn't matter if you bought the hill last week for $5.2 million or if your great grandfather bought it in 1920 for $1,500. All that matters is the present value of that hill. So in this scenario, your total energy and human capital expenditure for each ounce of gold dug up from your hill is equal to $55,000, or more than a new BMW (some models excluded). The Marxist, however, would say that the gold in your hill is the property of the collective (common ownership of the means of production). He might still let you dig it out at a cost of $3,000 per ounce, but then he would tax you $50,000 per ounce for the privileged of digging on communal land and removing (privatizing) communal gold. And of course this government action would do nothing to either the $55,000 price of an ounce of gold or to the >1:1 BMW:gold value ratio."


Why would the energy and human capital expenditure per ounce have to be $55,000?

If I walk around the countryside and trip over a 10oz nugget, did my walk suddenly cost me $550K?

I don't think it is realistic to assume that costs to mine gold will rise to meet the freegold valuation. Eventually they will, due to the nature of equilibrium.

But as you would be aware, I am concerned about this potential 'gold rush' and I think there will be a significant adjustment period where the cost of mining will be much less than the price of gold.

...

Two ways I could see your scenario working:

1) If the $55,000 adjustment is not a reflection of the 'revaluation' of gold as such, but rather a reflection of the deflation of most other goods in relation to gold. When I say most, obviously energy and human labour would have to revalue with gold. (However I think it is very unrealistic to expect that energy and human labour would revaluate to the same extent, thereby gold mining at the revaluation price would still be highly profitable).

2) If the $55,000 adjustment price is in fact relative to a high fiat inflation price, and everything else has also inflated to relative prices in fiat. This means that there is no point to buying gold, you'd may aswell just have some land or a bag of beans (a really big bag) as generally everything will keep value in relation to gold.

Pont 1 is unrealistic IMO and point 2 suggests that gold isn't really that special at all.

Perhaps you can clarify.

Thanks,

- Pete

Motley Fool said...

@Jenn

The amount of gold above ground both before and after Freegold is the same. How do you think all that gold is being protected today? Without serious security?

Granted, but if all gold were held in pools, as opposed to people choosing to hold gold themselves or give it do independent pooling services, this would be a problem. That was the scenario I was referring too, which from your previous seems not to be the case in Freegold, which is fine then.

Well I suggest you head down the street to your favorite dealer and get some. Freegold is coming whether you own it or not. Better to buy some now while it's still available and extremely undervalued.

I have already, within my means acquired gold. I know the system is changing and I know the importance of gold. I am merely debating the possible solutions. From all the replies, Freegold seems to be very close to my conception of Feketes gold standard with RBD, and that conception is the only possible solution I see.

@costata

A very sensible reply, my thanks.

Professor Fekete is promoting the re-introduction of the pre-WW 1 system. Excellent system IMHO but a radical departure from the existing system while the Euro Freegold architecture responds to evolutionary developments in the present system eg. floating currency exchange rates.

From my understanding of Feketes' proposal gold would not have a fixed price, similarly to Freegold. What this means is that currencies would float against it, but it is important to keep in mind that at any one time a equilibrium would be reached, which would seems similar to exchange rates being fixed. These would slowly change as the countries' economic policies change and/or a country brings new value to the world economy. Seemingly this is similar to your explanation of Freegold, so I dont see the difference.

Fekete's suggestion in a nutshell is, remove restrictions on the exchange of gold; dont fix the price of gold; make standardised units (coinage) available free of seignorage ( the minting premium to be paid out of tax receipts) ; and dont disallow the market in Real Bills, which will spontaneously emerge once gold is free to flow. If you could, please tell me how this differs from Freegold?

There are inherent problems in attempting to make gold fulfil the dual roles of store of value and medium of exchange. Happy to discuss the reasons if you wish.

I do wish, please do.

@ Pete

You wouldn't ask a lawyer to summarise tax law would you? Or even ask Prof Fekete to summarise his concepts in a tailored response to you?

Actually I would ask a lawyer that, and fekete has already summarised his concepts. Despite my best efforts(I looked at all posts ever by FOFOA) I couldn't find a article(named) that gives FOFOA's position on Freegold as a framework.

Regards

The Fool

Blondie said...

Address by Mr Rundheersing Bheenick, Governor of the Bank of Mauritius, at the Annual Dinner in honour of Economic Operators, Port Louis, 27 November 2010:

"The nominal value of that gold we controversially purchased from the IMF in November 2009, has risen by some Rs 570 million, perhaps the best investment the bank has ever made in its entire history; no wonder there is international talk about moving back to gold as a reference value, if no longer as actual backing, for paper currencies... The gold coin we launched here in 2007 did even better [than the platinum one], its value increasing by 42%. That “barbarous relic of a bygone age”, as Keynes dubbed gold, has not lost its shine over the centuries and may still be pressed into monetary service! So in this initiative we are ahead of the game, brickbats notwithstanding."

"To paraphrase Jean Monnet, the architect of the EU:
“Man has a natural instinct to resist change until it becomes a necessity, and he won’t recognise necessity until he’s faced with a crisis.”"

Motley Fool said...

@Pete

I can answer your question. If you stumble across a 10 ounce nugget your "energy and human capital expenditure" would be $550k, because that would be the reward for your efforts, small though they may be.

Hope that clarifies.

TF

Motley Fool said...

@Pete

I missed your first question. Gold derives is intrinsic value from the fact that its marginal utility is for all practical purposes infinite. Stated otherwise, it's decline in marginal utility is practically zero.

I suggest you reread FOFOA's last sentence in that quoted paragraph very carefully.

TF

Blondie said...

Motley Fool,

Can you demonstrate another occasion upon which humanity has successfully regressed to a system left idle for close to a century, rather than simply moving on into the future utilizing emergent evolution, as you suggest a resurrection of the real bills doctrine will do?

Motley Fool said...

Hey Blondie

Interesting rhetorical question. I think you may be missing the point.

Real Bills arise spontaneously, the moment gold is free of restraints, unless restricted by law like presently.

In case you don't know what law I am referring too, legal tender laws.

Historically legal tender laws used to be a law that said that within certain margins a , say 1 ounce, gold coin is acceptable tender. Losses due to wear and tear were picked up by the government, from tax revenues.

This was a useful thing, since you didn't want to weigh every coin you use.

This law was maligned into a obligation into paying any and all debts by FIAT currency or rather, being forced to accept, backed by legislation ( and essentially the gun of the government), FIAT currency for your produce.

Changing the meaning of this law held obvious benefits for the government, see the deluge of paper money and public debts.

So if people are free to choose what they may accept in payment, ie. both gold and FIAT in a Freegold system, then Real Bills WILL emerge spontaneously.

I hope that clarifies.

Regards

The Fool

JR said...

So is money (currency) the best and highest (most valuable) use for gold?

Friedrik Hayek, while not quite to Freegold and related ideas, had some interesting thoughts along these lines in envisioning money's evolution

"I do believe that if today all the legal obstacles were removed which prevent such an issue of private money under distinct names, in the first instance indeed, as all of you would expect, people would from their own experience be led to rush for the only thing they know and understand, and start using gold. But this very fact would after a while make it very doubtful whether gold was for the purpose of money really a good standard. It would turn out to be a very good investment, for the reason that because of the increased demand for gold the value of gold would go up; but that very fact would make it very unsuitable as money. You do not want to incur debts in terms of a unit which constantly goes up in value as it would in this case, so people would begin to look for another kind of money: if they were free to choose the money, in terms of which they kept their books, made their calculations, incurred debts or lent money, they would prefer a standard which remains stable in purchasing power.
...
I have said that it is an erroneous belief that the value of gold or any metallic basis determines directly the value of the money. The gold standard is a mechanism which was intended and for a long time did successfully force governments to control the quantity of the money in an appropriate manner so as to keep its value equal with that of gold. But there are many historical instances which prove that it is certainly possible, if it is in the self-interest of the issuer, to control the quantity even of a token money in such a manner as to keep its value constant.

There are three such interesting historical instances which illustrate this and which in fact were very largely responsible for teaching the economists that the essential point was ultimately the appropriate control of the quantity of money and not its redeemability into something else, which was necessary only to force governments to control the quantity of money appropriately. This I think will be done more effectively not if some legal rule forces government, but if it is the self-interest of the issuer which makes him do it, because he can keep his business only if he gives the people a stable money."
http://mises.org/daily/3204

Motley Fool said...

@ JR

Actually no. Looking from a debtors perspective a hyperinflationary currency would be best.

And yes, while there may be a initial revaluation of gold, thereafter the changes would be fairly slow.

Interest charged on loaned money, would contain this slow appreciation, taking into account the time value of money. Hence it would be fine to use it as money.

The Fool

ps. I'm posting here to much. haha.

DP said...

@MF: to much what? Amusement? :-)

There will be no appreciation in gold, only depreciation (perhaps in some cases, ultimately, appreciation where Value is truly again being added somehow or another) in other things. Gold is the benchmark of Value. That is the very core concept of Freegold, gold is the unwavering measurement unit of Value.

Motley Fool said...

Hiya DP

To explain in simple terms, imagine for a moment all the gold in the world has been mined out.

Now, still simplistically, all that gold would represent all the wealth ( or value if you will) of the world.

If the world economy grows, every unit of gold would be worth more ( by the percentage of growth). If there is no growth, gold will remain the same and lastly if the world economy decreases then gold would decrease.

Capiche? :P

The Fool

ps. Too much posting, too much time spent, but it's ok, I have some free time the next few days. :)

DP said...

In my opinion, Real Bills are simply invoices denominated in gold for settlement. You can settle in $£€¥ who cares, as long as you have the liberty to exchange the surplus for physical gold, after settling all your other Bills in currency. What I definitely agree using gold in settlement does add, is certainty. But that is what Freegold is about; returning gold to the role of benchmarking Value and providing stability as a result. RBD is like looking at one page from the Freegold playbook. Again, in my opinion.

DP said...

All the Wealth/Value in the world is not in gold. There is much of real Value besides, and more will be created. Gold is the stable measuring unit of Value. It won't change when there is no more to mine, except to become even more stable (and even more valuable) than it already was.

You're valuing things in currency, a shifting phantom benchmark. We are valuing things, including currency, in gold.

Motley Fool said...

Hey DP

Then allow me to educate you. xD

Real bills are not simply invoices denominated in gold for settlement. They are that too, but due to this certainty that you mention they are also something else.

It is important to say that they are also not not simply invoices, they are only invoices on consumer goods that will be used by the public in a 91 day period ( a season).

Now due to this certainty, they become in effect as good as money, and can be used in payment.

Due to them being extinguished in 91 days and them flowing along with the underlying goods, they are non-inflationary.

What this does is create a public wage fund ( that is currently destroyed), meaning consumer goods production can be funded.

At present we just have unemployment, because without this , you cant fund production in full and also not without inflation.

Essentially this increases the volume of gold by a factor of around 90.

Hope that makes sense.

The Fool

Motley Fool said...

Hey Dp

True. But if there were no wealth in the world, gold would be worthless. It is just a medium of reference for value, as you say. :)

TF

DP said...

I don't know what the point you're trying to make is. Have a good day now, READING rather than writing ;)

Edwardo said...

http://www.realecontv.com/videos/china/gold---chinas-end-game.html

julian said...

Hi All,

Just a thought I've been pondering:

Why do so many people still believe in and advocate for a fixed gold standard?

Love to hear from you.

Thanks.

Greyfox "It's the Debt, Stupid" said...

Now time for the lighter side of the Freegold debate.
JP Morgan Silver Manipulation Explained in cartoon form.
“You can’t run with your pants down”.

http://www.youtube.com/watch?v=Gl47z2g2EvI&feature=player_embedded

scepticus said...

Sorry I have not read the entire post, but the line of argument seems to be the gold has potentially infinite value with regard to everything else.

If that is the case how does one explain the fact gold fell in value with respect to bread by a factor of 4 during the Zimbabwe hyperinflation?

I don't regard that as an example of gold holding its value.

DP said...

@MF: Hello again, new friend. :-)

RB's don't create a public wage fund as far as I can see. They create a wage fund for the people along the chain that will produce the ordered goods. All people outside of this chain are not going to be paid by these goods being ordered. Unless all the goods are going to extraordinarily expensive of course?

This is already achieved with invoices -- if the employers along the chain do not have the capital to pay their wage fund they either go BK or they can get invoice discounters to give them short term credit with the invoice as collateral. This is not really so radical, I think.

The moving to a gold standard and removing fractional reserve, is what is radical about Fekete's suggestions. The absense of credit means RBD is needed as an adjunct, that addresses the concerns of people regarding how self-liquidating credit can still enable consumer goods to flow through the chain from producer through to consumer (as already happens under the current system of credit).

Fixed gold standard, no more FRB, and using Real Bills instead of invoices? This is a very radical change to hope for; not many are going to support all aspects of this change, and there would be significant disruption while the changes were all made (necessarily all together).

Freegold retains current currency systems, can retain FRB if each local economy chooses to do so but also enable a phased withdrawl if desired, and continues with the existing systems for coping with invoicing. Doesn't this feel a lot more achievable? It is an evolution, not a reinvention. Many here believe it is an inevitable evolution. For my part, I think it is also already evolving right now.

How will non-consumer goods and services be bankrolled under Fekete's plan? How about a National Health Service, say? Where do the wages of the doctors, nurses, administrators, porters, etc all come from? I am interested to know that (but clearly, not interested enough to read more detail of the RBD, because I am sure Fekete has a very smart solution, another difficult to agree reinvention of something or another, which will simply not get agreed to or be implemented, like the other aspects of the plan).

Anyway, this is not to say I am against the ideas of Fekete -- I am only saying they don't appear to me to be some panacea that resolves all the world's economic problems painlessly. RB's are just another way to achieve what is achieved today with paper credit, and are a bolt-on to make a classic fixed gold standard compatible with a functioning global economy. I'm sure he has another idea to deal with a deflation that will not make the pain similar to the 30's, because a fixed gold standard doesn't deal well with this issue and that is why people won't agree to it. RBD therefore hasn't demanded my fullest attention, I fully admit, because I'm concerned about more fundamental things, specifically the money system itself, for now at least. So far, Freegold is the solution that seems to me to be simplest and best. I think you might agree, when you've understood it.

Redwine said...

Interesting fact:

You can legally board a commercial airliner in the U.S., for international travel, with 199 1 oz. American Gold Eagle coins without having to declare more than $10,000. The coins are legal tender with a face value of $50 each.

DP said...

julian: Why do so many people still believe in and advocate for a fixed gold standard?

Because they are only thinking about the benefit of stable money compared to the destructive potential (and reality) of unrestricted paper credit, such as the Dollar. They are not considering the social costs of such a tightly restrictive system as a classic fixed gold standard. They are also missing the subtle difference between the nature of the Euro and Dollar.

Redwine said...

@scepticus

If you are in the process of starving the relative value of food to wealth storage increases. In other words, the marginal utility of food skyrockets.

DP said...

@Redwine: Interesting thought! :)

British Sovereigns are ~1/4oz, and are also UK legal tender -- the pre-1971 £1 coin.

So I'll see your $50/oz face value, and lower you £4! :-D

Motley Fool said...

Hmm Interesting. That makes me wonder. Krugerrands are also legal tender De jure but not De facto. They have no face value.

Does that means you can take even more on a plane, without declaration? :D

scepticus said...

redwine, the price of gold has more or less remained stable in bread terms (~300-400 loaves per Oz) for thousands of years despite the ratio of the amount of bread to the amount of gold increasing vastly over that time.

If FOFOAs argument is correct then I'd have expected to see a steady decline in the value of bread versus gold over the millenia but that is not what we see.

Arguing that gold can be valued sufficiently high to monetise all trade is therefore a fallacy. Luckily we don't need for that to happen because we can use equities etc as a store of wealth and therefore gold's marginal utility as a store of wealth is no better than that of equities.

Redwine said...

@ scepticus

'redwine, the price of gold has more or less remained stable in bread terms (~300-400 loaves per Oz) for thousands of years despite the ratio of the amount of bread to the amount of gold increasing vastly over that time.'

Bread is consumed (read FOFOA concerning stock/flow ratios). Also, bread production increase has been matched, or even exceeded, by bread consumption.

'If FOFOAs argument is correct then I'd have expected to see a steady decline in the value of bread versus gold over the millenia but that is not what we see.'

I don't see him making that argument.

'Arguing that gold can be valued sufficiently high to monetise all trade is therefore a fallacy. Luckily we don't need for that to happen because we can use equities etc as a store of wealth and therefore gold's marginal utility as a store of wealth is no better than that of equities.'

He doesn't argue that gold should monetize anything much less all trade. If by equities you mean such things as shares of GM or Pan Am then you are seriously misinformed about diminishing marginal utility.

Greg said...

Very interesting topic.

I got through most of it but you really might try condensing your thoughts some ;-)

I do take issue with this however

"There is a little trick to knowing whether value is higher or lower than price. This trick will reveal the direction of value, but not the magnitude of the disparity. The trick is to look at which direction the government wants to influence any price. If the government is attempting to manage a price upward, then it is a safe bet that the value is lower than the price. And if the government would like to keep a price down, then you can be pretty sure the value is higher than the price."


So the government really is ALL KNOWING like the leftists say it is!!

What you are demonstrating of course is how much THAT government values that commodity (possibly) but in no way shape or form are you any closer to discerning some sort of universal value, that is a fools errand.

In truth, the only way we have of knowing value is price. We know via prices how many claims someone else is willing to put forth for something. What really distorts things though is its a lot easier for the guy who makes 500$/hr to make the claim on the BMW while the guy who makes 20$/hr wants the BMW more, could even benefit from it more but has no chance in hell of "affording" it.

A great topic though

DP said...

@scepticus, in service to Redwine:

Why All Paper Will Burn (In plain English)

DP said...

@MF: Kruggerands are legal tender in SA, but with no face value as you say -- they are legal tender at prevailing metal content valuation.

This means that I'm afraid you lose in terms of the number you can get on a plane with, without feeling like you really ought to declare them! ;)

They are probably the ultimate, physical incarnation of the Freegold principle.

DP said...

@MF again: sorry, should have added before...

Since you're in the UK and Kruggerands aren't UK legal tender, you can (quite likely will, once the government gets hungry enough and gold gets pricey enough in Pounds -- fish gotta fly, birds gotta swim!), be subject to CGT somehow or another.

Redwine said...

Ben BURNanke to be on 60 minutes tomorrow. Maybe the markets went up because it was leaked he won't rule out another 600 Billion to buy up bonds.

http://www.zerohedge.com/article/bernanke-tells-nation-sunday-more-qe-coming

Redwine said...

Interesting questions:

How does the official U.S. price of $42.22/oz for gold affect the capital gains tax on purchase/sale of Gold American Eagles? If the face value remains $50.00 was there a declarable gain/loss? What are the basic capital gains tax laws concerning GAEs'? How is it legal for the government to tax capital gains on legal tender? Could you buy a house with 100 GAE and state the selling price as $5000?

There could be some interesting tax strategies using these legal tender gold coins!

Dave Narby said...

@ Edwardo

Re: That video about China issuing a gold backed currency:

I'm not sure I agree with him regarding China issuing a gold-backed Yuan, as while gold is a good store of value due to it's inflexibility, it is not the best currency for the same reason. Convertibility of dollars to gold almost bankrupted the US, that's why Nixon closed the gold window in '71.

To answer the author's central question, "Why would China urge it's citizens to buy gold?", the reason is simple: They see the US printing money like crazy to try and preserve a broken and corrupt system, and in order to avoid the civil unrest that would result from hundreds of millions of Chinese all at once being in the position of having nothing left to lose (the Cultural Revolution is not something Chinese wish to repeat), they do not want them saving money in dollars or dollar denominated assets (or Yuan either, since it's pegged to the Dollar, and it's likely they will continue to devalue the Yuan along with the Dollar as long as it is perceived as helping Chinese exports). Gold and silver will insure against a loss of wealth due to Dollar debasement. The Chinese are keen students of history, and doubtless see the chances of the Dollar surviving as extremely poor.

Interestingly, I just read this http://www.galmarley.com/framesets/fs_monetary_history_faqs.htm

The whole page is worth reading, but this stood out (bold face is mine). Remember, history is extremely important to the Chinese. There is a story of Chinese Premier Zhou Enlai being asked by Richard Nixon, during Nixon's 1971 visit to China, about the historical impact of the French Revolution, which had been fought nearly 200 years earlier. Premier Zhou's reply was "It's too early to tell."

(Con't)

Dave Narby said...

(Part 2)

From http://www.galmarley.com/framesets/fs_monetary_history_faqs.htm

"***" are mine for emphasis

------------

What can we learn?

These monetary episodes are varied, and represent the tiniest fraction
of the relevant historical facts about money systems.

The episodes are not easily comparable with modern states of today. ***But
perhaps similar to our own times were the circumstances in Kublai Khan's
China. Its borders were secure, it was enormously confident in its
institutions of state, it had enjoyed a prolonged period of considerable
economic success, and built its civic and commercial infrastructure on
what amounted to capital issued for nothing. Credit - in the form of
state and corporate paper - had been injected in quantities which had
never previously been imagined. ***

It left a population of savers holding paper promises of wealth, of
which there were such a massive number that everyone was happy.

What seems to have happened in China is that a large and confident
population worked harder than usual to accumulate a currency whose
respectability was backed by the apparent integrity of a secure empire.
As long as people strove to accumulate this money the state benefited
from the productivity gains of a motivated population, which cost the
state nothing. The empire's infrastructure was constructed on credit,
its economy expanded on credit. This growth came from the power of a
belief held by its citizenry that their labour was being validly
remunerated in the token form of this Chinese imperial paper.

In Khan's China the very best living standards were enjoyed - not
surprisingly - when people worked for something which it cost the state
almost nothing to put into circulation in ever greater amounts. To be
possible this required near unanimous confidence in the system, and not
surprisingly the period was recognised as one of enlightened economic
management - a view which persisted for several decades during a period
of steady currency inflation (which was also experienced by Athens
during its magnificent decline in the 60 years following 400BC).

***Yet the most prosperous and confident period preceded rapid financial
and political decline. When the confidence in the currency gave way
there was wholesale destruction of the value of savings in almost all
forms at once, and the popular energy required to sustain empire rapidly
disappeared.*** As its hitherto reliable institutions imploded the state
itself was overthrown from the inside within a few years.

***At that time the few holders of gold - which had no formal monetary
role whatsoever - saw their personal purchasing power increase quickly.***

--------

And that IMO is why you must hold physical gold until this crisis is
resolved.

costata said...

Motley Fool,

I see the conversation has been lively since you invited further comment from me.

In relation to the RBD I think that this system has two critical features. As you point out they were spontaneous and self liquidating. As a result they were neither inflationary nor deflationary.

In explaining this system I think that Fekete fails his students by not extending his logic. Under this system money was a combination of gold and Real Bills. Gold was relatively stable in quantity while the quantity of Real Bills on issue rose and fell in line with demand. Hence the price stability over more than a century.

I think the good Professor does his students a great disservice by portraying this as a gold currency standard. This system highlights the flaws of a gold standard. If Real Bills are not part of the system gold can be deflationary or inflationary. Gold can be counter cyclical and oppose the trend of supply and demand in an economy. That is the thrust of the Irwin paper cited by FOFOA in his post.

Real Bills are pro-cyclical BUT self liquidating. They cannot artificially extend a business cycle in the way that perpetual debt instruments can.

In order for a money system to be stable and satisfy demand it must expand or contract as needed. IMHO that is the reason why the Gold + RBD combination was so successful for so long. In other words it succeeded because it wasn't a "gold standard" at all. It was a Real Bills standard.

A fiat currency could perform the role of gold under a Real Bills regime provided it is not over issued. Destroying the printing "plates" at the end of each print run and using a new number series every year would suffice. If there was a shortage of currency Real Bills would signal the shortage by attracting a premium over face value rather than a discount.

In order to re-introduce this system Fekete will find himself opposed by everyone who supports the status quo, the Euro Freegold architects and everyone on the planet who uses gold as a wealth reserve. Personally I think it would be a better world. I wish him well in his quest.

oldinvestor said...

Why gold has intrinsic value in and of itself.

There is a deep and basic reason why gold was first noticed, and then appreciated by so-called primitive man.

Of all the 92 naturally occurring elements, it is the only metallic element that commonly occurs in its elemental form. This is because of its unique non-reactivity with other elements to form complex compounds. Usually every other element must be smelted in some form to obtain its elemental form.

Sure, you can occasionally find pure crystals of silver or copper, but the vast majority must be refined by a smelting process to obtain their elemental form, a technology that was not available until well into the city-state era. Gold, in many areas, can be picked up in its basic, unalloyed, pure form.

Thus, in earlier days, no other element could be obtained, in its original, elemental form. Why was this important? Because gold in its elemental form could be easily worked and shaped into object of utility and decoration, unlike all other complex mixtures of metallic elements we call rocks.

It would thus be an absolutely unique substance in the primitive world, and would have attracted attention, and gradually come to be accumulated, valued, and used as a store of value and trading vehicle.

Greyfox "It's the Debt, Stupid" said...

FOFOA said:
"There is a little trick to knowing whether value is higher or lower than price. This trick will reveal the direction of value, but not the magnitude of the disparity. The trick is to look at which direction the government wants to influence any price. If the government is attempting to manage a price upward, then it is a safe bet that the value is lower than the price. And if the government would like to keep a price down, then you can be pretty sure the value is higher than the price."

Greg stated: “I do take issue with this however”


Greg, the “Yankee gubermint” has influenced/suppressed the dollar price of gold through it’s tentacles J.P. Morgan, Goldman Sacks, gold derivatives, paper gold contracts, COMEX, LBMA, leasing, etc.
FOFOA/FOA/A/GATA any others have stated/proved this for many years. The true value of gold should be and will be much higher eventually.
The government (FED) buys it’s own TBills/Bonds to suppress interest rates and support debt sales. All government bonds are “instruments of guaranteed confiscation” via inflation and will be much lower in price in the future. Therefore I fully agree with the original FOFOA statement in the first paragraph.

Greg stated: “So the government really is ALL KNOWING like the leftists say it is!!”

The government is manipulative, deceitful, and very powerful but not “all knowing”. They will fail as all previous potentates/empires have. Your statements are not well contemplated.

Edwardo said...

On (the) Money?

Alexander Del Mar wrote in his The Science of Money (1885), “Value is an arithmetical relation between two or more commodities or services which makes its appearance during an act of exchange"

Edwardo said...

Dave, Dave?

I put the video link up because I thought it was thought provoking. I don't agree with the conclusion(s) the narrator arrives at either.

My thought on this apparent gambit by The Chinese-namely to vastly increase gold in official coffers as well to have it become widely owned by Chinese citizens- is that such a move would seem to comport with the Chinese government setting the stage for Freegold.

It seems to me that The Chinese, out of a sense of necessity, must be keen to cultivate their own domestic consumer market to take the place of the U.S.

If the Chinese can manage to engineer hundreds of billions of Chinese citizens into gold ownership, which, clearly, they can, in advance of a revaluation of gold to a vastly higher fiat denominated price, then they will have gone a long way to achieving the economic autonomy I believe they are after.

Greg said...

"The government is manipulative, deceitful, and very powerful but not “all knowing”.


Yes it is. And so are many "private" entities, whats your point.

The statement was made that we ascertain "value" as the opposite of the direction that govt is trying to move prices. I find this argument highly suspicious since it implies that govt knows the true value of something, or at least knows where the value lies in relation to current prices. This is impossible unless one believes that govt really is more knowledgeable than the private market, a very questionable claim.

Redwine said...

@ Greg

You make very strange arguments. Claiming that the value of a service or good is opposite to the direction government is pushing the price is in no way claiming the government knows anything concerning the items true value. It's safe to assume the true value is the one the free market is attempting to set. The free market 'knows' the true value and the government hasn't a clue.

answer2me said...

Mr. Narby!

Thanks for that link!
http://www.galmarley.com/framesets/fs_monetary_history_faqs.htm

All that history in one little spot. Much appreciated.

costata said...

Greg,

The government often does know a lot about it's own intentions and they are often the reverse of stated intentions. George Orwell had a few insights into this tendency. The "strong dollar" policy leaps to mind.

BTW You may also have an irony deficiency.

There's a very amusing episode of a comedy series called 'Yes, Minister' where a senior British civil servant, Sir Humphrey Appleby, is explaining to his Minister that you cannot know the final government policy position until they make the 'official denial'.

answer2me said...

@ redwine, @greg

I have been pondering this idea of value latley and its purpose in ones life. Here is what i have been working through.

What is value and what does it "buy" us during the given span of life?

I used to believe in the idea of time, then i progressed, time does not exists, what we are experiencing is "change". Now i have been pondering the idea that change isnt the answer, i think our physical experience in life is nothing more than a reinstatement of old values in modern times. It seems that we have been there and done that before as a human race. History repeats itself. I digress.

It was actually "another" who helped me with this. I dont remember the excact quote, it went something like this....."it seems that life is nothing more than a reinstament of old values brought about in modern times"-Another

when you brake it down all that value gives us is time. time to spend with our kids, time to read a book, time to stack more gold. There is no true value in anything that doesnt buy you more "time". In our culture money buys everything that will bring more time to ones life. Since this is the case, wouldnt it be better to have a passive stream of income? It would render more engery to ponder the greater things in life.

Motley Fool said...

Hi costata

One again a lovely reply.

I do agree that Fekete not extending his knowledge explicitly is a problem, but it is easy enough to grasp if you read his work. You have a fair point that maybe it should not be called a gold standard at all.

A fiat currency could perform the role of gold under a Real Bills regime provided it is not over issued.

This is true, but while a government controls money supply, expediency and self interest means that no matter how noble their intent initially, money will be oversupplied in the long run, as history has shown countless times. This is why I favour a variably priced fixed element, due to human history, gold.

Regards

The Fool

Ps. I would still like you to discuss the problem of gold in the dual roll of currency and store of wealth.

costata said...

Hi Motley Fool,

I will present a few thoughts on the dual role for gold but first .....

The deeper implication of my re-statement of Fekete's central theory is that we may not have been on a gold standard at all, in any meaningful way, during the 100+ years of stable prices that is often cited as an argument for the gold standard.

The dual role for gold is problematic in several ways. It can cause gold to behave in ways that creates a conflict between its medium of exchange role and the store of value role.

If gold is going up in exchange value it can prompt people to hoard or save gold in greater quantities. When gold is a circulating currency or backing a currency on a fixed exchange ratio there is the potential for a currency shortage if the economy is expanding at the same time.

As the Irwin paper notes a Central Bank or Banks can also create a shortage of gold. Bear in mind that even in the 1920s and 1930s economies were inter-connected. Gold was the ultimate reserve currency at that time. Unlike the US$ reserve system the quantity of the currency could not be arbitrarily increased in response to short term needs.

This resulted in a real deflation of around 47% during the first phase of the Great Depression according to the Irwin paper.

By separating the roles of medium of exchange and store of value you break the impasse. If the economy requires more currency you can increase it at will and vice versa.

This description ignores the role of banks in the creation of the money supply but hopefully we will relearn a few lessons from the latest debacle.

Motley Fool said...

Hey Costata

"The deeper implication of my re-statement of Fekete's central theory is that we may not have been on a gold standard at all, in any meaningful way, during the 100+ years of stable prices that is often cited as an argument for the gold standard."

Agreed.

"If gold is going up in exchange value it can prompt people to hoard or save gold in greater quantities. "

The thing I see is Real Bills are also income generating assets, with certainty to be paid ( due to being drawn on consumption). So hoarding should be minimal, as buying and holding RB's is better for your wealth( and also provides capital for economic growth).

"When gold is a circulating currency or backing a currency on a fixed exchange ratio there is the potential for a currency shortage if the economy is expanding at the same time."

I don't think the price of gold should be fixed. I think it should be allowed to float freely. Calculating a variable exchange rate is possible today, as is the instantaneous transfer of that information to say any shop.

Please provide further critique, I do not yet see a problem.

Regards

The Fool

DP said...

Good morning MF, et al.

I am wondering if there happens to be anyone from South Africa here, who can shed any light on to what extent Kruggerands are used in shops down there in direct payment for goods, rather than paper Rands? I understand them to be pretty much exactly what you are proposing, legal tender coins of a floating value based on the current price of gold content.

My feeling is that the average person will have difficulty with making the leap from having clearly denominated coins/paper in their wallets and purses, to walking around with coins of a certain weight in gold and not knowing what they are "worth" until they go into a shop or something and establish the day's gold price. If I am wrong in this assumption, someone should be able to point to Kruggers being widely used at retailers across SA, because people would surely come to naturally choose using them in preference to paper Rands?

When we had gold/silver coinage back in the day, it had a fixed face value on it, and everyone knew exactly what price they would be given for it when they went into a shop. Or indeed what price they would be given in a week's time too. If there was any feeling of certainty about the price they would be given for their gold coin in a month's time, I imagine it would be an assumption it might be a higher price. This would be deflationary like economic cryptonite; look at Japan.

If people get the idea they will always get more for their money in future, they'll wait as long as they can get away with it before they buy. I'm sure you're about to now say "look at computer equipment it just gets cheaper but people have still bought it". But I think people only buy computers when they need them, and they put it off as long as they can if they have one that works already. They don't throw them away every few months to get a newer, faster one. That would be ridiculous.

Whatever you're circulating as currency, needs to be of fixed denomination, I think. It would be too radical of a departure otherwise.

If the store of wealth, gold, is intrinsically part of the circulating medium, and the medium has a fixed face value on it, then that is a fixed gold standard.

I think it more likely that a much more subtle evolution of the current system is far more likely to happen (and is already in process, whether it is agreed to be the very best solution or not, in my view).

Motley Fool said...

Hey DP

I am South African.

It is not used at all in retail terms.

I spoke about legal tender laws in a earlier reply to Jenn I think. The problem, which I'll state explicitly, is that legal tender laws force you to accept paper. It doesnt help that gold has de jure legal status, when paper has de jure and de facto legal tender status.

It is also not so easy to obtain Krugerrands, at a reasonable premium, and cultural mentality ( paper thinking) means there aren't that many of them around, and those that are are hidden.

I think if you use gold as currency for a while, you would get a natural feel for its worth; remember its value will remain relatively stable.

Things that you purchase will have a fairly stable price too, so say, as a bad example, bread costs 1 ounce, then in six months time it will still cost 1 one once.

The Fool

scepticus said...

"Someone here recently asked, How can an ounce of gold ever be more valuable than a new BMW since the BMW embodies a vast amount of energy, human capital expenditure and significant utility in the real world?"

Interesting. That question was originally posed my me, on my blog, Liminal Hack in exactly those words.

Those are my words.

The answer that follows the above in the main blog post is quite wrong.

You suggest the LTV is false. But of course if BMW makers can't make a profit selling them they won't get made.

No-one is going to make a BMW and exchange it for an ounce of gold ever, and if that was the trade on offer then there simply would be no beemers for sale. You could view that as beemers having zero value, or having infinite value, depending on your bias.

Lastly the discourse about marginal utility is misguided. Most all of the economic output we produce has very low marginal utility - which only says that we can do without most of what is produced. But that misses the point, the surplus in this day and age exists to be consumed, and must be consumed because it cannot be stored.

Shows like X-Factor, and fashion items both should have nearly zero marginal utility according to your theory and therefore no value but actually these things are very highly valued year after year by the population.

This is the trap that people fall into when judging the world via concepts left to us by dead economists, or live ones for that matter.

DP said...

@MF: I think you have just illustrated my point quite well. Thank you.

BTW you might enjoy a particular post from Blondie here. This is part 3 of his 6 part series, attempting to summarise the concepts of Freegold. I think he has made a pretty good stab at it, and as I say this part 3 is particularly useful IMO.

Y'all have a great day now! :-)

scepticus said...

Thanks DP, I have been wondering what this freegold thing was about, and now I know.

Perhaps someone could explain to me why we don't already have freegold already?

Does it have to do with JP morgan?

Motley Fool said...

Hey DP

I think I haven't illustrated my point very well.

To buy with gold at present is stupid,due to there being seignorage and a scarcity premium.

If I wanted to buy something worth 1 ounce or lets call it 1400 dollars, then my choices are to pay 1400 dollars cash or to buy a coin for say 1540 dollars and then pay that at spot price.

That is enough disincentive to not put them on equal footing.

I believe gold coins should be free of seignorage, production costs being paid out of tax revenues... and with gold re-valued correctly, the scarcity premium would also fall away.

Then, it would be possible to compare and then you will find that gold is used in preference to paper.

TF

I hope that clarifies.

DP said...

@MF: If you had bought your Krugger 10 years ago and just put it in the "gold toe in the back of your sock drawer ;)", how many of those things "worth 1oz" would you be able to buy today?

If you had put 1400 dollars cash in your sock drawer 10 years ago, how many would you be able to buy today?

Time preference. You would not go and buy a gold coin today with currency, so you could buy something with it today. You would pay with the currency of course.

When you pay that premium to spot for gold today, that is you buying the luxury of time. You could choose instead to time your purchase such that the premiums are small to non-existent, but that is again your choice. In another ten years, how many things "worth 1oz" do you think you'll be able to buy, with the 1oz that you bought at a premium today?

And they say you can't buy time.

DP said...

How much was a Krugger, 10 years ago...

DP said...

@scepticus: I think we do. I don't see that there will be a sudden revaluation overnight from $1400 today, to $55000 tomorrow and then it's all done. I think it is happening at a steady pace and the move might accellerate. Also, the price won't move to some fixed arbitrary number like $55000 and stay there, it'll be floating and will go both up and down forever, depending on the management of each currency.

DP said...

Someday in the future, we might be talking about selling gold to buy a well-managed currency instead, who knows! :)

It doesn't feel too likely just now, but who can say.

Motley Fool said...

@DP

Still haven't succeeded in explaining I see.

Hum.

For gold to function as currency, it cant have a premium.

Lets say there is a gold shop right next to the place i want to buy my 1400 dollar item from.

Essentially no time would pass between me buying the coin and paying for the item.

The time based value of money has no relevance in terms of it being a practical medium of exchange.


Put another way. Lets say you go to the bank and withdraw $100 and your account is credited by that much, but the machine only gives you $90. This is the paper analogy for the way you are suggesting I should pay in gold.

I'm sure you can see people wouldn't do it.

Gold was what $200 dollars ten years ago?


TF

DP said...

MF: I believe gold coins should be free of seignorage, production costs being paid out of tax revenues... and with gold re-valued correctly, the scarcity premium would also fall away.

Why should that part of the taxpaying public who choose not to save in gold ("the poor"), pay for the fabrication costs of gold for the people who do ("the rich")? I think it is right that you have to pay the fabrication costs if you want the gold coin. That is the price of your time preference.

Motley Fool said...

Hey DP

That is a fair question.

The thing is, a coin will be minted only once, and then with the velocity of money, be used and exchanged a lot.

The true cost in the scale of the economy, and tax revenues, would be very small.

So it is not so big a burden as it appears.

Furthermore , these days one could do some very innovative things, that were not possible 100 years ago.

Imagine for a moment a 1 gram gold piece encased in a lucite holder. This would protect it from wear and tear; the container can be used to verify it's authenticity ( much like paper currency today) , and we have the technology ( have had for 100 years) to split gold at a atomic scale.

So with gold revalued you could have these very small fractions of weight to use as currency and wear and tear costs would be minimal.

This would also make it accessible to the poor.

TF

Ps. I'm reading blondies 6 part piece.

DP said...

MF: Lets say there is a gold shop right next to the place i want to buy my 1400 dollar item from.

Essentially no time would pass between me buying the coin and paying for the item.

The time based value of money has no relevance in terms of it being a practical medium of exchange.


But, why would you want to waste money buying the gold coin and then selling it again right away? The shop wants currency, to pay the wages and expenses of operating the shop.

You would only buy gold if you want to SAVE that purchasing power for some time in the indeterminate future. The price of the time you are buying, is the premium over spot. When you want to use up the purchasing power in some future year, you will sell the gold on for currency, and go on your spending spree.

Ten years ago you saved $200 plus premium for a 1oz gold coin, and in 10 years you can sell the coin for $1400 easily and then go and buy stuff. Probably the same stuff you could have bought for $200 ten years ago I daresay. That is what happened over the last 10 years.

Until politicians, bankers and borrowers all grow a brain and start showing some restraint, it'll probably still happen every 10 years. If they don't change what they have been doing, how much will you be glad that you bought a single gold coin today, in 50 years time? You'll probably have to do a year's hard labour to buy what you have only to work for a day today. Your hard labour will be the stroll to the coin shop to sell. You can probably by then get some lacky to go and do even that for you for the equivalent of today's $0.01, and they will say "ahhh's a-comin' boss, aaaah's a-comin'!", because they will be glad you let them do it and not someone else.

DP said...

MF: Ps. I'm reading blondies 6 part piece.

Good to know. Why are you talking then, if you've started reading? :)

You'll get through the required reading a lot quicker, if you stop asking questions. It's all in the archives. ;-)

Bonne journee...

Motley Fool said...

DP

Alright. I suggest you read my response to part 5. You make the same mistake as blondie on this issue imho.

The Fool

costata said...

Hi Motley Fool,

You said:
"The thing I see is Real Bills are also income generating assets, with certainty to be paid ( due to being drawn on consumption). So hoarding should be minimal, as buying and holding RB's is better for your wealth( and also provides capital for economic growth).

The most singularly 'shit for brains'' thing ever said on this blog. Congratulations.

Motley Fool said...

Hey Costata

"and also provides capital for economic growth"

That's the only part I would remove, if I could. The rest I think is valid.

Then again, i'm just a fool, so I wouldn't take me to seriously. :P

TF

Ps. Looked for a link, since a simple sentence is not sufficient.

http://www.professorfekete.com/articles%5CAEFPositionPaper10MoreRealBillFallacies.pdf

On the second page, bank runs are considered.

Motley Fool said...

In fact Costata here are some better links :

http://www.professorfekete.com/articles%5CAEF6thPillarOfMoneyAndCredit.pdf

http://www.professorfekete.com/articles%5CAEF7thPillarOfMoneyAndCredit.pdf

The Fool

Motley Fool said...

I decided to post my response to blondies 6 part summation here, because the quote below was actually from FOFOA.

There are also many finer minds here that can call me a morn and point to the flaw in my reasoning.

How else does human learn if not by making mistakes? :)

--------------------------------------
Up to this point of your six part piece, I have no problem. Here is my first point of disagreement.

"In a gold money system with gold lending (which is always demanded by the collective will) fractional reserve banking is the inevitable result. And from there, bank failures are the inevitable result at the first sign of panic (loss of confidence). And from there, some of the savers lose their money."

Fractional reserve banking is a inevitable result, but the meaning of fractional reserve banking has changed.

If the assets held by the bank to compensate for their outstanding currency is restricted to two things : gold and Real Bills, then bank failures are not at all inevitable.

It only became inevitable when banks where allowed to extend credit backed by government bonds or houses etc.

With respect, you also do not seem to grasp all the consequences of allowing Freegold. Neither do I for that matter, but I do think I should point one out.

Gold can only be a measure of value if you can exchange it for other items of value, such as food. Whether you do it by proxy, ie buy food with paper that is valued in gold, or with physical itself is not that relevant for the purpose of any specific transaction.

In fact in terms of practicality, paper is more useful.

The big problem is that creators of paper ( governments) will always find ways to distort the valuation of their paper to gold, due to them being able to create the paper. While these may only be temporary imbalances, they will find value in those times.

For this reason, despite paper being more convenient, physical gold is superior as currency.

Yes we can have private institutions where you can bank your gold, in return for interest and accept from them clearly demarked bills ( maybe in terms of weights of gold, 1 ounce bill, 1/100th ounce bill) if you choose and pay with that. People can then assess their own risk, by way of the institution they choose and manipulation by those institutions would show up quickly as discounting of their bills by shopkeepers.

Leaving paper creation in the hands of government is folly.

Sincere regards.

The Fool

scepticus said...

DP says "I don't see that there will be a sudden revaluation overnight from $1400 today, to $55000 tomorrow and then it's all done. I think it is happening at a steady pace and the move might accellerate. "

Fiat money now pays zero nominal return, as does gold so the revaluation will be completed when that fact is reflected in relative prices after accounting for better long term stability of gold and the better exchange liquidity of fiat.

This is also the reason for JPY strength - it has paid 0 nominal return for ages and its strength is an outcome of the rest of the world moving towards zirp.

Gold will never get to 55K/oz. The reason why is contained in this little snippet from the OP.

"That's all they [gold coins] do. And hoarding them doesn't interfere with any other economic activity, at least not when they are not "official money."

The presumption expressed is that economic activity will proceed regardless of what happens to the value of gold and that no matter what its prices it will not alter economic activity and that saving in gold doesn't alter economic activity.

However if that is the case then gold price is simply a bubble unconnected with reality that will collapse back to historical norms or below when that fact become apparent.

To reach 55K per oz then saving gold must have an effect on economic activity. Saving is deferred consumption and since the overall non financial economic surplus cannot be saved and must be consumed today then by definition all deferred consumption must be matched by pre-poned consumption not to have an observable economic effect.

Jenn said...

Here are Ben Bernanke's closing remarks at the Sixth European Central Bank Central Banking Conference, Frankfurt, Germany on November 19, 2010. (bold emphasis mine)

Conclusion

"As currently constituted, the international monetary system has a structural flaw: It lacks a mechanism, market based or otherwise, to induce needed adjustments by surplus countries, which can result in persistent imbalances. This problem is not new. For example, in the somewhat different context of the gold standard in the period prior to the Great Depression, the United States and France ran large current account surpluses, accompanied by large inflows of gold. However, in defiance of the so-called rules of the game of the international gold standard, neither country allowed the higher gold reserves to feed through to their domestic money supplies and price levels, with the result that the real exchange rate in each country remained persistently undervalued. These policies created deflationary pressures in deficit countries that were losing gold, which helped bring on the Great Depression.3 The gold standard was meant to ensure economic and financial stability, but failures of international coordination undermined these very goals. Although the parallels are certainly far from perfect, and I am certainly not predicting a new Depression, some of the lessons from that grim period are applicable today.4 In particular, for large, systemically important countries with persistent current account surpluses, the pursuit of export-led growth cannot ultimately succeed if the implications of that strategy for global growth and stability are not taken into account."

"Thus, it would be desirable for the global community, over time, to devise an international monetary system that more consistently aligns the interests of individual countries with the interests of the global economy as a whole. In particular, such a system would provide more effective checks on the tendency for countries to run large and persistent external imbalances, whether surpluses or deficits. Changes to accomplish these goals will take considerable time, effort, and coordination to implement. In the meantime, without such a system in place, the countries of the world must recognize their collective responsibility for bringing about the rebalancing required to preserve global economic stability and prosperity. I hope that policymakers in all countries can work together cooperatively to achieve a stronger, more sustainable, and more balanced global economy."


Changes to accomplish these goals will take considerable time, effort, and coordination?

No they won't.

Jenn said...

Here are Ben Bernanke's closing remarks at the Sixth European Central Bank Central Banking Conference, Frankfurt, Germany on November 19, 2010. (bold emphasis mine)

Conclusion

"As currently constituted, the international monetary system has a structural flaw: It lacks a mechanism, market based or otherwise, to induce needed adjustments by surplus countries, which can result in persistent imbalances. This problem is not new. For example, in the somewhat different context of the gold standard in the period prior to the Great Depression, the United States and France ran large current account surpluses, accompanied by large inflows of gold. However, in defiance of the so-called rules of the game of the international gold standard, neither country allowed the higher gold reserves to feed through to their domestic money supplies and price levels, with the result that the real exchange rate in each country remained persistently undervalued. These policies created deflationary pressures in deficit countries that were losing gold, which helped bring on the Great Depression.3 The gold standard was meant to ensure economic and financial stability, but failures of international coordination undermined these very goals. Although the parallels are certainly far from perfect, and I am certainly not predicting a new Depression, some of the lessons from that grim period are applicable today.4 In particular, for large, systemically important countries with persistent current account surpluses, the pursuit of export-led growth cannot ultimately succeed if the implications of that strategy for global growth and stability are not taken into account."

cont.

Jenn said...

"Thus, it would be desirable for the global community, over time, to devise an international monetary system that more consistently aligns the interests of individual countries with the interests of the global economy as a whole. In particular, such a system would provide more effective checks on the tendency for countries to run large and persistent external imbalances, whether surpluses or deficits. Changes to accomplish these goals will take considerable time, effort, and coordination to implement. In the meantime, without such a system in place, the countries of the world must recognize their collective responsibility for bringing about the rebalancing required to preserve global economic stability and prosperity. I hope that policymakers in all countries can work together cooperatively to achieve a stronger, more sustainable, and more balanced global economy."

Changes to accomplish these goals will take considerable time, effort, and coordination?

No they won't.

Jenn said...

I seem to be having an issue with Blogger this afternoon. Part 2 seemed to post by part 1 didn't. Here's my second attempt at posting part 1.

Here are Ben Bernanke's closing remarks at the Sixth European Central Bank Central Banking Conference, Frankfurt, Germany on November 19, 2010. (bold emphasis mine)

Conclusion

"As currently constituted, the international monetary system has a structural flaw: It lacks a mechanism, market based or otherwise, to induce needed adjustments by surplus countries, which can result in persistent imbalances. This problem is not new. For example, in the somewhat different context of the gold standard in the period prior to the Great Depression, the United States and France ran large current account surpluses, accompanied by large inflows of gold. However, in defiance of the so-called rules of the game of the international gold standard, neither country allowed the higher gold reserves to feed through to their domestic money supplies and price levels, with the result that the real exchange rate in each country remained persistently undervalued. These policies created deflationary pressures in deficit countries that were losing gold, which helped bring on the Great Depression.3 The gold standard was meant to ensure economic and financial stability, but failures of international coordination undermined these very goals. Although the parallels are certainly far from perfect, and I am certainly not predicting a new Depression, some of the lessons from that grim period are applicable today.4 In particular, for large, systemically important countries with persistent current account surpluses, the pursuit of export-led growth cannot ultimately succeed if the implications of that strategy for global growth and stability are not taken into account."

Edwardo said...

I've noticed an unfortunate feature amongst some of the posts of late, namely the tendency to assert that some other poster's view, or a view offered outside of this forum is "wrong", without offering much, if anything, by way of a counter argument let alone a refutation. If I may be so presumptuous, since this is not my blog, perhaps some of those posts could be revised and fleshed out by their authors. I imagine you know who you are.

Greyfox "It's the Debt, Stupid" said...

Interesting article about FreeGold/FOFOA at Mediacity, see a couple of quotes below and the link.

So are you one of those people that believe the end of the world is coming as the world’s banks keep printing more and more fiat paper money? Or maybe you do not even know what hyperinflation means but you do know that throughout history no country has been able to print its way to prosperity. The good news for the doom and gloomers is that the world is not going to end because of all the money printing that is happening currently. Yes, the dollar is going to collapse and people that save their wealth in dollars and other various paper monies around the world are going to be financially destroyed. But we as a civilization are not going back to the dark ages.

You see there is a hidden financial system that has been set up around the world over the past couple decades. FOFOA calls it Freegold. It is a system that uses gold as wealth and paper or electronic currency as a medium of exchange. Think about it: never in the history of the world have so many nobodies owned gold. Gold was always horded by kings and royalty, the small people of the world were rarely able to own it. This is not the case with the hidden Freegold system. The banks of the world have been distributing gold all around the world and making sure it gets into the small people’s hands. For the last 20 or 30 years they have done this by manipulating the price of gold down through the paper futures market and through ETFs that hold physical metal.

http://www.mediacity-project.org/fofoa-dollar-and-euro-gold-and-gold-will-collapse-the-dollar.html

answer2me said...

@ greyfox

that articles also references Revelations, "Chapter 18 in the bible seems to be about two world financial systems one that was an arrogant whore and made the world drunk with credit and the other one a true beast of a system".
This, in my opinion diminishes the authors credibility. but the word is getting out.

Tyrone said...

Think about it: never in the history of the world have so many nobodies owned gold. Gold was always horded by kings and royalty, the small people of the world were rarely able to own it.

This doesn't make much sense to me. Gold had been money and currency before it was confiscated. Entire countries of "nobody's" carried it around in their pockets. The opposite is true today. Very few people even own it, but I like to believe I'm holding the fair share of many other nobody's.
Cheers!

Motley Fool said...

@DP

Hmm I missed that reply.

"This is already achieved with invoices -- if the employers along the chain do not have the capital to pay their wage fund they either go BK or they can get invoice discounters to give them short term credit with the invoice as collateral. This is not really so radical, I think."

Actually, there is a huge difference, but it is not easy to explain why.

Unfortunately I will need to give you some reading first before I can even begin to try and explain what the difference is.

http://www.professorfekete.com/articles%5CAEFMonEcon102Lecture1.pdf

http://www.professorfekete.com/articles%5CAEFMonEcon102Lecture2.pdf

http://www.professorfekete.com/articles/AEFInterestAndDiscount.pdf

This should make a good start. Thereafter I could probably start pointing out differences.

Regards

The Fool

scepticus said...

Fool, as a fan of Fekete, perhaps you have seen this article:

professorfekete.com/articles%5CAEFFederalReserveAsAnEngineOfDeflation.pdf

Have you read that?

Pete said...

Truly ironic that MF is giving reading assignments out when MF doesn't take the time to read FOFOA.

As far as I can see it, the real beauty behind FreeGold is that it floats against currency... this means that it is not susceptible to hoarding or arbitration trading, the main failings of previous gold standards.

What can possibly compete with that combination of flexibility and stability?

answer2me said...

@ motley fool

Since you don't like reading the archives, here is a quick one liner as to what freegold is.

"It is about fiat currency finding its natural equilibrium, its stasis with a parallel physical gold wealth reserve"-FOFOA

Perhaps this might help you with your deliberations.

Paul said...
This comment has been removed by the author.
Paul said...

Guys, I think the whole "government is attempting to manage a price upward" thing was not meant to be taken literally. I think it was a bit tongue in cheek, you know?

Seriously, sometimes following this blog is like watching The Life of Brian.

"He has given us a sign! He has given us... His shoe! The shoe is the sign. Let us follow His shoe."

"No, no, the Gourd! Follow the Gourd! The Holy Gourd of Jerusalem!"

Pete said...

Haha, I agree Paul.

Of course the Govt isn't all-knowing, all-seeing. But if the Govt is attempting to artificially stimulate the price of something, you can be sure that the market is pricing it at a lower price, therefore will be overvalued with the Govt's meddling.

Or rather, the Govt will try to manipulate prices to suit its own agenda(s), and that should make you question what is driving those agendas and consider what happens when the price manipulation finally fails.

Paul said...

Hi Jenn

So now we have The Bernank joining the chorus. There does seem to be a concerted effort by TPTB to gradually re-introduce gold to the de-gilded Western audience. Nothing too obvious yet, just hints and nods to gold's prior role, and the acceptance that that role is neccessary after all (albeit with some adjustments required).

Looks to me like it's an attempt to keep the gold price moving up, but in a controled manor. The thinking being that it's inevitable anyway, so lets see if we can't manage it up slowly enough for the banks to survive. Fat chance.

Pete, yes governments will manipulate for self interest. Maybe we're seeing one of the few times govt manipulates price towards value.

holdinmyown said...

I have been away for a while and it has taken me some time to catch up on the comments to FOFOA's most recent post. I must say that upon being introduced to the Motely Fool's early posts I was quite frustrated. I was resentful that he (she?) would be so presumptuous as to demand answers to basic questions that would be obvious to anyone who has read any reasonable amount of posts by FOFOA let alone FOA or Another. My first reaction was that I do not suffer Fools well. However after persevering through the comments I found a treasure trove of thoughts from DP, Costata and others.

I would like to express my deepest appreciation to you MF for initiating this great discussion. It has helped me to further my education. However I would encourage you to spend a great deal of time with the information that is available at this site and at the US Gold archives. Forget about wanting the "Coles Notes" version af Freegold. It does not exist (although Blondie has done a great job!). You have started down the Gold Trail. Don't lose your way.

Jenn said...

@Paul

Hi Jenn

So now we have The Bernank joining the chorus. There does seem to be a concerted effort by TPTB to gradually re-introduce gold to the de-gilded Western audience. Nothing too obvious yet, just hints and nods to gold's prior role, and the acceptance that that role is neccessary after all (albeit with some adjustments required).

Looks to me like it's an attempt to keep the gold price moving up, but in a controled manor. The thinking being that it's inevitable anyway, so lets see if we can't manage it up slowly enough for the banks to survive. Fat chance."

Hello Paul-

I like your thinking, but I would add this. Perhaps Bernanke is not joining the chorus, perhaps he is acknowledging the conductors.

Is he saying, "I believe we should slow purchases of gold" or is he saying, "I now understand Freegold."

--Jenn

Paul said...

Jenn

Yes, I think that's right. He has highlighted the precise reason the old gold-based deficit re-balancing system didn't work.

However, in defiance of the so-called rules of the game of the international gold standard, neither country allowed the higher gold reserves to feed through to their domestic money supplies and price levels, with the result that the real exchange rate in each country remained persistently undervalued.

Instead of the surplus nation allowing the gold received to flow out into the local market, strengthening the local currency, they buried in their central banks. Without reading too much into this, is he saying that the solution would have been for the cental bank to allow a free gold market? Is The Ben Bernank a closet freegolder?

Ben, if you're reading this, emancipate yourself. Throw open that closet door, throw off those paper chains and shout it out loud for all to hear:

"I'm free, I'm golden and I'm proud!"

We're here for you Ben. Time to come home.

holdinmyown said...

The Bernank 60 Minutes Interview:

http://www.reuters.com/article/idUSTRE6B50DI20101206

"One myth that's out there is that what we're doing is printing money," he said. "We're not printing money. The amount of currency in circulation is not changing. The money supply is not changing in any significant way."

They may not have printed actual FRNs to any degree as yet but their commitments to do so have increased exponentially. So what are we to believe? That they will not print or that they will live up to their commitments to print? By increasing excess bank reserves have they not increased their commitment to print? By increasing the guaranteed deposits from $100k to $250k have they not increased their commitment to print? By allowing the FDIC to operate at a deficit have they not increased their commitment to print? By holding Maiden Lane assets (toxic debts) off balance sheet have they not commited to print?

So what is it Ben, are you lying now or were you lying then?

Motley Fool said...

@Scepticus

I have pretty much read all his work.

@Pete

I am taking the time to read FOFOA from the start, but there is a lot, the posts are long and there are many comments(which I am reading too). It will take me some time. Please bear with me.

I have learned some things already from FOFOA, but 85% of what I have read thus far I already knew. The oil angle is new to me and brings some lovely insights.

The Fool

Motley Fool said...

To all FOFOA disciples

From the 30 odd posts I have read and thanks to blondie ( and DP pointing the way) I now understand what Freegold is.

It is a good basic idea.

I have respect for FOFOA, from what I have read of his work, but I do not take anyones work as gospel.

There are many issues that are not considered here on this blog.

Your willingness to open yourselves to new ideas, depends only on yourself. That all of this is not the gospel as preached by FOFOA may mean you are not willing to consider it.

I like the level of minds here, but I will give the old warning to not get stuck in a paradigm and always be willing to expand your boundaries. I am assimilating the knowledge provided here and trying to use it to expand my own knowledge. ( We are the Borg, resistance is futile. )

The above was written tongue in cheek. Please don't crucify me. :P

Regards

The Fool

DP said...

Good morning again, my friend The MF. I am very pleased to hear that you have made the effort now to read a lot more of the material around here, and that it begins to make a lot more sense to you as a result. I'm sure that you will enjoy further "ah-ha!" moments as you continue to feel your way along the thread with the rest of us. Freegold is the simple concept that just keeps giving.

I want to join holdinmyown in thanking you for your contribution to the discussion the last few days in this post's comment thread. I am sure that it has been very useful to a lot of people, and certainly it has been useful and interesting to me personally.

I look forward to working my way through the Fekete assignments you have set for me. :-) I have passed through Fekete some time ago along the circuitous route to finding Freegold, with which I have yet to find fault but as you say nothing and nobody are perfection incarnate. Previously, I got only so far with the Dr's ideas, before I began to find issues, and moved on. I shall enjoy going back over Fekete's work in more detail now with a better perspective.

Finally, I have noted along the way FOFOA's choice to stay out of the discourse. I have a strong feeling we will all once again very much enjoy the next post.

Cheers!

Angel Eyes said...

Motley Fool's blog is here.

Motley Fool said...

Hey DP

I have now made a electronic copy of all FOFOA's posts. My brief glut of internet access ends tomorrow. I will try and read through all of them this December.

I may be around sporadically, but will probably only be around again next year.

Fekete's work is not easy to understand, he writes like a mathematician (which he is). I do think his extension of Adam Smith, Carl Menger and Mises' ( amongst others) work is pure genius.

FOFOA likely considers me a fool ( which I am, so that's alright).

Cya around. Maybe today, maybe tomorrow, maybe next year.

The Fool

Edwardo said...

scepticus wrote:

"No-one is going to make a BMW and exchange it for an ounce of gold ever, and if that was the trade on offer then there simply would be no beemers for sale. You could view that as beemers having zero value, or having infinite value, depending on your bias."

I hear your assertion, but I detect no evidence to support it, merely a fervent announcement. In the meantime, I feel obliged to point out to you that certain gemstones (of an unspecifed quality) are already worth far more than an entire fleet of BMWs. Ditto certain objet d'art.

"Shows like X-Factor, and fashion items both should have nearly zero marginal utility according to your theory and therefore no value but actually these things are very highly valued year after year by the population."

This line of thinking seems positively bizarre, even incoherent, employing as it does a T.V. show within a discussion/context of the concept of marginal utility. A T.V. show isn't properly consumed the way a pair of shoes are, which leads me to...

your referencing "fashion" in such a vague, open ended manner, which also strikes me as, at best, a non starter.

"Fiat money now pays zero nominal return, as does gold so the revaluation will be completed when that fact is reflected in relative prices after accounting for better long term stability of gold and the better exchange liquidity of fiat."

When did fiat money ever pay any sort of return, nominal, let alone real?

As for the rest of your statement, I must admit, I can't parse it.

"That's all they [gold coins] do. And hoarding them doesn't interfere with any other economic activity, at least not when they are not "official money."

This quote, wherever it emanates from, seems somehow lacking a critical degree of context. And of course, gold coins are just part of a the larger realm of physical gold.

Likewise the following statement from you:

"The presumption expressed is that economic activity will proceed regardless of what happens to the value of gold and that no matter what its prices it will not alter economic activity and that saving in gold doesn't alter economic activity."

It's not a presumption, gold hasn't altered economic activity one jot since it has risen approximately six fold-in dollar terms- over the last ten years.

DP said...

scepticus: Fiat money now pays zero nominal return, as does gold so the revaluation will be completed when that fact is reflected in relative prices after accounting for better long term stability of gold and the better exchange liquidity of fiat.

This is also the reason for JPY strength - it has paid 0 nominal return for ages and its strength is an outcome of the rest of the world moving towards zirp.


Fiat money NEVER paid interest. Take a $100 note and stick it in your sock drawer. Come back a year later, how much interest appeared on top of it? The interest you are getting is given to you by the bank/institution you gave it to, as your cut of the spoils from their investing it and to reflect the fact that it is worth less than when you gave it to them. You deposited your cash with them, and it became theirs. To thank you for letting them use it, and to compensate you for the risk they might not have it to give back to you when you want it as well as your loss of purchasing power due to inflation during the time they held it, they pay you interest. You can lease people your gold too and thereby receive interest via a similar mechanism, if you really want to. You will get a lot less for leasing gold though, since generally speaking the risk of inflation during the period of the loan/lease for fiat is significantly higher and of course you expect to be compensated for that risk.

Secondly, JPY is strong now because it was so, so weak before. When they went to ZIRP all that time ago, it was an obvious arbitrage trade to sell JPY short against other currencies that were still paying much higher interest rates on their bonds and therefore those currencies were in significantly higher demand. It even got a tail wind from the BoJ having a stated aim to weaken JPY to help them with export competitiveness, which they felt they had to do because domestic demand had fallen off a cliff. (AKA The Yen Carry Trade.) There was a massive amount of volume in this carry trade, and as it gets unwound the opposite force of selling other currencies to buy back the short-sold JPY from earlier, before hitting a loss on the carry trade transactions, creates a similarly artificial strength in JPY. A short squeeze on Yen speculators. I have no idea when the yen carry overhang is going to be all wrung out and dry again. Perhaps it already has been(?). I'm sure there are better-informed people around here with an opinion on this?

scepticus said...

Hi Edwardo, thanks for the considered riposte. My response:

"I hear your assertion, but I detect no evidence to support it, merely a fervent announcement. In the meantime, I feel obliged to point out to you that certain gemstones (of an unspecifed quality) are already worth far more than an entire fleet of BMWs. Ditto certain objet d'art. "

Gold has never achieved a valuation of $55K (todays dollars), so my assertion has considerable evidence. at 55K gold would buy about 55,000 loaves of bread , which it has never done in history. Of course gems can be worth more than a beemer, where they have extremely high symbolic value. You cannot value a gem according to marginal utility.

"This line of thinking seems positively bizarre, even incoherent, employing as it does a T.V. show within a discussion/context of the concept of marginal utility.
"

That not the point. If a large amount of what we consume is not 'properly consumed' that is, it is a service or some other intangible, it can't be measured my marginal utility. In which case the argument about marginal utility is not sufficient to justify a purchasing power or value for gold or anything else.

Fashion goods ARE consumed, but they do not appear to be valued by people according to marginal utility.

""Fiat money now pays zero nominal return, as does gold so the revaluation will be completed when that fact is reflected in relative prices after accounting for better long term stability of gold and the better exchange liquidity of fiat."

Fiat money has paid a nominal return since 1971 (arguably earlier) as per the bank base rate and 'risk free' yield curve.

"This quote, wherever it emanates from, seems somehow lacking a critical degree of context. And of course, gold coins are just part of a the larger realm of physical gold."

the quote is by the author of the OP - FOFOA I presume.

"It's not a presumption, gold hasn't altered economic activity one jot since it has risen approximately six fold-in dollar terms- over the last ten years."

Then I would say that you have a bubble. Its either a bubble, or freegold.

In fact although I may have missed a key point, would it be the case that freegold could be characterised as a permanent, never ending bubble in gold?

scepticus said...

@DP "The interest you are getting is given to you by the bank/institution you gave it to, as your cut of the spoils from their investing it and to reflect the fact that it is worth less than when you gave it to them."

Not true. Base money is the electronic equivalent of paper money and base money does pay interest, in fact it pays the bank base rate. So if the base rate is 2%, the central bank pays the commercial banks 2% interest on all deposits of base money they have sitting in the central bank.

Consumers can't hold electronic base money, only banks can. But that doesn't alter the fact that fiat pays interest. If the base rate was 0, very few savers would get 2%. But if the base rate is 2%, many savers would get 2%.

Motley Fool said...

Hmm Scepticus

I may be able to resolve your issue.

Marginal utility does not only refer to physical goods. It applies to all things we spend our money (wealth) on.

Psychologically fashion shows and television has marginal utility to people, hence they spend money on cable etc.

And just like any thing that is consumed, any one person only needs to watch so much fashion tv ( depending on his preference). He cant watch it 24 hours a day because he needs to eat sleep and work too.

Does that help?

The Fool

DP said...

@MF: Having had a very quick glimpse at your blog (thanks, Angel Eyes), perhaps I was making an incorrect assumption when I first saw your name, that you were the proprietor of The Motley Fool?

If that is the case, I apologise if I have perhaps been unnecessarily tough on your Thoughts, and in expecting you to demonstrate the courtesy of reading the archives before pulling Freegold apart.

Sincerely,

DP :-)

DP said...

scepticus: Base money is the electronic equivalent of paper money and base money does pay interest, in fact it pays the bank base rate. So if the base rate is 2%, the central bank pays the commercial banks 2% interest on all deposits of base money they have sitting in the central bank.

This is the incentive the CB offers the commercial bank, to encourage them to keep the money in reserve rather than to loan it out. If the commercial bank took that money off deposit with the CB and "locked it in its own vault", there would still be no more of it when they checked it a year later. The CB does this because it is very worried that the commercial banks would be so stupid as to greedily lend out all of their assets, keeping almost nothing in reserve, and would then be highly susceptible to a run.

The interest paid by the CB on reserves held with them is not part of the cash (equivalent) itself, it is a bonus of additional cash for not instead taking it out and using it somehow.

Motley Fool said...

Hey DP

I don't understand how who I am should make a difference to how you treat me, unless you are biased.

But no I am not that proprietor. I found it afterwards on google, was quite amused that my name coincided and decided I liked the irony, and left it as is.

The Fool

DP said...

MF: I don't understand how who I am should make a difference to how you treat me, unless you are biased.

Yes, I was biased. I was biased to think you were someone that should know better than to come to a forum and state up front you haven't read the content but then proceed to demand personalised answers and have the audacity to try telling everyone here what is wrong with the thing you said yourself you have not yet read or understood. I admit with hindsight, I should have checked your profile and from there identified your blog, which would have clearly demonstrated to me you were not at all who I had assumed. So, as I say, I apologise for making that assumption. :-)

Motley Fool said...

Hey DP

I don't mind the assumption, though you may wanna work on your being biased. :P

That being said, I don't see the need for apology.

Peace

The Fool

DP said...

A video I just watched from Youtube which, I think, displays the positives made possible through paper credit. Much of the time we focus only on the negatives. It's not ALL bad.

The Joy Of Stats

Motley Fool said...

DP

That is a very cool video. Thing is that has happened despite FIAT currencies, not due to it. The measurement for wealth in that graph would have been measured in FIAT also and not gold. It would look a lot different if gold had been used to determine wealth.

The Fool

DP said...

MF, RBs are still paper credit.

Motley Fool said...

Dp

Haha, good point. Doh. xD

It would be interesting to get that data, to compare the speed of growth during 1800-1900 of the countries using some semblance thereof (us, uk, etc). vs the growth from 1910 to 2010, for life expectancies.

The wealth would be very nice if it were measure in gold ounces taking into account the fluctuating currencies.

That would be a sight to see. :D

TF

DP said...

@MF: Agreed. Aint gonna happen though :-)

scepticus said...

DP, a commercial bank cannot take its reserves and lock them in a vault of its own because the reserves MUST be deposited with the CB.

It can lock paper cash its vault I think but not electronic base money.

So all electronic base money pays the base rate all the time, unless it is locked up in one of those sterilization facilities, in which case it pays more than base rate, not less.

Leaving aside the anomaly of paper cash, fiat money has historically ALWAYS paid a nominal return.

Motley Fool said...

Hmm Scepticus

I suspect gold also paid interest under those circumstances, the interest was just 0% because money wasn't being continually debased. :P

Historically gold also paid interest, in gold, if you take the case of a individual.

TF

Texan said...

Scepticus,

I have skimmed through your many, many posts, and I gather you don't think gold can be a store of value.

I don't think you are understanding what FOFOA and others are really talking about.

Here is a real world analogy. I lived in Argentina for several years, and have followed their financial adventures ever since. The Argentines have long had a token fiat currency (austral, then peso). But no one holds large amounts of savings in pesos. They hold their savings in dollars, apartments, and farmland. I would expect that this is probably a similar strategy in most of Latin America.

Now I know a lot of Argentines are switching out of dollars into gold. Through hard experience of several bouts of real hyperinflation, they know how the story ends.

Try not to over think it. If you wake up tomorrow and the US government is exchanging $1 bills for $10 bills, you will be glad if you owned gold.

And yes, if that happens, bread will be a lot more
expensive (in nominal dollars!)

scepticus said...

MF "I may be able to resolve your issue. "

Well kinda, but I don't see how one can then use marginal utility to claim an potentially unbounded value for gold.

THis bit:

"The answer is "the same utility," because unlike ANYTHING else, (yes, even silver), gold has INFINITE marginal utility in this particular role."

this does not imply unbounded value. As we have seen in Zimbabwe, the diminishing marginal utility of gold makes an appearance as people find one more loaf to be preferable to one more little speck of gold. So even if gold never suffers from diminishing returns in its role as a store of value, the value assigned to wealth storage can and does change.

perhaps this just means that the notion of marginal utility - a method of valuing - can't be applied to *stores* of value.

Also, what MU fails to explain to us is how part of the value equation, perhaps the greater part, is determined by how others are simultaneously valuing the same item at the same time. This is the greater fool theory of value, and it has some merit. In that people will value items with either a speculative bent, or with a view to the symbolic outcome of owning or consuming the item.

One will often acquire an item not because one needs it but because one thinks another needs or wants it. In fact money as medium of exchange and store of value derives entirely from a shared, consensual delusion that others want it.

The notion that fiat money is required to 'free' gold ought to ring alarm bells because once freed from any objective constraint its value is purely symbolic, and symbols are a cultural construction subject to change. As such gold would be valued according to just the greater fool theory of value, if it is not actually required to conduct economic activity.

Presumably this objection has already been addressed in past posts on this site or the linked ones?

costata said...

Re: Real Bills Doctrine

Everyone interested in this should attempt to understand interest rate versus DISCOUNT (raised again and again by Fekete). More on this later.

MF you, as one who appears to think they understand it, needs to understand the critical, hyper-critical difference between an interest rate and a discount in terms of its affect.

Motley Fool said...

Hey Scepticus

It's not unbounded. It is bounded by the amount of wealth that exists in the world, that is not being consumed. ( if that makes sense).

Actually, in terms of technicals, FOFOA is incorrect here, I changed my wording to agree with him in order to not create further confusion.

Gold doesn't have Infinite marginal utility, it has Constant marginal utility ( for all practical purposes).

The rate of change of marginal is the important part. For bread it declines very fast. For gold it declines so incredibly slowly that it can be said to not change at all.

As to your last part.

The economy is very complex. Very very very complex.

There are two choices. Arbitrarily choose a value for representation ( like currently) , which ends up failing because due to this complexity you simply can't account for everything, your changes are too slow, and there is a time delay in your getting information.

The other choice is to let the market determine the value. The unbalanced equilibrium theory of market value models reality quite closely here. There is a spread between what people will pay and what they will sell at, but even so it defines a narrow range.

The market is infinitely more capable of deciding what a currency value should be because it is ( in a single item such as gold) y referencing everything with everything else continuously and by that way giving gold it bid spread.

I know, a few sentences doesn't even begin to cover it, but maybe you can get the gist of my meaning from that. :)

Regards

The Fool

Motley Fool said...

Hey costata

You are a bit of a condescending bastard. Does that work for you? :P

I do understand it, and what it affects, and yes it is very important.

TF

Texan said...

Let me add one more point. I would expect you will take issue with my " nominal" comment, and say that is why it can never revalue in today's dollars.

But it can. Because it is, in effect, the "ultimate" ( as in perfect) real estate. There is only a finite amount of it, so as the world starts to "go Argentine", naturally they will look to ANY hard asset to store value against massive devaluation. However gold is the only hard asset that is both universal, portable, indivisible, and not disclosed.

So as people move to buy hard assets, they will bid gold to the moon in today's dollars. Because as my Dad used to say about land, "they aren't making any more of it". Which means current owners are the only sellers. You can't buy it except from a seller, who aren't going to be very inclined to part with it (read the John Law link).
Get it?

Now, in the interest of objectivity, I will say that I can see scenarios where this does not happen. All of them require the US to introduce some degree of "hardness" to it's currency, such as a 20% interest rate or something. Do you think that's happening.

Motley Fool said...

Actually costata

I'm once again being nice and changing my wording to reflect yours.

You have it bass-ackwards. What one should try and understand is what affects the rate of interest and what effects the discount rate.

I dont need to be nice to someone who sneers at me.

The Fool

Edwardo said...

A number of scepticus' contentions seem more than a little dubious.

To wit:

Gold "revalued" at higher levels, perhaps even vastly higher levels, must, perforce, have some marked (dampening) effect on economic activity. Gold has risen approximately six times since 1999 with no discernible effect on economic activity to date.

The idea that those those who build BMWs simply would not do so with the prospect of having them valued for the cost of a one ounce gold coin doesn't seem quite so outlandish when gemstones (of some unspecified quality) already are worth far more in currency terms than all but the best autos of any brand available. I could have substituted a number of other items instead of gemstones such as objet d'art.


Using a recurring T.V. series as an example of marginal utility (in action) is unorthodox at best, but, more frankly, it seems bizarre.

Ditto for your reference to
fashion, which, itself, is something of a hazy concept that you employ for the purpose of making an unsuccessful point regarding the nature of another (disputed) concept, namely, marginal utility.

scepticus said...

"It's not unbounded. It is bounded by the amount of wealth that exists in the world, that is not being consumed. ( if that makes sense). "

Not sure why that would be. Surely its bounded by the desire for deferred consumption?

Nearly all the worlds physical wealth, todays surplus, is consumed if not today then this year. So by unconsumed wealth are we talking land and stashes of copper, or something else?

"The market is infinitely more capable of deciding what a currency value should be because it is ( in a single item such as gold) y referencing everything with everything else continuously and by that way giving gold it bid spread."

This I agree with - but I would say, if I have understood you, that this is the same reason why the market doesn't need a single reference asset, which is what I think freegold claims to be.

There are three ways to assign value:

Marginal Utility
Greater Fool Theory (speculation)
The Symbolic (e.g. a brand)

What I am struggling to understand is firstly why people here are saying (I think) only the first applies to gold, and secondly why it is valid to apply MU (which talks about the marginal use value of goods and services) to a *store* of value.

If a store of value qualifies as such because the item *holds* its value, why does it have this attribute in the first place? What can MU tell us about the answer to this question? Nothing, I think, because it doesn't answer the question of why gold holds value over time, it simply assumes it does.

If anyone has a link to point me to on these matters or cares to advance an explanation I'll be most grateful.

Motley Fool said...

Hey Scepticus

"the desire for deferred consumption"

Thats just another way of saying the same thing. In a way land is also "consumed".

http://www.professorfekete.com/articles/AEFMonEcon102Lecture1.pdf

Here is a link for you that answers those questions. He discusses it it in more detail in other places but this should be sufficient.

Regards

The Fool

scepticus said...

edwardo my points may well be contentious, especially here!

What I am trying to understand is essentially what the key quality of gold is that would make a small speck of worth a BMW.

I am told it is because gold has nearly flat MU and beemers don't, but this explanation simply assumes gold acts as a store of value. But why, actually?

My points about fashion etc is as per above, MU, Greater Fool Theory and Symbolic value are all important here.

Once could suggest that the symbolic benefits conferred by having two pairs of Jimmy Choos IS the use value of a pair of Jimmy Choos, but without knowing the nature of the symbolic value of the brand, it is impossible to say anything about the MU. So MU is secondary here.

Does this make sense?

julian said...

"gold has INFINITE marginal utility in this particular role"

how i am understanding things,

as store of value, the marginal utility of gold does not diminish (or at least keeps the appearance of a constant marginal utility)

the only reason it works that way is because its use is not for consumption, so there can not be reached a "limit" such as being "full" with bread (hehe you can't eat it?!)

yet, as has already been stated, gold, like any other physical thing, is subject to preferences and substitution

especially when considering such a needs hierarchy as that of maslow, we see that circumstances and contexts make all the difference

yes, as always, things are (inter)dependent

and when it comes to preferences, people might prefer to consume rather than save, but that does not affect the marginal utilities of anything, it just affects what will be consumed (or saved in the case of gold or any other savings vehicle)

this is why someone can value a BMW more than 1troy Au, or vice versa - preference

but the reason gold makes a better store of value than a BMW or anything else, is because it does not get consumed (or degrade over time), and that fact means that its marginal utility remains constant

1 more gram of gold does not decrease the utility of the rest of the hoard, because it is not "USED" in the same way as any other physical thing (or service)

even TV shows require one's time, and this is limited, therefore there is definitely marginal utility involved with that

this is the understanding i take from FOFOA's latest blog entry, and from reading some of the comments

-julian

Motley Fool said...

@scepticus

http://www.fame.org/htm/Fekete_Anatal_Whither_Gold_AF-001-B.HTM

This is better if you have more time available. If you really feel the need, I can find a even more detailed one for you as regards this particular aspect.

Regards

The Fool

julian said...

@scepticus

you will do well to reflect on your own question and come up with a short list of reasons, i bet they will be similar to those that many friends here would end up sharing with you

think about it

SOME THING must be a store of value for humans, as economic actors

whatever that thing is, what qualities would you think it might need to best serve such a USE?

think of all the things available to humans here on earth, and compare and contrast them with respect to their potential or capacity for stores of value

on some level, it is arbitrary perhaps, that gold is the granddaddy of them all, but on a deeper, more fundamental level, it is no coincidence that gold plays this role best

scepticus said...

thanks MF I'll take a look.

costata said...

Hi Motley Fool,

I liked this:

"You are a bit of a condescending bastard. Does that work for you? :P"

Yes.

"I do understand it, and what it affects, and yes it is very important."

No you don't and yes it is.

"You have it bass-ackwards. What one should try and understand is what affects the rate of interest and what effects the discount rate."

Ass-backwards? Is a discount the reverse side of an interest rate coin? Are two people treading a stair in opposite directions at the same time automatically Siamese twins?

A discount rate on a Real Bill stops at zero while a debt instrument has no LIMIT.

You say I'm condescending, I challenge you to think.

DP said...

I was just taking a walk back up memory lane, to see what I could learn from all that has gone above (aside from trying to avoid assuming people are who they at first appear :-) ), and realised nobody had responded to this nugget from sean:

So let me see if I got this straight... the utility of gold is that it is not a utility.

I just wanted to come back to that and give my opinion on it: Yes. What is more, I have come to think all those people clamouring to buy silver for the same reason they might be buying gold, are going to experience an "Ah-ha!" moment, too late to do anything about it.

I thought I had posted a comment like this at the time, but I see that it still didn't make it up to the Blogger servers somehow. They (Google) seem to have a lot of trouble just lately, with posts not showing up and then suddenly they arrive the next day. I've actually had a couple of comments I've posted that still haven't shown up even days later now. Oh well, bygones...

I'm sure there are plenty of other drops of juice we could wring out of this bag of comments, but TBH I am at this point looking at the calendar and the number of comments on this post already, and thinking time is likely about to be called by the headmaster anyway. I look forward the bell, and to the new school day that follows.

DP said...

@MF: I was just taking a quick look through the posts on your blog, and wanted to add a comment to the Eye of the Storm but found I couldn't unless I register for an account somewhere in SA that I am clearly not about to do. :) So, I figured I only have this avenue now to write to you, unfortunately (apologies to everyone else).

I would only wish to see the "a trillion dollar derivatives monster" upgraded to "quadrillion dollar". I'd hate for your followers to understate their real risk by a factor of 1000. ;-)

Fauvi said...

In case someone is interested to hear the some news regarding the situation in Germany. After an extensive hopping through MSM today I noticed:

*Using double speak they paint a doom scenario for the next 10 – 20years !(self explanatory for the monetary measures to be taken in short time?)
* An euro dislocation appears to gain momentum (Germany out or two different currencies)
*A growing number of MSM publications recommend gold (10% in order to be available
for everybody and to prevent a price explosion?). They even published some “research”
material how much gold people in Germany have!

Am I reading too much into this?

Motley Fool said...

Hey Costata

The problem with trying to talk to people with a superiority complex is that you can never teach them anything.

Due to insecurity of their personal worth, they make themselves feel better by trying to humiliate others.

Sadly the level of their intellect doesn't even help at this point as the only consideration is power play.

You are not trying to make me think, you are trying to make me look stupid ( something I can manage very well on my own thank you very much).

I call bullshit when I see it and I don't have time for cock measuring games.

I don't mind being wrong at times, It is the path of learning. My self worth is also not measure by the mistakes I make or how others measure against me.

Your little analogy shows you still have it bass-ackwards( yes I misspelled that wrong purposefully).

"Is a discount the reverse side of an interest rate coin?"

No.

"A discount rate on a Real Bill stops at zero while a debt instrument has no LIMIT. "

This is true, but you are still missing the point.

The importance lies in realising that the interest rate finds its value in peoples propensity to save, whilst the discount rate finds its value in peoples propensity to consume.

That these were mistaken to be these same rate is a huge mistake in economics.

They are not the same thing, and to a certain extent they work against each other.

A grain merchant advancing grain to a miller is not a loan. He should not get Interest and the rate of compensation is not determined by the rate of interest.

I am probably wasting my breath. As I said, it's pointless trying to explain things to condescending know-it-alls.

The Fool

Ps. Just for salt in the wounds, I can see you possess intelligence, but you are not that smart buddy. Get over yourself.

Motley Fool said...

Hey DP

Yeah I smiled when I saw sean having that aha! moment.

In my home language a "triljoen" actually has the right amount of zeroes, I think ( I do get confused).

Since I wrote it in english I should have used quadrillion. Nice catch. :D

Regards

The Fool

ps. yeah, their comment system is a bit stupid, then again to comment here I had to register an account too. :P

raptor said...

I know FOFOA opinion on gold vs silver and I agree with it... but I just got a sort of "revelation" in fact it is just a very simple logic if you think about it (sorry to de-rail the discussion, just wanted to share.)
So the thing that "hit" me is the following, as most of you know we not yet in the mania phase, but what I think will happen when we get there is first the gold will lead... as it becomes obvious to most of the ppl there is no higher price soon to be reached, big amount of small investors will rush to silver market (for many of them gold will seem too expensive).
After the mania passes the silver will drop faster as always.

My conclusion from this is that at this stage silver will outperform 2-3 times percentage wise gold rise during this short period.

May be this will be a good idea if you want to TRADE and do the switcheroo around this time.

ok.. just wanted to share, cause it seems pretty obvious something like this could happen.

julian said...

scepticus says:
why it is valid to apply MU (which talks about the marginal use value of goods and services) to a *store* of value.


If a store of value qualifies as such because the item *holds* its value, why does it have this attribute in the first place? What can MU tell us about the answer to this question? Nothing, I think, because it doesn't answer the question of why gold holds value over time, it simply assumes it does.


the marginal utility of a thing does seem to determine how well it "holds" value

that is the hypothesis and the general concept put forth in FOFOA's "The Value of Gold"

this hypothesis is "tested" by a thought experiment that deals with marginal utilities of different things, with gold proving to not diminish in marginal utility, and therefore "hold" its value, no matter how many "units" are "consumed - aka hoarded", while the other things, valuable as they are, do indeed decrease in marginal utility, and therefore their "value" is not so stable as a "store of value"

remember, at the beginning of his post, FOFOA discusses Value Theory, and some of its intellectual history

value comes from utility, and from inherence

all physical things must be useful in some way, for them to have value, since no physical thing is valuable for its own sake, but for the sake of some aim

value is often based on NEED, and because utility is for the serving of those needs, a BMW can easily be valued higher than a troy ounce of gold, if the need is transportation

but

if the need is storing value, gold's utility is best

@scepticus:

your basic question is : "what makes anything hold value, and what makes gold do it best?"

i have a feeling you know an answer to this question, you just don't believe it's accurate

it probably is though

Edwardo said...

"Does this make sense? Once could suggest that the symbolic benefits conferred by having two pairs of Jimmy Choos IS the use value of a pair of Jimmy Choos, but without knowing the nature of the symbolic value of the brand, it is impossible to say anything about the MU. So MU is secondary here."

-Yes, but it seems to me that the suggestion you posit, if you are, indeed, positing it, is purely conjecture.

scepticus said...

Indeed it is Edwardo, as is the notion of 55K/troy oz.

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