Monday, September 12, 2011

Once Upon a Time

_________________

The story I am about to relate to you was first told in a lecture hall at the School of Political Sciences in Paris (L'École des Sciences Politiques) on March 17, 1932, from the depths of the Great Depression. It is, perhaps, more relevant today than it was on the day Jacques Rueff delivered it. Rueff began with this:

"The story I am going to relate covers a long period. It is the life story of the gold standard, now afflicted with so grave an ailment that only time will tell if the victim will succumb or be left, at the very least, in a state of virtual paralysis." [1]

He said “only time will tell”… well, some time has passed, and it did "tell".

So what grave ailment was he talking about in 1932? What did time reveal since then? And how has this important story been misread over the years? I will try to answer these questions and to retell Rueff's story the way I think it should be told today. And my hope is that this will, in your mind, bring together many dissonant concepts, as it did in mine, into a grand, unified, long-line view of Freegold.

Jacques Rueff told the story of two different monetary conferences, two "committees of experts" that both met in Genoa, and changed the course of monetary history. The first committee gathered in October, 1445, and the second one began in April, 1922, so Rueff's lecture had ten years on this second conference. The two committees gathered under similar circumstances, to respond to monetary disorder in the aftermath of a protracted war, yet they came to opposite conclusions.

The first committee declared gold the new, sole monetary reserve, unleashing its 500-year reign as the governor of supply and demand that would act as the natural counter-balance to international trade for the next half a millennium. The second committee, under the guise of improving this system, destroyed it, laying the groundwork for the unchecked growth of global imbalance, perpetual malinvestment and the series of periodic monetary crises we have experienced for the last 90 years.

The 1922 Genoa Conference. The British Prime Minister Lloyd George on front row, left.

Prior to 1922, gold was a vibrant, fertile member of the global economic ecosystem — what I like to call the Superorganism that governs naturally, far above the ability of mere mortals. Rueff put it this way:

"Gold… governs all the components of our international transactions with faultless effectiveness… it is a forceful but unobtrusive master, who governs unseen and yet is never disobeyed. Nevertheless, it is too wise to oppose the inclinations of men. It never, for example, prohibits the purchase of foreign securities; taking all their actions into account, it guides the conduct of men in order to prevent the upsetting of the balance it is supposed to maintain. We should also point out that while guiding men's actions it respects their freedom of choice. They are always at liberty to buy according to their preferences, but the monetary mechanism, in its omnipotence, will raise the price of those items whose purchase is contrary to the general interest, until such time as consumers decide of their own free will to stop buying them. The gold standard thus resembles an absolute but enlightened monarch; he does not destroy man's freedom, but employs it for his own ends."

The sustainability (and, indeed, the very survival) of the global economic ecosystem is predicated not on balance in the monetary realm, but on the delicate balance between real production and real consumption. It is the flow of actual physical gold that, at least prior to 1922, moderates and regulates this complex balance because gold, like real production and consumption, exists in the physical realm and is therefore not subject to the politics of easy money. But following the economic destruction of Europe in WWI (1914-1918), the US experienced high inflation accompanied by a dramatic inflow of gold. So in the early 20s, along with raising interest rates and federal budget cuts, the US began a policy of gold "sterilization" to resist the natural price mechanism—inflation—that would have otherwise acted not only as a brake on the inflow of gold all through the 20s, but also as a spur on the struggling European economy:

Federal Reserve Sterilization of Gold Flows

When a country imported gold, its central bank could sterilize the effect of the gold inflow on the monetary base by selling securities on the open market…

Sterilization of gold flows shifted the burden of the adjustment of international prices to other gold standard countries. When a country sterilized gold imports, it precluded the gold flow from increasing the domestic price level and from mitigating the deflationary tendency in the rest of the world. Under the international gold standard, no country had absolute control over its domestic price level in the long run; but a large country could influence whether its price level converged toward the world price level or world prices converged toward the domestic price level…

Traditionally, economists and politicians have criticized the Federal Reserve for not playing by the strict rules of the gold standard during the 1920s.

…Federal Reserve sterilization in the early 1920s probably served the best interests of the United States.

-Leland Crabbe, Washington, D.C., 1988
Board of Governors of the Federal Reserve System [2]

The price mechanism is the Superorganism's governor in the delicate balance between production and consumption. It is what keeps the economy in a sustainable balance somewhere between starving shortages and ruinous waste. And the flow of unambiguous real gold has always been a key international transmitter of the price mechanism because gold is the physical-monetary proxy for economic goods and services, subject to the same physical limitations as goods and services. Modern currency, on the other hand, even though it flows and trades like a commodity, is subject only to political limitations, not physical ones, and is therefore qualitatively different (an inferior, infertile transmission medium) from the perspective of the Superorganism.

The flow of gold is the flow of real capital, even if today it is obscured by an electronic matrix of imaginary capital (infertile media). Today's debt (the bond market) is imaginary capital in that it cannot perform in real terms; with "real terms" defined as economic goods and services (under current economic conditions) plus gold—and this part is important—at today's prices. It is all nominal debt, but the price of goods and services—as well as the price of gold—is what connects it to reality. And at today's prices of each, bonds are imaginary capital. It is our obsessive compulsion to centrally control the price mechanism that sterilizes the vital signals that would otherwise be transmitted to billions of individual market participants keeping the monetary and physical planes connected.

The outflow of real capital from any zone signals the need to produce more and consume less. The inflow of real capital signals the need to consume more and produce less. The price mechanism transmits this signal to individual actors in the economy. The inflow of real capital will raise prices vis-à-vis real capital, which makes exports more expensive abroad, lowering exports and raising imports. The country with an inflow of real capital will have to start consuming more of its own production or else it will just pile up and rot.

Likewise, the country with an outflow of real capital will have to start producing more than it consumes. Again, this signal is transmitted to individual actors via the price mechanism. With less real capital upon which credit flourishes, credit will contract, general price levels vis-à-vis real capital will drop, the purchasing power of real capital will rise, and real capital will become more expensive in terms of goods and services. Exports will rise because exportable goods will fetch a higher price abroad, imports will slow because local prices have fallen versus the vanishing real capital, and people will have to begin producing more than they consume in order to survive.

The monetary plane, that electronic matrix of imaginary capital, obscures the simplicity of what is actually happening today, and it does so by design. But it's really simple, and hopefully I can help you see through all the noise. Everyone knows that the sovereign debt in Europe is a problem today. But all we hear are complex solutions proposed within the monetary realm. Consolidate this paper, roll over that paper, haircuts, pay cuts, job cuts, interest rate cuts, print, sell, buy, repo, reverse repo, reverse-reverse repo, rescue funds, POMO, SOMA, EFSF, SMP, EMP, ETA, ESPN; it can make your head spin after a while.

The lesson from the monetary changes made in the post-war 20s is that if you want the debtors to ever be able to repay their debts in real terms, you do not sterilize the vital spur and brake function of gold by locking its purchasing power. It is the price mechanism—price changes in goods and services—that transmits the arbitrage signal that causes gold to physically flow to where it has the greatest purchasing power. For a struggling economy to grow and expand to a point at which it can repay its debts, the gold not only needs to flow, but it must be a fertile member of the economic ecosystem so that it can perform its vital function.

I know this is difficult to see, so I want you to try a little thought experiment with me for a moment. I want you to imagine that the complex and confusing monetary plane doesn’t exist. You can still imagine the debt existing, but imagine that the debt is denominated in physical goods and services. So there’s only real goods and services… and gold—gold being the proxy for goods and services that floats in value against those goods and services.

(We can eliminate currency from the equation in our thought experiment because we know that we want a relatively stable currency—not too much inflation, not too much deflation—for the purpose of contracts and debt if we want a vibrant economy.)

Now imagine you have one country with debts denominated in goods and services. Let's call it Greece. Greece owes Germany X goods and services. Meanwhile Germany is still exporting goods and services while Greece is still importing. This leaves Germany with a structural surplus in its Balance of Payments and Greece with a deficit. But gold can reverse this flow in an instant on the BOP at a high enough price. And once it does, it will begin to exert the brake and spur forces on the two countries until the flow of actual goods and services finally corrects and reverses. Once that flow corrects, the gold flow (which is opposite the flow of goods and services) will reverse and subsequently the brake and spur forces will also reverse.

Gold flows in the opposite direction of goods and services. Remember when ANOTHER said, "gold and oil can never flow in the same direction"? Well it's the same thing with other goods and services. Germany and Greece may both be exporting and importing, but Germany is exporting more, which shows up on the BOP as a Trade Surplus and a Capital Account Deficit. At a high enough price, a small amount of gold can (and will) flow in the other direction, from Greece into Germany, and if its value exceeds the (net) trade difference between Germany and Greece, it will turn Germany's Trade Surplus into a Trade Deficit and a Capital Account Surplus.

Now jump back to post-WWI. Europe was the debtor with debts denominated in goods and services owed to America. But Europe's economy was struggling to get back on its feet, making it difficult to pay its debt in actual economic goods and services. So the proxy—gold—flowed from Europe to America in unprecedented amounts. This flow should have acted as an incremental brake on the American economy and a spur on the struggling European economy. But instead, the US sterilized the effects of this gold flow in 1920 and '21 while implementing "intelligent and courageous deflation" (President Harding's words), and then in 1922, the Genoa Conference sterilized gold's natural mechanism globally.

Once sterilized, gold flowed uncontrolled into the US right up until the whole system collapsed and beyond. This would be similar to Greece selling gold at today’s prices to pay off its debt. The gold would quickly be gone and then the economy would collapse. The sterilization of gold may be at least partly responsible for the roaring 20s, the Great Depression, the rise of Hitler and the Second World War.

You can't squeeze blood from a turnip. That's an old saying. It means that you cannot get something from someone that they don't have. In order to pay its debt in real terms, Greece needs to ultimately get back to producing more than it consumes. And as counterintuitive as this may sound, they will first need to run a BOP surplus in order to get there. You do that by exporting more value than you import.

I realize how backward this sounds, but that’s only because we haven’t seen gold function properly in more than 90 years—beyond living memory. And this is why the limited stock of physical gold is far more valuable than the paper gold promises of New York and London would have you believe. This is why Greece will never part with its gold at today's prices. It is far more valuable. Greece ultimately needs to get back to importing gold which is what happens when you produce more than you consume. But you can't get back to that place by spewing your real capital at imaginary capital prices.

At the true value of physical gold set by the Superorganism, Greece will automatically start running a Trade Surplus on its BOP and Germany will automatically run a Deficit with Greece. The high price of gold is the only factor that can achieve this goal. At that point Greece will be paying its debt in real terms and gold will be flowing. This will spur the Greek economy until that flow of gold is reversed and it starts flowing back into Greece. At that point Greece will have a vibrant economy. And then, as the gold flows in, it will start to act as an incremental brake, a natural governor that prevents the overheating of the new Greek economy. This will occur naturally. This is the future in real terms, regardless of all the monetary floundering. And this future cannot be managed by a committee of experts no matter what economic school of thought they practice. This is Freegold.

The elegance of this natural regulator is that, as long as it is free from systemic counterfeits, it functions regardless of the shenanigans of monetary "experts". That's because the Superorganism's price mechanism is a function of the purchasing power and flow of real capital, not the purchasing power and flow of imaginary capital (paper promises). To wrest control away from this "forceful but unobtrusive master" one must render its purchasing power and flow infertile in the global economic ecosystem.

What the 1922 Genoa Conference did was to institutionalize the "sterilization" of gold for the rest of the world through the reserve structure of the international banking system. And this bit of genius was decided by a "committee of experts" from 34 different countries. They did this by introducing paper gold—or paper promises of gold—into the international banking system as reserves equal to the gold itself. This wasn't the first paper gold, but it was the first time that specific paper gold (that from New York and London) was used as an equal reserve upon which credit can be expanded. What is acceptable as international reserves is critical because trade settlement is a function of the reserves. This conference was the birth of the $IMFS.

In 1922, they officially changed the old gold standard into the new "gold exchange standard", which Rueff said was "a conception so peculiarly Anglo-Saxon that there still is no French expression for it." The stated purpose was "the stabilization of the general price level" which you can feel free to read as code for sterilizing the price mechanism and its elegant governance of an extremely delicate and complex balance. This, of course, gave birth to the arrogance of the managed economy and its attendant science, Keynesian Economics (est. 1936) and its step-daughter Monetarism (est.~1956).

With the gold mostly staying put in London and New York, and paper promises of gold flowing as equal base money elsewhere, the monetary base was effectively duplicated. Credit could now expand without ever having to contract, at least not because of the unwanted flow of gold. But of course that's not how it actually works in practice. The "unwanted" flow of gold is not the cause, but the effect of real imbalances (physical, not monetary ones) between international production and consumption. So, obstructing the adjustment mechanism of real gold settlement set the world up for periodic busts, economically destructive punctuations and regular currency devaluations.

To use a modern buzz word, they expanded the 500 year-old international monetary base into a more flexible "basket" that included US dollars, British pound sterling, and gold. As dollars began to accumulate abroad, they would be deposited back in the New York banks in exchange for a book entry reserve on the foreign country's balance sheet. In this way, the unbalanced flow of trade acted only as an occasional spur, and never as a brake. The only brake would now come in the form of destructive crises and abrupt monetary resets.

Here's a comment I wrote back in May, 2010:

The US exorbitant privilege began at the International Monetary Conference of 1922 when for the first time international banks were allowed to accept not only physical gold, but also US dollars (paper gold) as reserves. But all US dollars held by foreign banks were put on deposit back in New York City banks. And there they were counted as local US deposits, the same as if you and I put our gold into the bank, in addition to being counted abroad.

These deposits were used as the basis for credit expansion in both the US and in the foreign countries claiming them as reserves. This process doubled the money supply paid out through the US balance-of-payments deficit for the last 88 years (except that money which France demanded in gold). US deficits never contracted the aggregate purchasing power of the US after 1922, the way deficit settlement is supposed to. It also exported US inflation outward. And it continues today.

The only solution to this problem is the explosive expansion of the gold base (volume x price). Volume can be expanded through mining, but not fast enough to suffice in a crisis. Therefore price will take the brunt of this reset. The price of gold will explode.

1971 was the first step toward Freegold. The final step is today.

1445

Now let's look back at the first monetary committee that deliberated in Genoa from October, 1445 until June, 1447. The Hundred Years' War was already more than a hundred years old at that time, as was the economic and monetary havoc that protracted war brings. By 1420, the French currency, the livre, was under severe market pressure to devalue. The King valued his livres at .78 grams of gold each, relative to the gold mark, the contemporary unit of weight for gold. But the marketplace was trading livres at only about 11% of that official value, or .09 grams of gold. The market had already devalued the livre by 90%.

Jacques Rueff describes the French King's response: In 1421 Charles VII "resorted to a series of measures bearing a remarkable likeness to those which were to be adopted in France five centuries later: the prohibition of exchange transactions by unlicensed dealers and the fixing of a scale of fees for such transactions; a ban on the export of gold and silver specie; the imposition of fines on notaries who stipulated payments in gold and silver marks, that is, in bullion rather than in livres, the intensive exploitation of France's silver mines; and an attempt to achieve a balanced budget by rigorous and methodical management… But all these efforts did not succeed in alleviating the financial distress. A variety of monetary adjustments—which might be termed devaluations—were devised, as usually happens in such troubled times."

Genoa spent 15 years under French domination during the war, but by 1445 it was its own city-state, a maritime republic and an important trading center and port for international commerce. It was also home to the Bank of St. George (1407-1805), one of the oldest chartered banks in the world. In 1444, the Bank was chartered to manage the public debt and make loans to the government, not unlike a modern CB or Treasury. "Niccolò Machiavelli maintained that the Bank's dominion over Genoa made possible the creation of a 'republic more worthy of memory than the Venetian.'" [3]

The Bank of Saint George

So when the fluctuations, weakness and debasement of the local and foreign exchange currencies "gravely unsettled" its marketplace in 1445, the Genoese government convened a "committee of experts" consisting of mint officials and Bank of St. George trustees to figure out a solution to all the monetary turmoil. The committee labored for almost two years, but could not come to an agreement. So instead, it issued a report in which the majority and minority set forth their views.

The minority report, which was rejected, recommended a "basket" monetary standard (although they didn't use the word "basket") consisting of 1/3 gold, 1/3 silver and 1/3 in the depreciating currencies of the countries involved in any transaction. The majority report on the other hand, signed by 15th century "Trail Guide" Benedetto Centurione of the house of Centurione and trustee of the Bank of St. George, recommended the adoption of the gold standard pure and simple.

Benedetto Centurione appears to have been the head of the house of Centurione, one of the wealthiest influential houses of international commerce. It had many foreign branches, each run by one or more of the Centurione brothers. As Rueff told it, "Nicolo and Giovannie were in Majorca, Raffaelo was at Bruges, and Paolo at Lisbon." They later opened branches in Antwerp and in the Indies, "and Christopher Columbus [a Genoese native] was undoubtedly one of their traveling salesmen."

But in 1445, as Rueff tells it, Benedetto "was quite aware of the fact that for half a century a large number of trading countries had adopted the gold standard. One after the other, Egypt, Syria, Yemen, Hedjaz, and some parts of the Greek world had adopted… gold." (Reminds me of a more recent Trail Guide who noted a certain Eastern taste for gold.)

In his majority report, Centurione wrote, "The banks will be obliged to pay in [gold] florins, exchange will take place in [gold] florins; in this way gold will not leave the country and, in time, by driving out bad money, it will constitute the wealth of the people." This was the opinion that prevailed in 1447. Soon the banks were required to settle credit imbalances in gold, the new banking system reserve, and to deposit one hundred gold pieces as security for fines in case they broke the rules. And all bank drafts drawn on Genoa abroad had to also be denominated in gold, thus making it the new international bank reserve, in the modern sense of the term.

As Jacques Rueff described it in 1932, this "plain and simple" recommendation would "endow the world with the most marvelous instrument of international co-operation in its history… The system was to function perfectly well until it was shattered—also at Genoa—by the second committee of experts, which in April and May, 1922, contrived to demolish the work of the house of Centurione."

Jacques Rueff

Like Centurione, Rueff also turned out to be a bit of a monetary architect himself in his later years. During the Great Depression, Rueff was a major figure in the management of the French economy. In 1941 he was dismissed from his office as the deputy governor of the Bank of France as a result of the Vichy regime's new anti-semitic laws. After the war he served in political office as the Minister of the State of Monaco, as a judge on the European High Court of Justice, and later as a key economic advisor to French President Charles de Gaulle. The 1958 "Rueff Plan" balanced the French budget and secured the convertibility of the French currency.

Rueff was highly critical of the use of the dollar as a unit of reserve, which he warned would cause a worldwide inflation. He was strongly in favor of European integration, and always remained a firm opponent of Lord Keynes' ideas. In 1947, Rueff critiqued Keynes' magnum opus, The General Theory of Employment, Interest and Money. After his critique of Keynes, Rueff's main critic became James Tobin, a Keynesian economist who would later serve as an advisor to both the Federal Reserve and the US Treasury where he would help design the American Keynesian economic policy during the Kennedy administration. It is somehow fitting that Rueff's archnemesis, Tobin, would be best remembered for his 1972 suggestion of the "Tobin Tax", a tax on the exchange of foreign currencies in response to Nixon ending Bretton Woods. [4]

The London Gold Pool

Jacques Rueff's advice led Charles de Gaulle to begin withdrawing physical gold from the US Treasury during the later years (1965-1967) of the London Gold Pool, and then to withdraw altogether from the Pool in 1968 which ultimately led to the closing of the US gold window in 1971. Here is de Gaulle speaking in 1965:



And here is a description of the subsequent failure of the London Gold Pool that I wrote for my 2010 post Living in a Powder Keg and Giving Off Sparks:

The London Gold Pool was a covert consortium of Western central banks, a 'gentleman's club' of sorts, that agreed to pool its physical gold resources at predetermined ratios in order to manipulate the London gold market. Their goal was to keep the London price of gold in a tight range between $35.00 and $35.20US.

London had become the world's marketplace for gold. For more than a half century nearly 80% of the world's gold production flowed through London. The "London Gold Fix" daily price fixing began in 1919 and only happened once a day until the London Gold Pool collapsed in 1968 and an "afternoon fix" was added to coincide with opening of the New York markets.

In 1944 the Bretton Woods accord pegged foreign currencies to the US dollar and the dollar to gold at the exchange rate of $35.20 per ounce. At that time gold was not traded inside the US, but in London it continued to trade between $35 and $35.20, rarely moving more than a penny or two in a day.

Through the first decade of the Bretton Woods system there was generally a shortage of US dollars overseas which lent automatic support to the fixed gold peg. But the US was running a large trade deficit with the rest of the world and by the late 1950's there was a glut of dollars on the international market which began draining the US Treasury of its gold.

Then, in one day in October 1960, the London gold price, which would normally have made headlines with only a 2 cent rise, rose from $35 to over $40 per ounce! The Kennedy election was just around the corner and in Europe it was believed that Kennedy would likely increase the US trade deficit and dollar printing.

That October night, in an emergency phone call between the Fed and the Bank of England, it was agreed that England would use its official gold to satiate the markets and bring the price back under control. Then, during Kennedy's first year in office the US Treasury Secretary, the Fed and the BOE organized the London Gold Pool consisting of the above plus Germany, France, Switzerland, Italy, Belgium, the Netherlands, and Luxembourg.

The goal of the pool was to hold the price of gold in the range of $35 - $35.20 per ounce so that it would be cheaper for the world to purchase gold through London from non-official sources than to take it out of the US Treasury. At an exchange rate of $35.20, it would cost around $35.40 per ounce to ship it from the US to Europe. So the target range on the London markets acted as a shield against the US official gold which had dwindled substantially over several years.

The way the pool was to work was that the Bank of England would supply physical gold as needed into the public marketplace whenever the price started to rise. The BOE would then be reimbursed its gold from the pool according to each countries agreed percentage. If the price of gold fell below $35 an ounce, the pool would buy gold, increasing the size of the pool and each member's stake accordingly. The stakes and contributions were:

50% - United States of America with $135 million, or 120 metric tons
11% - Germany with $30 million, or 27 metric tons
9% - England with $25 million, or 22 metric tons
9% - Italy with $25 million, or 22 metric tons
9% - France with $25 million, or 22 metric tons
4% - Switzerland with $10 million, or 9 metric tons
4% - Netherlands with $10 million, or 9 metric tons
4% - Belgium with $10 million, or 9 metric tons

And since they, as a group, were doing this in secret, it turned out that they were able to make a substantial profit in the first few years of the pool. Since they were buying low and selling high within a fixed trading range that only they knew was fixed, they reaped substantial profits and even increased their reserves as much as FIVE-FOLD by 1965!

But with the cost of US involvement in Vietnam rising substantially from 1965 through 1968, this trend reversed and the dollar came under extreme pressure. From 1965 through late 1967 the gold pool was expending more and more of its own gold just to keep the price in its range. Seeing this, France (who was one of the insiders and knew of the price fixing operation) began demanding more and more gold from the US Treasury for its dollars.

And as this trend progressed, the world was flooded with more and more dollars that were backed by less and less gold, creating an extremely volatile situation. Public demand for gold was rising, the war was escalating, the pound was devalued, France backed out of the gold pool, and in one day, Friday March 8, 1968, 100 tonnes of gold were sold in London, twenty times the normal 5 tonne day.

The following Sunday the US Fed chairman announced that the US would defend the $35 per ounce gold price "down to the last ingot"! Immediately, the US airlifted several planeloads of its gold to London to meet demand. On Wednesday of that week London sold 175 tonnes of gold. Then on Thursday, public demand reached 225 tonnes! That night they declared Friday a "bank holiday" and closed the gold market for two weeks, "upon the request of the United States". (So much for "the last ingot", eh?)

That was the end of the London Gold Pool. The public price of gold quickly rose to $44 an ounce and a new "two tiered" gold price was unveiled; one price for central banks, and a different price for the rest of us. Even today official US gold is still marked to only $42.22 per ounce, $2 LESS than the market price in 1968!


The Architects

In my opinion, there are two things we learned from ANOTHER via his mouthpiece FOA that outweighed all the other great insights they shared. Those two things are:

1. The true purpose behind the euro and its architecture, and
2. The effect the approaching euro launch would have on gold.

Following ANOTHER's revelations, Jacques Rueff was the first name I put on my own personal list of early ideological euro architects a couple years ago. The ECB itself pegs the beginning of "The Road to the Single Currency, The Euro" at 1962 with the "Marjolin-Memorandum". [5][6]

The Marjolin-Memorandum was the European Commission's first proposal for an economic and monetary union. Robert Marjolin (1911-1986) was a French economist and politician involved in the formation of the European Economic Community (EEC). He was 15 years Jacques Rueff's (1896-1978) junior and, like Rueff, he was an economic advisor to Charles de Gaulle. I mention this only to further the connection between the modern euro and Charles de Gaulle of the 1960s who complained publicly about the exorbitant privilege afforded the US by the use of dollars as international CB reserves, demanded physical gold from the US Treasury, and pulled out of the London Gold Pool which led to the end of Bretton Woods three years later.

What we learned from ANOTHER thirty years later was:

1. The purpose of the euro was to provide an international transactional alternative to the dollar.
2. The consequence of the launch of the euro would be that gold would undergo "the most visible transformation since it was first used as money."

Quote - Monday, August 6, 2001 - GOLD @ $267.20 - FOA: "The result will be a massive dollar price rise in gold that performs over several years."

Tuesday, January 1, 2002 - Launch of euro notes and coins
Friday, February 8, 2002 - GOLD ABOVE $300
Monday, December 1, 2003 - GOLD ABOVE $400
Thursday December 1, 2005 - GOLD ABOVE $500
Monday, April 17, 2006 - GOLD ABOVE $600
Tuesday, May 9, 2006 - GOLD ABOVE $700
Friday, November 2, 2007 - GOLD ABOVE $800
Monday, January 14, 2008 - GOLD ABOVE $900
Monday, March 17, 2008 - GOLD ABOVE $1000
Monday, November 9, 2009 - GOLD ABOVE $1100
Tuesday, December 1, 2009 - GOLD ABOVE $1200
Tuesday, September 28, 2010 - GOLD ABOVE $1300
Wednesday, November 9, 2010 - GOLD ABOVE $1400
Wednesday, April 20, 2011 - GOLD ABOVE $1500
Monday, July 18, 2011 - GOLD ABOVE $1600
Monday, August 8, 2011 - GOLD ABOVE $1700
Thursday, August 18, 2011 - GOLD ABOVE $1800


What I can tell you with full confidence is that this is only the very beginning of gold's functional transformation.


Here are a few more quotes from A/FOA:

It's important to understand that most of the world wanted to at least see another currency that could share some of the dollar's function. It didn't have to replace it. To this end, most every country gave some philosophical and political support in its creation.

++++++++++++

Within this change, gold would undergo one of the most visible transformations since it was first used as money.

++++++++++++

We are, today, at the very conclusion of a fiat architecture that is straining to cope with our changing world. Neither the American currency dollar, its world reserve monetary system or the native US structural economy it all currently represents will, in the near future, look anything as it presently does. Trained from birth, as all Western thinkers are, to read everything economic in dollar system terms; we, too, are all straining to understand the seemingly unexplainable dynamics that surround us today.

Western governments, the public and several schools of economic thought are attempting to define and explain what extent these changes will have within our financial and economic world.

++++++++++++

Asking more; what if the architects of a competing currency system and the major players that helped guide its internal construction, all took a hand in promoting the dollar's extended life, its overvaluation and its use; so as to buy time for this great transition in our money world?

++++++++++++

The actual debt machine that built much of America's lifestyle is now going into reverse as it destroys its own currency; one built upon a stable debt system with locked down gold prices.

++++++++++++

To compete in the new architecture of a Euro System currency, unrestrained trading of gold will advance its dollar and Euro price significantly.

++++++++++++

This not only has "everything to do with a gold bull market", it has everything to do with a changing world financial architecture. And I have to admit: if you hated our last one, you will no doubt hate this new one, too. However, everyone that is positioned in physical gold will carry this storm in fantastic shape. This is because the ECB has no intentions of backing their currency with gold and every intention of using gold as a "free trading" financial reserve. None of the other metals will play a part in this.

_____________

Here's something interesting. In Indonesia, CPI includes gold! This is very $IMFesque.

Inflation up, exports down
Esther Samboh, The Jakarta Post, Jakarta | Tue, 09/06/2011

SNIPS:

An uncertain global economy has put pressure on Indonesia’s economy, as the yearly inflation rate grew in August for the first time since January over surging gold prices, while export growth slowed due to sliding global demand.

Core inflation — the primary measurement of the country’s inflation rate, which includes gold but excludes volatile food and government-controlled prices — accelerated faster than headline inflation to 5.15 percent, well above Bank Indonesia’s 5 percent threshold.

“The increase in core inflation is not across the board. The impact of the gold prices increase is small, as gold is not a primary or secondary need for the people,” Eric Sugandi, an economist at Standard Chartered Bank Indonesia, told The Jakarta Post over the phone.

“In August, there was no help from lower import prices to offset the surge in gold prices,” Destry told the Post in a telephone interview.

Rusman announced that the surplus in the nation’s trade balance fell to $1.36 billion in July, its lowest level so far this year, halving June’s surplus of more than $3 billion. “The trade surplus narrows as exports slide and imports surge,” he added.

Exports slowed 5.23 percent in July as compared to June, reaching $17.43 billion, while imports grew 6.57 percent to $16.06 billion.

BI governor Darmin Nasution said increasing fuel imports and a slight slowdown in global demand may continue to pressure the nation’s current account — which includes trade balance — to book deficits starting in the fourth quarter of this year. “The fluctuation in the current account will be greater.”

“If the current account books a deficit, we will need capital inflows” to maintain a surplus in the nation’s balance of payment to build up the central bank’s foreign exchange reserves, he added.

This is a very interesting news article because it not only demonstrates how 90 years of the $IMFS has distorted foreign government benchmarks at the highest levels, but also how ass-backward this view actually is. Indonesia's Consumer Price Index should include food and exclude gold, not the other way around! In a fiat regime, you want your fiat to be relatively stable against the goods that make the economy healthy. But in this case, what they are registering as inflation (rising price of gold) is actually deflation in real terms because the purchasing power of gold in Indonesia is rising against things like food.

In Freegold, this rising purchasing power of gold against food would have the effect of an inflow of physical gold and a spur on the economy as exports rise due to being cheaper in gold elsewhere. But here's the catch: the signals are all messed up by the $IMFS! Indonesia is already running a trade surplus. And gold is rising versus food everywhere. It doesn't matter if you're producing or consuming more in your country today, gold is still rising. In this way we can know for certain that today's price of gold is not really the true value of gold (gold priced in goods).

And that's because the price of gold today still does not reflect the physical flow of gold that would normally be a function of arbitrage, with speculators transporting gold to where its purchasing power is highest. The flow of gold today is still sterilized by the paper gold trade within the LBMA bullion banking system that, by a recent LBMA survey, was around 250 times larger than the flow of new gold from the mines. That's a total turnover in the LBMA (sales plus purchases) of 5,400 tonnes every single day. That's the equivalent of every ounce of gold that has ever been mined in all of history changing hands in just the first three months of 2011. That's what the LBMA members, themselves, voluntarily reported. And that's a lot of paper gold that is still sterilizing the economically beneficial price mechanism that physical gold would otherwise be transmitting.

Yet things are changing, even today. That's what the rising price of gold since 2002 tells me. This is about much more than just a rising price. It's not just about a gold or even a commodity bull market. As FOA said, "it has everything to do with a changing world financial architecture." Gold's function in the monetary system is changing. And as FOA also said, "None of the other metals will play a part in this."

Gold will return to its pre-1922 function, but that does not mean we will return to a pre-1922 gold standard. This post is not about the merits of the gold standard. It is not about praising the hard money camp’s decision in 1445 over the easy money camp’s decision in 1922. It is about the choice of the Superorganism over the management of men. The pre-22 gold standard, although it allowed gold to function, still carried the same flaw I point to so often; that using the same medium for exchange and savings leads to regular recurring conflicts between the two camps.

This is an important distinction to understand. Gold's true function is relative to the real, physical balance of trade, not man's flawed, political-overvaluation of debt and other monetary schemes. In 1971, the entire planet switched to using a pure token money as its medium of exchange. These symbolic tokens do fail miserably and regularly as a store of value, but they work remarkably well as a medium of exchange. They are not going away.

The whole ECB/Euro architecture was built to turn Genoa 1922 on its head, to reverse the damage done and to restore the function of gold which Jacques Rueff knew all too well. The ECB has one plain and simple mandate, to act with regard to a target CPI that is statistically harmonized across different economies dealing with different economic factors. In other words, the job of the ECB is to maintain stability in the purchasing power of a common currency against the general price level in many different countries.

This simple architecture is designed to work best in Freegold, where the price and flow of physical gold will automatically regulate and relieve the pressure of economic differences between member states. If the ECB had been designed to assist the European economies, it would likely have been given the second mandate, same as the US Fed. The Fed has two mandated targets: CPI and full employment. These dual mandates are like fair weather friends, because when the heat is on—like it is today—they actually become dueling mandates. The ECB, on the other hand, is not mandated to assist the economy like the Fed is. In fact, FOA wrote back in 2000:

"Basically, this is the direction the Euro group is taking us. This concept was born with little regard for the economic health of Europe. In the future, any countries money or economy can totally fail and the world currency operation will continue. What is being built is a new currency system, built on a world market price for gold."

Like I said earlier, the monetary plane, which includes all that nominal sovereign debt in Europe, is only connected to the physical plane by two things, the price of goods and services (CPI or the general price level, on which the ECB has a mandate) and the price of gold (which the ECB happily floats). I think we can all agree that the aggregate debt is doomed at today's prices. It is fictional, imaginary capital. But those of you predicting the imminent collapse of the euro as a medium of exchange need to explain how nominal euro debt is more likely to break its connection with goods and services than its imaginary connection to gold at today's prices.

I'll give you a few hints. Unlike the US, where the expenses of the same government that calculates CPI rise along with CPI, and where the CB has conflicting mandates that benefit from a statistically-lowered CPI, the ECB has not only met its mandate, but done so credibly. And unlike Indonesia, the ECB does not count gold in its CPI (HICP). Instead, the ECB floats its gold publicly and without worry. So while you're wondering in which of the two choices the disconnect will happen in Europe, consider this: Over the last decade, the general price level has performed more or less as expected while the gold price in euro broke off in 2005 and rose 325% in six years:

January 1, 2002 – GOLD @ €310.50
Tuesday, November 15, 2005 - GOLD ABOVE €400
Tuesday, April 18, 2006 - GOLD ABOVE €500
Thursday, January 10, 2008 - GOLD ABOVE €600
Friday, January 30, 2009 - GOLD ABOVE €700
Wednesday, December 2, 2009 - GOLD ABOVE €800
Tuesday, May 4, 2010 - GOLD ABOVE €900
Monday, May 17, 2010 - GOLD ABOVE €1000
Monday, July 11, 2011 - GOLD ABOVE €1100
Tuesday, August 9, 2011 - GOLD ABOVE €1200
Monday, August 22, 2011 - GOLD ABOVE €1300


And those of you that incessantly argue that gold is just one of many commodities—an asset like any other that, when push comes to shove, will ultimately be liquidated in favor of symbolic token currency units—need to explain how the monetary plane, insolvent at today's low prices, will maintain any grip on reality at even lower prices. The fact is it can't. And that's why you can only maintain your arguments with fantastic stories of modern day all-powerful overlords enslaving the serfs to their graves. But unfortunately, that's not how a diverse global economic ecosystem actually works.

Our money is credit. “The people’s” money has always been credit. Credit expands and contracts based on the availability of actual money, the monetary base. 1922 was the first time they included a form of credit as the base itself. A Pandora’s box if ever there was one!

But don't assume there is coercion involved when I say credit is our money. It is the best possible money for a vibrant economy. It is how the pure concept of money emerged in the very beginning. When gold first became money, it was as the mental unit of account. I'll give you five ounces of gold worth of cattle and you'll owe me five ounces worth of milk and other goods and services. When we participate in a vibrant economy, we deal in credit denominated in money. When we withdraw from a mismanaged economy, we withdraw into the monetary base, we hoard the reserves. Holding credit is our vote for vibrancy. Hoarding reserves is our vote against the current economy.

Gold is in the process of changing functions in the global economy. And in this transition, "the most visible transformation since it was first used as money," it will plateau at a new, mind-blowing level before it resumes its proper function. This is happening. It must happen, because bullion bank paper promises cannot function like gold. So be careful what kind of gold you're holding (physical is what you want), or you might just miss out on the revaluation of the millennium. Gaining a deeper understanding of what is happening, as you can here, here and here, should help those of you that worry about buying gold now because a few analysts, who have no idea what they're talking about, keep saying this is the top. This is the "top range" prediction I made two years ago:


Here's the main thing, gold will work the same way as a reserve asset in Freegold as it did before 1922, even without going back to being the sole monetary base. Gold is superior to even the entire monetary plane in this regard. It is the sole monetary member of the physical realm. Whether it is part of the transactional currency system or not doesn’t matter to its balance-governing role. It can fulfill that role even in Freegold. That’s what the architects figured out! That was their Grand Induction. That’s how the euro architects are comparable to the Genoa Conference of 1445. And that's how Jacques Rueff is comparable to Benedetto Centurione. Probably far superior!

Sincerely,
FOFOA

[1] The Age of Inflation, Chapter 2, Jacques Rueff
[2] http://fraser.stlouisfed.org/docs/meltzer/craint89.pdf
[3] http://en.wikipedia.org/wiki/Bank_of_Saint_George
[4] http://en.wikipedia.org/wiki/Jacques_Rueff
[5] http://www.ecb.eu/pub/pdf/other/whypricestability_en.pdf p. 51
[6] http://www.ecb.int/pub/pdf/other/ecbhistoryrolefunctions2004en.pdf pp. 15 - 17

"It's worked so far, but we're not out yet." -Leonard "Bones" McCoy

287 comments:

1 – 200 of 287   Newer›   Newest»
Michael said...

Thanks agin'

Terry said...

How ever much you get paid FOFOA, it isn't enough!! Beautiful post Sir!!

Pain d'Or said...

Briljant FOFOA thx !

Glad you pulled Jaques Rueff into play ;-))

78Rubies said...

Thanks. :-)

Michael H said...

comments ...

Blondie said...

Bravo!

Now we really do know where we have been. And where we are going is truly all the more obvious as a result.

jc said...

Your work continues to provide such clarity. Thank you FOFOA, for seeing so clearly this story and blazing the trail as this whole story plays out today.

M said...

Anyone who can read french should have a look at this link.

France to ban cash sales of Gold and Silver:

Edit: The article was in English when I linked it. I don't know how to fix it. It says:

"From 1 September 2011, all purchases of metals will no longer be made ??in cash. Designed to fight against trafficking of metal ...''''and scheduled for June 2012, its implementation was rushed. Initially there was talk of applying a law against trafficking of metal (rail railway, power cable etc ...).

Can be made in cash payment of a debt greater than an amount fixed by decree, taking into account the place of tax residence of the debtor and the professional purpose of the operation or not. In addition a monthly fixed by decree, the payment of salaries and wages is subject to the prohibition contained in the preceding paragraph and shall be made by check or by transfer to a bank or postal account or account held by a payment institution.

Any transaction on the retail purchase of ferrous and non ferrous is made ??by crossed check, bank or postal transfer or by credit card, not the total amount of the transaction may not exceed a ceiling set by decree. Failure to comply with this requirement is punishable by a ticket for the fifth class.

II.-I Notwithstanding, the costs of the department conceded that exceed the sum of 450 euros must be paid by bank transfer.

III.-The preceding provisions shall not apply:

a) For payments made by persons who are incapable of binding themselves by a check or other payment, as well as those who have no deposit account;

b) For payments made between individuals not acting for business purposes;

c) paying the expenses of the state and other public figures.

http://www.egaliteetreconciliation.fr/Achat-d-or-et-d-argent-en-liquide-interdits-en-France-au-1er-septembre-2011-7960.html

costata said...

Powerful

Bravo

M A M said...
This comment has been removed by the author.
M A M said...

I have read a few of your very interesting articles and have no problem with the store of wealth function of gold vs money (although I have more kg in AR than AU). What I can't understand is your price target of gold 40-70k per ounce.
As currently all gold is worth abt. 10 trillions
all stocks are abt 55 trillion
all debt 158 trillion (of which 41 trillions are marketable) multiplying the current price of gold by 30 would by far top the value of stocks and debt combined.
Can one resident expert point me to the article that deals with this problem or explain it?
Thank you.

M said...

@ M A M

Did you calculate what the value of all government bonds around the world are worth today ? (JGB's Bunds, Cad and Aus govt bonds ect.)

Jeff said...

MAM, start with How can we possibly calculate the Future Value of Gold. Then just another hyperinflation post 3. Then just keep reading.

M A M said...

re M. I read about it here: where a McKinsey report for 2010 is quoted http://www.financialexpress.com/news/world-govts-debt-above-41-tn-study/832334/0

Joel said...

Wow, thanks, Fofoa. A timely post addressing the "overlord theory" of Shelby and others I recently asked about. Especially liked this part:

"And those of you that incessantly argue that gold is just one of many commodities—an asset like any other that, when push comes to shove, will ultimately be liquidated in favor of symbolic token currency units—need to explain how the monetary plane, insolvent at today's low prices, will maintain any grip on reality at even lower prices. The fact is it can't. And that's why you can only maintain your arguments with fantastic stories of modern day all-powerful overlords enslaving the serfs to their graves. But unfortunately, that's not how a diverse global economic ecosystem actually works."

Reposted comments towards my last post from Treasure Chest:

@ Costata,
Will check out Bron's reasoning, thanks for the heads up, that's what I was looking for was some more specific arguments on taxation. Interesting that you have tied up with Shelby before. No need to apologize for someone else's "rudeness by plagarism," though, but I appreciate it anyway.

@Jeff,

I suggest you switch to decaf and start paying attention. If you don't have the brainpower to discuss why or why not you believe we will be taxed, then simply pass. Don't stoop to plagarizing someone else's words to form a dismissive reply to something you don't even bother to weigh in on.

No offense, Jeff. (see how hollow, arrogant, and insincere that sounds, lol?)

I am very familiar with Fofoa's thoughts on taxation, and even mentioned them in my post, but there are a lot of other smart people here (in case you haven't noticed through your ego-colored glasses) whose opinions I highly respect.
Taxation will remain a major issue facing holders of gold, whether you have the knowledge to weigh in on it or not. If gold gets the huge revaluation that Fofoa and others think it will, we will be glad to pay the taxes. However, if it merely remains a negative correlation to inflation, then the combination of a)the loss of purchasing power at conversion back to the prevailing currency; and b)taxes render it a losing proposition (but a lower net worth is still better than zero net worth).

Robert Mix said...

EXCELLENT article FOFOA! Thank you. You have helped me clear up most of my confusion re the Euro and its place in a future freegold.

Value of gold... Would Greece part with some of its tonnage of gold to satisfy their debts to French and German banks with gold at +/- $1845? NO WAY! There it is, evidence that the value of gold is ALREADY more than paper gold market price.

M said...

I may be mistaken but gold made a new all time high in Euro's around this morning and now it is falling in all currencies. Gold has been making all time highs in Euros before it makes all time highs in dollars.

burningfiat said...

Robert,

Great point.
The two viewpoints:

1) Gold will be mobilized by debtor nations at some point.
2) The gold price will be staying in the neighborhood of the current paper price.

Are basically mutually exclusive.

BTW, thanks FOFOA for another sublime text.

/Burning

Ash said...

Germany Plans for Possible Greek Default (Spiegel)

Entire countries and their banking sectors could be protected with the two instruments, Schäuble's man in Brussels argued. The loans would help Italy and Spain, but also small countries like Cyprus, who could find themselves unable to borrow money from fearful investors following a Greek bankruptcy.

Banks in many euro-zone countries could eventually find themselves dependent on the billions from Luxembourg, because they would have to write down their holdings of Greek government bonds. Greek banks would suffer the most from the consequences of a national bankruptcy. For this reason, German officials argue, it is quite conceivable that Greek banks could still receive aid even after the Greek government itself had been cut off from EFSF assistance. As the financial crisis showed, banks are deeply interconnected across national borders. If one major bank fails, others can easily be dragged down with it.

Such consequences are to be expected regardless of whether Greece keeps the euro or withdraws from the euro zone. In reality, Athens would have no choice: The government could only hope to boost its languishing economy if Greece reintroduced its own currency and sharply devalued the new currency against the euro.

M A M said...

Thank you Jeff, I read the article on the flow, and I can follow the argument up to the point where the -technically correct thesis- that the sky is the limit for the price of gold trumps the (price rise limiting) influence of the price on emotions of the haves as well as have-nots, and thus the influence on societies (I am neither socialist nor communist). But of course a discussion of this point is moot, as it is just a personal guess (at least on my part, I can imagine a sharper increase in value regarding all financial assets and a slower one against all necessities). Anyway I will be pleasantly surprised if it passes the 10.000 USD (basis 2009) per ounce mark.

Motley Fool said...

comments...

Jeff Snyder said...

Fantastic history and article, Fofoa!

I was checking your site daily thinking that your next article might be about the Swiss franc peg, which seems to be a big step toward freegold, and big advance for the Euro, insofar as I understand such things, but was very pleasantly surprised by this one.

I hope you will address the significance of the Swiss peg at some point, but thanks for this! You seem to keep outdoing yourself!

Max De Niro said...

When I was a child, I used to hate waiting. A one day wait would be phyiscally painful.

This is frickin killin me.

Börjesson said...

I'm new to this blog, and can't claim to understand all the intricacies of Freegold yet. But I'm working my way slowly through the archives, and maybe by the time I catch up, the penny will have dropped!

For now, I have one question:

In the original writings, it seems Another and FOA expected Freegold to happen fairly soon, within a few years or so. Has there been any discussion, and can anyone recommend any particular posts, about why it didn't happen back then? What stopped Freegold from happening in, say, 2001? And could the same thing, whatever it was, stop it again this time?

DP said...

Muy bien! Gracias!

Jeff said...

Borgesson, check out Credibility Inflation.

JR said...

Hi MAM,

I think you got this but to follow up on why Jeff directed you to How Can We Possibly Calculate the Future Value of Gold?, the big idea is its not an apples to apples comparison.

Comparing the demand to store wealth in the inherently flawed, time limited debt media of today is not the same thing as the demand to store wealth in a much more robust storage medium - gold. From How Can We Possibly Calculate the Future Value of Gold?:

**********************************

"Stefan brings up a recurring topic of discussion here at FOFOA. He asks, "How could gold ever be worth more than $10,000 in today's dollars?" And I reply, "How could it not?"...

I don't think it is as simple as pouring a hundred cups of water into one large beaker and noting the total volume....

Instead of looking at wealth, or even debt, let's look at "purchasing power". Better yet, let's look at the concept of "Stored Purchasing Power"

You see, time is the factor most ignored in the concept of "stored purchasing power". It is ignored because it is relatively irrelevant to most people...

The future amount of time is infinite, therefore "stored purchasing power" is theoretically limitless. The only thing that limits its potential is a faulty storage medium, which limits the collective confidence in its ability to preserve wealth over time....

So, quickly cutting to the chase, the logical conclusions we can deduce from this conceptual line of Thought are that:

1. the storage of purchasing power is size-unlimited in a solid medium with potentially infinite confidence and one that does not infringe upon anything else, and

2. the storage of purchasing power in a flawed medium with a mathematical limit (like debt) is constrained roughly to the aggregate purchase price of everything in the world at any point in time, with a decent margin of error.

I say this is the rough limit because it represents the emergency exit from said flawed medium."


**********************************

See the difference, or why demand for a faulty medium of storage is a different issue that demand for a more robust storage medium:

With a faulty storage medium I will not be as eager to store the fruits of my labor for deployment so far into the future. For I will recognize that at some point in time the medium will fail and my efforts will have been for naught. So I will be more likely to "spend" my considerable wealth in the here and now. Not right now, but you know what I mean. I'll probably build a 70,000 sq. ft. high tech castle on a lake for me and my wife and things like that.

**********************************

Don't fall for the "false assumption...that real physical gold must hold the same time-value-durability confidence level... as paper wealth. Its apples to oranges.

Cheers, J.R.

JR said...

Hi Joel,

Don't let Jeff get to you, I don't think he meant it in the way you interpreted it - I am certain he was just trying to be helpful while at the same time paying homage to one of the brightest and longest running commentators we are lucky to have - Costata. I should know, I'm the king of being unnecessarily abrasive.

**********************************

Anyway, you comment: "If gold gets the huge revaluation that Fofoa and others think it will, we will be glad to pay the taxes." Be careful about "we." Remember, its not about me and you (we'll me for sure, but maybe not you - you might be a giant or super-producer for all I know) being patriotic or whatever, its about the GIANTS, the super-producers/super-savers.

Here is a big idea to chew on - its all gonna be about the flow of gold in Freegold. Basically, if gold gets taxed, gold won't flow as it otherwise would, because the tax is an artificial restriction on gold's purchasing power, no? Consider the import of this idea from FOFOA's above post:

The lesson from the monetary changes made in the post-war 20s is that if you want the debtors to ever be able to repay their debts in real terms, you do not sterilize the vital spur and brake function of gold by locking its purchasing power. It is the price mechanism—price changes in goods and services—that transmits the arbitrage signal that causes gold to physically flow to where it has the greatest purchasing power....

But gold can reverse this flow in an instant on the BOP at a high enough price. And once it does, it will begin to exert the brake and spur forces on the two countries until the flow of actual goods and services finally corrects and reverses. Once that flow corrects, the gold flow (which is opposite the flow of goods and services) will reverse and subsequently the brake and spur forces will also reverse.


The gold has got to flow, and taxes are an "artificial barrier" to the free flow of gold. The "brake and spur" forces are impaired by taxes on gold, because the taxes impact gold's free flow.

**********************************

At a real simple level, if country A taxes gold, and country B doesn't, all else equal where does the gold go?

**********************************

Here is an **excellent thought** along these lines to close from the one and only Ender:

Freegold is a system that provides a technical means of balancing the books with regards to international trades while also providing a measuring stick to the businessman to measure local government policies. In today’s world, a businessman can invest just about anywhere so it’s in the best interest of the tax gathering politicians to create the best business environment from which to gather their bounty. What better way than to create an environment that shows the price of gold dropping over time – effectively telling the businessman that if you hold our currency, you will be able to buy MORE gold tomorrow than today. The only way they can do this is to create an economy that exports more than it imports so the savers will bring home gold from other countries. The more gold in the economy, the lower the price goes.

**********************************

I hope these ideas help you in your journey to see the issue from another perspective.

Cheers, J.R.

JR said...

Hi Joel,

Just say your comment from last thread re: "foreign exchange controls." I think its apropos FOFOA's most recent post discusses James Tobin and the infamous "Tobin Tax." I suspect that's along the lines of what FOA was referring to - here's a few more "ideas" popular amongst the modern currencies managers and economic theorists - http://en.wikipedia.org/wiki/Foreign_exchange_controls.

Cheers, J.R.

Texan said...

Very nice post FOFOA, much appreciated. The price signals are absolutely bonkers right now, they all feel so wrong I am getting physical headaches watching them. None of the relationships that should work are working. The whole market, every market, hangs in limbo with zero liquidity. No one knows what the right price is for anything. It's very unpleasant, and it's been going on now for several years.

Paul I said...

Great post FOFOA, many thanks.

Just when the swirling bilge of mainstream articles threatens to overwhelm my understanding, you grab me by the collar and pull me out of the drain.

All these endless, endless articles bemoaning the levels of sovereign debt, and very rarely (outside this blog) coverage of the nature of sovereign debt.

"It cannot be repaid", "Greece must default", "Austerity is the only option", "bla bla bla".

Hey, maybe if the system has allowed the debts to grow so big that they can't be repaid, it's not actually the debt that the problem, it’s the system!

I've always been intrigued by FOA’s (I think) characterization of the Euro being like inevitable clockwork. Tick Tock. But I never quite understood the mechanism. Can anyone help me out? Is it a reference to the fact that it was known from the outset that the Euro was a currency union without a debt union?

Is that the Tick Tock? That it was inevitable that Euro sovereign debts would grow to the point of crisis, since there could be no national consensus on monetization? No US style quick fix?

Is it too much of a stretch to believe that the Euro architects knew the Tick Tock would force the nature of the system to be examined? Knowing too that hidden inside the exploding bomb was the solution to the problem? Forced clearing through physical gold?

My goodness, that would be a high altitude view indeed.

JR said...

Hi Paul L,

I think the Euro architects knew the dollar would explode on its own, so they supported that course, allowing themselves time to get an alternative ***world transactional currency*** - the Euro - up and running. As FOFOA wrote above "The purpose of the euro was to provide an international transactional alternative to the dollar."

**********************************

"Q: **Who does BIS really represent?

A: "old world, gold economy, as viewed thru modern eyes" or "way to move from US$ without war".

Those are the words of ANOTHER from my post "The Gold Man" (not Goldman) at the BIS. The BIS truly represents "the rest of the world" from a monetary perspective. It is the "trade union" of their Central Banks. All is not as it seems on the surface.

So how do you view an "old world gold economy" through modern eyes? And how do you move there peacefully with the easy money camp? It's quite simple actually. You let nature take its course, you support that natural course however long it takes (rather than pathologically fighting nature like the dollar system does with its obsessive-compulsive drive to control), and you don't deprive the easy money camp of their precious fiat. It's Freegold. It is about allowing meritocracy to rise like a Phoenix from the ashes of the dollar's inevitable collapse"


http://fofoa.blogspot.com/2011/04/deflation-or-hyperinflation.html

**********************************

"The European plan was to support the $IMFS at least until a new fiat "reserve" currency could be established, one large enough to absorb the shock of a failing reserve currency, to avoid being forced back 100 years into a physical gold-based economy which would have been very traumatic. This effort took 20 years from 1980."

http://fofoa.blogspot.com/2010/03/synthesis.html

***********************************

Friend of Another (10/13/98; 10:51:03MDT - Msg ID:556)

"The central purpose behind the Yen Carry trade and the Gold Carry trade is to place liquidity into the world financial structure. This action was made necessary by the failure of the US dollar to function any further as a money creation vehicle. In these last days of the dollar, worldwide debt as denominated in dollars has ceased to expand and is indeed contracting. This is a natural event that occurs in the latter time cycle of un-backed paper currencies. This contraction was expected to complete the fiat money cycle back in the late 1980s. It has been the Central Banks, lead by the BIS that created ingenious ways to expand liquidity until another currency system could be introduced. In these 1990s, the Yen / Gold Carry was one of those ways."


Cheers, J.R.

Edwardo said...

If one ever wanted something as close to proof as was obtainable that Charles Hugh Smith has still not read this blog, and does not understand freegold, his latest post should suffice.

Note to Charles: Even after Nixon closed the gold window the oil producers were only ostensibly exchanging their black gold for (unbacked) green paper.

http://www.oftwominds.com/blogsept11/oil-dollar-debt9-11.html

BusyB said...

The rational logic that "should" motivate political types to foster the flow of gold, so that the whole society benefits, is based upon the assumption that political types are rational. They are not, which is shown by their favoring the use of coercion; which is why they generally are in government, which is the only "legal" user of coercion. Leaches of societies gravitate towards government, as in this institution they can get away with theft of other peoples production. To think that the political types will "get religion" and stop preying on others, may be hopeful, but historically is doubtful; so plan accordingly. This paradigm shift regarding gold will mean the end of the "good times" for social predators and their public facade of "public servants" will fall and their true nature will come to the fore. Any "official" will become an obvious "little Hitler" as these types of coercive personalities will attempt to perpetuate their "system" by direct theft rather than indirect theft. To be frank, unless coercive types "get religion" and stop their theft, the only real solution is to remove them from society, via the "usual methods".

Indenture said...

Suggested FOFOA posts for Newcomers:
The Waterfall Effect
‪The Return To Honest Money‬
All Paper is STILL a short position on gold
Gold is Money - Part 1
Gold is Money - Part 2
Gold is Money - Part 3
GOLD & MONEY: More Than Meets the Eye
and Freegold: by Blondie

Michael H said...

On Naked Capitalism today:

http://www.nakedcapitalism.com/2011/09/david-graeber-on-the-invention-of-money-%E2%80%93-notes-on-sex-adventure-monomaniacal-sociopathy-and-the-true-function-of-economics.html

"On the Invention of Money – Notes on Sex, Adventure, Monomaniacal Sociopathy and the True Function of Economics"

A good foray into the 'money concept'.

First, the author refutes the mainstream economic premise that, prior to the invention of money, all trade transactions consisted of spot direct barter, plagued by the need for the 'double coincidence of wants'. Money came about to solve the problems of barter.

"Just in way of emphasis: economists thus predicted that all (100%) non-monetary economies would be barter economies. Empirical observation has revealed that the actual number of observable cases—out of thousands studied—is 0%.

...Similarly, the number of documented marketplaces where people regularly appear to swap goods directly without any reference to a money of account is also zero. If any sociological prediction has ever been empirically refuted, this is it."


"What anthropologists have in fact observed where money is not used is not a system of explicit lending and borrowing, but a very broad system of non-enumerated credits and debts."

The author describes two ways in which money could have come about: the non-state bureaucracy of the Sumarian temples, and the legal codes for redress of offenses.

In both of these instances, 'money' came about first as a unit of account, not as a circulating medium of exchange:

"...Sumerians, though they had the technological means to do so, never produced scales accurate enough to weigh out the tiny amounts of silver that would have been required to buy a single cask of beer, or a woolen tunic, or a hammer—the clearest indication that even once money did exist, it was not used as a medium of exchange for minor transactions, but rather as a means of keeping track of transactions made on credit."

In other words, first there was credit (e.g. gift economy), then there was unit of account, then the medium of exchange.

The Dork of Cork said...

I would prefer Gold would have nothing to do with the fractional system - indeed under a Irving Fisher 100% system Gold would only be used to settle external trade between nations - removing banks from executive control.
The fact that Venetian banks have full executive control without input from Princes in Europe is a disaster for European civilisation - the entire freegold architecture fills me with dread for the future.
This will not end well.

Ash said...

Michael H,

David Graeber's work is indeed fascinating. It is also a clear empirical refutation of the Austrian theory of the origin of money, as articulated by Menger (yes, I have read the attempts to respond on the Mises Economic Blog).

This video interview with Graeber on "Conversations With Great Minds" with Thom Hartmann on RT is also very good.

http://www.youtube.com/watch?v=SnOqanbHZi4

JR said...

Well done Michael H,

At risk of getting ourselves tangled up in the utterly silly semantic debate whereby Graeber and Murphy just **talk past one another** to justify their pre-existing world views yeah money is credit.

[sidebar for Max - don't you just love the ideologues and their ideology :) ]

**********************************

FOFOA from above:

"Our money is credit. “The people’s” money has always been credit. Credit expands and contracts based on the availability of actual money, the monetary base. 1922 was the first time they included a form of credit as the base itself. A Pandora’s box if ever there was one!

But don't assume there is coercion involved when I say credit is our money. It is the best possible money for a vibrant economy. It is how the pure concept of money emerged in the very beginning."


**********************************

FOFOA quoting Randy (@ The Tower) from Gold is Money - Part 3

"...It seems that George Baker sensed (rightly?) that the public, familiar with their Currency being a tangible asset (gold coin), would NOT be readily comfortable with the truth about Money. That is to say, that they might struggle to accept the reality that their Money Supply, as represented on the books of the bank, was created by credit, and existed through the grace of confidence. In effect, the tangible Currency had become a mere symbol for the Money (credit) it represented while circulating outside of bank account ledgers...

From two eminent bankers who surely knew their business, you now have it that the creation or granting of Money (the extension of Credit) has more to do with the creditworthiness of the borrowers than the collateral that secures against possible default. And recall, these comments occurred while on a gold standard AND in total absence of a government-sponsored central bank -- which was authorized (against Baker's preference) a year later.

As you come to understand how Money and Credit are interrelated, the more you will understand the separate Wealth of gold and why you need it now more than ever."


Cheers, J.R.

JR said...

Cliff notes - Graeber confirms the Menrgerian understanding of money, but won't/can't admit it because he doesn't understand it.

Likewise for Murphy, who I suspect can't admit what I am certain he understands to some degree because he has sold-out on the true roots of the early "Austrian" thinkers theory in favor of the politically bastardized, wacko Rothbaradian gold standard advocacy that is the cheap imitation LvMI pawns off as the real thing.

Remember, there is no such thing as an "AE," despite what the ideologues on either side so want you to believe. See for example the name change of the blog "Coordination Problem".

At the end of the day we are social beings and for most (the non-sociopaths) of us we want other people to like us, so I suppose its easier to understand why LvMI'ers like Murphy pander to the masses (sorta like ZH) in lieu of the real deal.

For a taste of the real deal, consider FOFOA's "The Return to Honest Money," and be thankful he has the courage and intellect to stand alone from this madness.

As so insightfully posited in Johnathon Swift's epigraph:

"When a true genius appears in the world, you may know him by this sign, that the dunces are all in confederacy against him."

Cheers, J.R.

DP said...

Ignatius is of the mindset that he does not belong in the world and that his numerous failings are the work of some higher power. He continually refers to the goddess Fortuna as having spun him downwards on her wheel of luck. Ignatius loves to eat, and his masturbatory fantasies lead in strange directions. His mockery of obscene images is portrayed as a defensive posture to hide their titillating effect on him. Although considering himself to have an expansive and learned worldview, Ignatius has an aversion to ever leaving the town of his birth, and frequently bores friends and strangers with the story of his sole, abortive journey from New Orleans, a trip to Baton Rouge on a Greyhound Scenicruiser bus, which Ignatius recounts as a traumatic ordeal of extreme horror.

With only the smallest degree of squinting, Ignatius sounds like a lot of people one meets.

Michael H said...

I noticed that Graeber makes no mention of a store of value. What should we make of this?

Did the 'store of value' function of money evolved after the 'medium of exchange' function? As in, once a medium surfaced, it began to be hoarded.

Or did the 'store of value' function come after the 'unit of account' function, in which the previously unenumerated debts began to be counted and accounted for in terms of a reference good?

Ash said...

The common thread underlying all conceptions of classical economics is the emphasis on the underlying rational, self-interested behavior of humans driving economic relations of organization within human society. Fortunately, observers of actual historical development exist who complement (or contradict) established theories with empirical evidence.

Graeber (in his response to Murphy): "First of all, we are not dealing with a situation where people borrow things from one another and expect an equivalent of exactly the same value. I suppose the certain Austrian school theories of human nature assume that’s what neighbors in a moneyless economy _would_ do with one another, but again, this just shows a flaw in those theories of human nature, because when tested against the empirical evidence, this is not what one finds.

What one finds are a variety of mechanisms of distribution, some open-ended sharing, some relatively centralized allocation (the actual Iroquoian societies that people like Jevons used as examples mainly had women’s councils allocate things and didn’t swap directly between households at all), and some direct exchange, particular with people in that vague middle ground between neighbors and strangers – but that exchange was based not on exact value equivalence – a concept that presumes the prior existence of money in the first place, and is therefore completely illogical to attribute to people unfamiliar with the use of money to buy and sell things – but a broad sense of owing someone a favor of a roughly equivalent sort.

This need not be a material object at all, it could be help, or ritual sponsorship, or maybe your son is in love with your neighbor’s daughter, but let’s leave that aside for a moment. Insofar as it is goods, it would generate a system of vague ballpark equivalents. And this is indeed what one finds where there is extensive “gift exchange”: a rank system, whereby certain types of goods are seen as roughly equivalent to others, but not a proportional (i.e., monetary) system where you can say how many of this type of rank B objects is equivalent to one of these rank A objects. The question is what would be the circumstances that would generate a system where one can measure such precise equivalents. Here, again, ethnography provides endless examples of what actually does happen and it’s nothing like the economists predict."


http://blog.mises.org/18301/david-graebers-response-to-my-article/

Although Marx did not rely on a premise of individual or collective rationality to develop his theories of capitalism, he did essentially accept the classical formation on the origin of money from barter society, as Graeber also notes:

3) I never argued that the moneyless spot trade (barter) did not exist in human history, only that

a) both the historical and anthropological record confirm it occurred almost exclusively between strangers, or those with whom one has no moral relationship.

...Let’s take (3a) in greater detail. This is basically what my critic is falling back on – ironically, reproducing a theory of the origins of money which, ironically, seems to have been first proposed by Karl Marx, and later by Karl Bucher. Unable to find any plausible reason why neighbors will be limiting themselves to the spot trade, he seems to be arguing that Mesopotamian merchants _must_ have invented money as a medium of exchange through their own spot transactions in long-distance trade for that system to then be adopted as a unit of account in administrative transactions within Temples. Aside from the peculiar circularity of the argument – “since money can only have been invented by barter, if they were using money, it must have been invented at some time earlier through barter” – it flies in the face of both logic, and again, all empirical evidence we actually have about ancient or “primitive” trade.


Thus, empirical observation trumps stubborn adherence to theory every time.

Ash said...

The common thread underlying all conceptions of classical economics is the emphasis on the underlying rational, self-interested behavior of humans driving economic relations of organization and modes of transactions within human society. Fortunately, observers of actual historical development exist who complement (or contradict) established theories with empirical evidence.

Graeber (in his response to Murphy): "First of all, we are not dealing with a situation where people borrow things from one another and expect an equivalent of exactly the same value. I suppose the certain Austrian school theories of human nature assume that’s what neighbors in a moneyless economy _would_ do with one another, but again, this just shows a flaw in those theories of human nature, because when tested against the empirical evidence, this is not what one finds.

What one finds are a variety of mechanisms of distribution, some open-ended sharing, some relatively centralized allocation (the actual Iroquoian societies that people like Jevons used as examples mainly had women’s councils allocate things and didn’t swap directly between households at all), and some direct exchange, particular with people in that vague middle ground between neighbors and strangers – but that exchange was based not on exact value equivalence – a concept that presumes the prior existence of money in the first place, and is therefore completely illogical to attribute to people unfamiliar with the use of money to buy and sell things – but a broad sense of owing someone a favor of a roughly equivalent sort.

This need not be a material object at all, it could be help, or ritual sponsorship, or maybe your son is in love with your neighbor’s daughter, but let’s leave that aside for a moment. Insofar as it is goods, it would generate a system of vague ballpark equivalents. And this is indeed what one finds where there is extensive “gift exchange”: a rank system, whereby certain types of goods are seen as roughly equivalent to others, but not a proportional (i.e., monetary) system where you can say how many of this type of rank B objects is equivalent to one of these rank A objects. The question is what would be the circumstances that would generate a system where one can measure such precise equivalents. Here, again, ethnography provides endless examples of what actually does happen and it’s nothing like the economists predict."


http://blog.mises.org/18301/david-graebers-response-to-my-article/

Although Marx did not rely on a premise of individual or collective rationality to develop his theories of capitalism, he did essentially accept the classical formation on the origin of money, as Graeber also notes:

3) I never argued that the moneyless spot trade (barter) did not exist in human history, only that

a) both the historical and anthropological record confirm it occurred almost exclusively between strangers, or those with whom one has no moral relationship.

Let’s take (3a) in greater detail. This is basically what my critic is falling back on – ironically, reproducing a theory of the origins of money which, ironically, seems to have been first proposed by Karl Marx, and later by Karl Bucher. Unable to find any plausible reason why neighbors will be limiting themselves to the spot trade, he seems to be arguing that Mesopotamian merchants _must_ have invented money as a medium of exchange through their own spot transactions in long-distance trade for that system to then be adopted as a unit of account in administrative transactions within Temples. Aside from the peculiar circularity of the argument – “since money can only have been invented by barter, if they were using money, it must have been invented at some time earlier through barter” – it flies in the face of both logic, and again, all empirical evidence we actually have about ancient or “primitive” trade.


Thus, empirical observation trumps stubborn adherence to theory every time.

Jeff said...

Michael H,

FOA discussed ancient people on the gold trail three. It's a good read. Start here: (1/25/2001; - usagold.com msg#56)

Michael H said...

Jeff,

I have read FOA's gold trail, which is why I posted the link to the NC piece.

Here is a comment from Graeber in response to someone who brings up coinage and debasement. There is a lot packed into this one paragraph:

"The idea that debasement comes at the beginning of money (of this sort) would only be true if what money is, is gold, or silver, or what-have-you, and that coins simply are affirmations of the fact that units of gold, silver, bronze, etc, are of a certain uniform weight and purity. This does not appear to be the case. Ancient coins all circulated at a value higher than that of their metal content; they were a combination of the value of the metal, and fiduciary value, in the sense Aristotle identified in saying that money is simply a social convention, a tacit agreement to treat some things as if they had value. The difficulty was in interior versus exterior use – when Roman rulers lowered the silver content of their coins, it did eventually cause inflation, but usually only after the lag of a couple generations, because while Roman coins were still acceptable at face value for payment of taxes, those outside the empire treated them just as pieces of precious metal, and thus the price of imports went up."

Terry said...

Can someone help me understand the "Sterilization" of gold and it's relationship to inflation and interest rates?

JR said...

OMG YESSSSSS DP!!!!!!!!!!!!!!

JR said...

Hi Michael H,

Graeber is arguing with someone (Murphy) whose position is "money" is and must be gold - an idea born out of political/intellectual advocacy for what "should be."

That kind of normative economics is ideological advocacy, and has ***nothing*** to do with Menger, Mises, or any other real intellectual concepts about money. That type of ideological clowniness is why more and more people sympathy with the decision of the folks at Coordination Problem to drop the AE label altogether.

**********************************

That said, suppose even trying to discuss the origin of "money" based on modern, "mainstream" definitions of "what is money" is to tilt at windmills?

Suppose "money" is a concept "we" are still trying to get our collective heads around, and with the passage of time human's collective understanding of "money" is ****EVOLVING***?

********************************

Gold is Money - Part 3:

"The most common, mainstream understanding of money is that of a device bearing three functions. The three functions are 1) medium of exchange, 2) unit of account and 3) store of value.

A more purist understanding states that money is only a medium of exchange. And that the usability of money in other roles flows from its declared form. For example, if our common medium of exchange is physical gold only, then it is also an excellent store of value.

In fact, as a medium of exchange, money is only one half of a full barter exchange. The other half is when you change your money into that item you desire. But when physical gold is the common medium of exchange, then it is possible that the concept of a "medium" (or middleman) is incorrectly applied, because if gold was what you were after (for its store of value function), then the exchange is completed in only one step! Direct barter!

Finally, there is our new understanding of "the pure concept of money" which is our innate human ability to associate relative values. And within this understanding of 'money', it became clear that in order for our ability to function properly and efficiently in the way it has evolved over millennia, gold must be free for each of us to impute value to it."


cont.

JR said...

cont.

From Return to Honest Money, FOFOA discussing the **EVOLUTION** of our understanding on "money," one which continues today:

*********************************

"Back in October of 2009 I wrote a series of posts called Gold is Money...In this series I introduced the concept of the separation of monetary roles into different media, not fixed at parity to each other...

But first, here are a few excerpts from Gold is Money..."Money", as it is understood today, has three main roles...

[quoting FOA]"Understanding all of this money evolution, in its correct context, is vital to grasping gold's eventual place in the world. A place where it once proudly stood long ago."


[back to FOFOA] The human concept of money is changing whether we like it or not...In Part 2 I explained how the evolution of the money concept over maybe 2,500 years led to what we think of as money today: the three functions all tied into one...

Well here's how I kicked off Gold is Money Part 3: Allow me to start by beating a dead horse. There is a vital difference between what may in fact be the ideal, perfect monetary system and what are the real monetary changes we are heading straight into today...

If we can discover together where we are heading financially, economically and monetarily, and why we are heading there, then perhaps we can know, in advance, how the understanding of the global consciousness will evolve and unfold in the coming weeks, months and years...

Taking the above in the context of the ongoing monetary evolution to Freegold...

...as Freegold evolves and the "money functions" separate into transactional medium and store of value...

...Reference Point: Gold, which is the underlying nature of a global marketplace that reveals where our monetary evolution is actually heading..."


Cheers, J.R.

Jeff Herron said...

Every time I read a post like this, I hope that the FOFOA blog is being archived for study by future generations after the great reset occurs. This blog will make one heck of a textbook for some future economics student.

This is economic writing of the highest level, communicated in language simple enough for even me to follow. A masterpiece -- and a shame that so few are aware of FOFOA's singular mind and great light. But more are awakening to the Freegold reality all the time!

I don't have anything to donate to you today, FOFOA. But the next time I do, I'll come straight here to do so. You are indeed a modern-day Hazlitt in your ability to effectively communicate some very complicated ideas.

Huzzah!

JR said...

Terry,

On sterilization - If gold flows into a region, ceteris paribus (all else equal), than there is more gold chasing more goods. At this time, we had gold backed money, so gold was a proxy for paper money. More gold = more "money" chasing real goods = inflating prices measured in gold/its paper money proxy.

So what could the FED do if more and more gold was flowing in externally and chasing real goods, pushing up/inflating the prices of real goods? The Fed could "strelize" this inflow of gold (in modern CB parlance this is called a reverse repo) to remove gold out of the economy, and thus reduce the inflationary pressure on real goods.

Federal Reserve Sterilization of Gold Flows

When a country imported gold, its central bank could sterilize the effect of the gold inflow on the monetary base by selling securities on the open market


So the Fed pulled gold from the economy and replaced it with paper securities it soled to investors for their gold. Paper securities that aren't media of exchange but must be converted back into gold/the proxy paper money to be spent, so this process "sterilized" the gold inflows and kept a check on the inflationary pressure of real goods by limiting the increase in gold chasing real goods.

*******************************

This is conceptually very similar to Greenspan's "great moderation", where exported dollars where recycled back into the treasury market, thereby creating asset inflation and limiting the amount of the circulating media (dollars) chasing real goods, thus alleviating inflationary pressure on real goods.

In FOFOA - speak, the "great moderation" is just and extension of **CREDIBILITY INFLATION**.

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

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


...

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

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


Hope that helps get you started!

Cheers, J.R.

Michael H said...

Hello JR,

The reason I made my second comment about store of value is that I found it strange that the SoV function was not mentioned once in an essay about the evolution of money.

What I was trying to get to was: how did we get to a point where MoE and SoV were wrapped into one? Can the evolution of the joining of the functions tell us about what to expect when these functions separate? How did society function before the SoV and MoE were wrapped into one?

This brings to mind something else: Graeber mentions that, once people are used to using money, they will use money-substitutes when forced to do without money -- with the example of prision populations using cigarettes as money.

Likewise, we should expect society to function differently after SoV-MoE separate than they did before they joined.

Blondie said...

Michael H said:

"...we should expect society to function differently after SoV-MoE separate than they did before they joined."

Indeed. (BusyB and DOC, going by their comments above, are not factoring these differences into their thinking)

When you say "before they joined" you are implying that they were separate previously in the same form in which we understand them today. Considering that our concept of money is continuously evolving, that is not necessarily so.

Michael H said...

Blondie and JR,

"When you say "before they joined" you are implying that they were separate previously in the same form in which we understand them today. Considering that our concept of money is continuously evolving, that is not necessarily so."

"That said, suppose even trying to discuss the origin of "money" based on modern, "mainstream" definitions of "what is money" is to tilt at windmills?"


Both true.

It is interesting that, in a gift economy, value is stored in the minds of others as remembrance of favors owed.

Terry said...

Thanks JR, that helped. I am still behind on the interest rate connection. Perhaps there is more help available? My density precludes clear understanding at this time. again, thanks.

Crack said...

Wodaya think that "more" in "more dollars" is Terry?

Terry said...

If you are implying "more" is interest, how does that refer to interest "rate"? I guess I am just too dense to get it. Thanks for trying Crack.

Blondie said...

Michael H said:

"It is interesting that, in a gift economy, value is stored in the minds of others as remembrance of favors owed. "

Trust is required. This is why barter was normally conducted with strangers; to conclude the transaction immediately, as there was no mutual basis for trust. One must trust that another has a conscience, so it helps if you are already familiar with them, and will be in regular future contact (ie share the same community).

This is likely also why when we look back into our monetary past barter seems logical and a gift economy counter-intuitive: today there is very little trust, and we assume that it was always similar (people often generalize these things as "human nature", but this is not the case; it is the natural human response to the conditions of the time), so the idea of a gift economy in which credit is remembered and ones conscience is an integral part of the fabric of society seems outrageous.

Yet the reverse was true, gifting (with remembered credit) was the norm, and barter the anomaly.

An objective benchmark for value, however, remedies this situation and restores trust even between strangers, because it is not them that you are trusting but the media they are exchanging with you, and this media is backed by the market at a known rate via a transparent process.
Freegold.

Trust is priceless. Freegold supplies it for free.

Implications radiate out from there, with infinite resolution.

The Dork of Cork said...

FOFOA
You have changed your tune since "Greece is the word"

So now we may lose some members............. for the greater good......destroy Europe....... - fair enough.

But this is a very Puritanical & extreme view.
Puritanism is a dirty word in Europe

Is not money a poltical object ?
This has happened before - but you have begun your modern narrative in 1922

I see the Venetian banks plotting the destruction of Europe just like they did during the Great war so that German , French above ground and UK below ground Gold could flood into the worlds first petro - currency , destroying the coal based / capital intensive / Gold standard currencies and of course the flower of European manhood.

Just who do these people serve ? Mammon is a cold heartless God - don't you think ?
This goes very deep - Ireland & Scotland is familiar with the Venetian banks then based in Holland financing Armies to wage all out war against the old tribal structure during the 17th century - implanting the now obsolete in your eyes nation state.

I have a nasty taste in my mouth - this treachery can be distasteful.

How could anybody imagine & plot such discord ?

I can smell war - We need a New Henry the First - to purify this wasteland of broken dreams.
www.youtube.com/watch?v=K1MuvvS_xSw

Blondie said...

Following on from my last comment,

Credit is a measure of trust.

Genuine credit cannot expand or even exist in the absence of trust.

Freegold would mean that we held and used currencies because they were useful to us, because they bought gold and by extension they were trusted to purchase anything, and we were all in agreement as to their value at any point in time. They were ultimately backed by the market, by our peers, by our mutual trust in our medium of exchange. The objective benchmark provides the trust, enabling free and fair trade with anyone.
Because this is not currently the case, coercion is used.

This is the difference between freedom and slavery.

JR said...

DoC,

I'm gonna play nice so I'll say perhaps you haven't read Greece is the Word in some time?

Like the part where FOFOA wrote the Euro **PROBABLY WON'T** hyperinflate. If you wanna take some time to re-reflect on "Greece us the Word" and get back to the comments after your re-acquaintance with the piece I'd be happy to continue this discussion, but I suspect you will feel differently at such time ;)

I don't mean to project on you, but one of the biggest and MOST COMMON intellectual barriers to Understanding Freegold is the Euro. Most can't get their mind out of the present, and the Euro as it is now.

"Everyone knows where we have been. Let's see where we are going!"

Cheers, J.R.

Midas II said...

Hi JR,

Could you please explain why under Freegold people would prefer to use gold over currency as the store of value, even though currency would be used in day-to-day transactions (and so, currency would presumably earn interest since it could fund productive investments, as it does today)?

Gold, by lack of a bond to the physical economy (which I understand it would not have, hence 'Free'), would remain economically unproductive. What then would make it the better store of value, even though currency could be used productively and gold could not?

(I won't argue that Gold makes for a better store of value today, but today isn't representative of a healthy economy).

Aaron said...

Hello Midas II-

"Could you please explain why under Freegold people would prefer to use gold over currency as the store of value, even though currency would be used in day-to-day transactions (and so, currency would presumably earn interest since it could fund productive investments, as it does today)?"

Today your average Joe doesn't invest in a company to support the company's mission. The average investor doesn't understand productive investment. The average investor buys stocks in the hope that future returns will offset purchasing power losses in the currency they receive to pay their bills. That's all there is to it. "I'm investing. I can pay my bills. Cool! Who cares where this money goes!"

You said, "What then would make it the better store of value, even though currency could be used productively and gold could not?"

I think here you are talking about return on dollar investments in nominal terms -- one side of the equation -- but you haven't considered the purchasing power of the dollar versus the purchasing power of gold -- the other side of the equation. Supply versus demand. Quantity versus quality. Continuing with your thought that by holding currency as a wealth reserve you will make nominal gains, stop to think in terms of real gains and you will see the difference between gold and currency as a store of value.

--Aaron

Wendy said...

Midas,

I can't help but point out the capital appreciation (and no interst) of gold over the last 10 years.

You have alot of reading to do my friend....I suggest you start with sept 2008 blogs

We can only hope that we've dodged JR's and Costata's ire

Robert LeRoy Parker said...

Gold, by lack of a bond to the physical economy (which I understand it would not have, hence 'Free'), would remain economically unproductive

This is all wrong. Reread the essay above to see just how productive gold will be. Gold will be the ultimate wealth consolidator, an unbiased arbiter of the flow of value. But it will only be set free to do this essential task when people reject the paper encumberances that currently masquerade as gold.

victorthecleaner said...

Question for everyone: Who is selling all the gold?

Context: In 1995-1999 when Central Banks were selling, carry traders were going short and the price of gold was falling, the right question to ask was who was buying all this gold?

Now the price is rising remarkably steadily, even non-goldbug mainstream investors have started to buy, and even the first CBs are buying. So who is selling all this gold? What do you think? What do you know? For some reason, the bullion banks are still not under pressure.

Is the price increase sufficient in order to get private investors to sell? I am sure the jewelry of the American middle class that is being melted down, is not sufficient to supply the market. So who is selling?

Someone said that the Belgian CB had about half their gold on lease. Are the Europeans still propping up the London bullion market? Have the US meanwhile found some additional gold? Where? In Fort Knox or in Iraq?

Victor

Blondie said...

Chinese Premier Wen Jiabao said on Wednesday:

"We will continue to get actively involved in economic globalization and work to build a fair and equitable international trading regime and financial system,"


Buying gold qualifies as a means to this end, does it not?

Blondie said...

”Who is selling all the gold?”

It would be helpful to first quantify the “all” in that question...

Accurate figures on gold supply and demand don’t seem to exist, mainly due to the opacity of some sectors (OTC gets mentioned a lot in this regard), just estimates as far as I can tell... the following seem to be roughly representative of what a google search will yield:

”The 2010 supply demand situation is as follows:


Mine supply of ~2500 tonne

Scrap supply of ~1650 tonne

Total:                ~4150 tonne

When you subtract the 76 tonnes bought by Central Banks, you end up with about 4074 tonnes supply for the year.

Global Demand for 2010 was ~4000 tonne“


Quite how these figures are established I do not know, but they are certainly rounded, and presumably account only for physical gold flow. The supply figure is definitely physical.

Central Bank purchases appear to have risen this year, but by how much? 200 tonne more?

Of course as the price rises the flow of value can remain constant while the weight of the flow diminishes...

Anecdotal evidence suggests to me that the weakest hands have sold, and there is now progressively less scrap gold flow as the price rises. This should result in a gradual acceleration of the price rise... or at least it would if the price were discovered in a physical only market, until such a time and a price that resulted in enough flow for the price to find equilibrium.

”In 2009, scrap supply surged by 30 percent to a record as consumers rushed to sell anything they had, both to turn a fast buck on a booming market and to cushion the blow of recession.
In the years since then, large amounts of recycled gold flooded the physical market. But growth has slowed sharply as people either run out of things to sell, or wait for higher prices. Klapwijk expects recycled gold to grow by only about 5 percent this year.“


5 percent in price or weight? Makes a big difference.

I see no need for “clandestine” sources to account for current flow. Maybe others have differing figures and opinions to share?

Crack said...

DOC

perhaps y'all spent to long @ confession

Crack said...

Terry

"how much" more?

whats it take to git y'all not spen yor cash alredy, lock it up with me so I can spen it today insted, give y'all "more later" after I made me a bunch?

J said...

Blondie,
I'd like to know how these numbers are calculated. Supply and Demand will always remain even when measured by weight on a global scale. Gold is not issued, it is moved.

If a gram of scrap is sold then there was demand for that gram of scrap.

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

The thesis as presented by FOFOA and adhered to by many-if not most of us-who follow him here on his blog has been that as the debt crisis intensified cash would be exchanged for trash and, as the saying goes, dumped on the/your/their lawn. It always seemed fairly clear that the cash would come from local monetary authorities primarily, perhaps even exclusively, but I am not sure there has ever been an in depth and detailed discussion about who would be the key players providing support and the nature of said support.

It seems clear now that China is now casting itself in the role of a lender of last resort. And while this is almost certainly gold positive, and likely freegold positive, especially when seen in conjunction with such nascent operations as PAGE, one would be foolish to not recognize that such support comes with a price, likely a very high one. Some may call it quid pro quo while others might just refer to it as bribery.

To wit:

http://www.cnbc.com/id/44512449

Excerpt:

China’s premier, Wen Jiabao, said the country remains ready to help Europe through its current debt crisis, but said Europe must recognize China as a full market economy.

Addressing CEOs and policymakers at the summer World Economic Forum in Dalian, China, Wen said he had told European Commission President Jose Manuel Barroso on a recent phone call that China was willing to invest more money in the region.

But he urged the EU to grant China the status of a full market economy before the World Trade Organization (WTO) does so in 2016.

“Recognizing China as a full market economy is a way a friend recognizes a friend,” Wen said.

d2thdr said...

Subscribing to comments. Thank you FOFOA.

Motley Fool said...

Hey Edwardo

Thanks for the link. I lol'd.

My understanding has been that the front lawn dump is the last step, after all possibility for loans or extensions have been used, the printing phase.

The Chinese negotiations are hilarious to me.

China knows that they are screwed. They have this mountain of paper, and nothing they can do about it. One option is to crash the game immediately but that is not in their best interest. So they are trying to use this leverage as best they can, without breaking world markets. Buying resources in Africa and all over the world, and lately for political advantage.

On the other hand the European politicians are desperate to pretend and extend, just another year, month, hell, 5 minutes.

These high level strategic games are mightily amusing. xD

TF

DP said...

Everyone has their price for willing compliance, and China's request seems like a reasonable one to me.

Michael H said...

Börjesson,

"In the original writings, it seems Another and FOA expected Freegold to happen fairly soon, within a few years or so. Has there been any discussion, and can anyone recommend any particular posts, about why it didn't happen back then? What stopped Freegold from happening in, say, 2001? And could the same thing, whatever it was, stop it again this time?"

Welcome!

I admit that I have not seen a detailed account of why freegold didn't happen ~2001.

However, I can offer two responses to your comment:

First, I think the view that "ANOTHER and FOA were wrong because freegold didn't happen in 2001" is not the right way of looking at things (I know this is not the sentiment you expressed but I have seen others voice it that way). Really, what A/FOA did was draw us a map for both understanding true value and for understanding that the gold market was about to change, and what to expect when it did change.

As part of that, they saw a possibility that all fiats would break and gold would be the direct oil currency -- a disaster! This was a greater danger prior to the introduction of the Euro.

But, the steps that they outlined -- interest rates through the floor, rising gold price, the front lawn dump, etc. -- have played out, only instead of happening over several months they might happen over a couple of decades.

It is important to remember that gold was at the tail end of a 20-year bear market when A started writing. Gold was $360 at the start of 1997, on its way down to a double bottom of roughly $250 in 1999 and 2001. Can you imagine buying gold in an environment where every spike seems like a siren song to lure in fresh longs before a new, lower low?

Second, if I had to pinpoint one event that was most responsible for stopping freegold in 2001, I would vote for the BoE gold sales. This brought a large amount of real, physical gold into the market at a time when the gold market was under heavy stress. See, for example, Victor's post on the GOFO:

http://victorthecleaner.wordpress.com/2011/04/21/the-gold-forward-offered-rate-gofo-fever-chart-of-the-lbma/

The other principal factor in the delay of freegold is that the players are not actively undermining the status quo, they prefer to find seats close to the exit while handing the protagonist (USD) all the rope he needs to hang himself.

Michael H said...

Midas II,

"Could you please explain why under Freegold people would prefer to use gold over currency as the store of value, even though currency would be used in day-to-day transactions (and so, currency would presumably earn interest since it could fund productive investments, as it does today)?"

As Wendy mentioned, I think that under freegold we will continue to see a rising gold price in currency terms. So, instead of buying debt (giving up dollars today for more dollars tomorrow), people will buy gold.

(Others have speculated that a well-managed currency under freegold will see a steadily falling gold price, but I can't quite wrap my head around how this could happen without the entire world rushing into this currency in lieu of gold, turning it into the new reserve currency and bringing with it Triffin's dilemma.)

I think 'safe' currency interest-bearing investments, such as bank deposits, will earn negative real rates of return. This is the dis-incentive towards holding cash long-term.

As for productive investments: yes, there will be some. But, as Aaron alluded to, the landscape will change. Currently, most 'investments' are bought with an eye towards selling them at a higher price later on.

I think under freegold we will return to investing with an eye to what the investment is and what it produces, cognizant of the risk of capital loss. For some, this risk will be worth the potential reward. For most, holding gold will be a safer bet for the long term.

Also, keep in mind that, when a typical saver buys gold, there is a dis-saver selling gold. This dis-saver could be funding current consumption (such as a retiree) or funding a productive venture from their past savings.

Just because savings aren't going into debt instruments does not mean that new productive ventures aren't being financed.

Michael H said...

Midas II,

May I suggest this post

http://fofoa.blogspot.com/2011/04/winner-takes-gold.html

as further reading?

Edwardo said...

Hi MF,

Yes, I suppose "the front lawn dump"
refers to outright printing, but it seems to me that it referred to an evolving process that included fostering the big players to get out in front of the hyper-inflation bear. In short there's the front lawn dump before the worst effects of hyperinflation are felt and the front lawn dump after it is in, as it were, full swing.

I'm glad the link made you chuckle and I completely agree that The Chinese are trying everything they can think of to get out from under their dollar denominated holdings on the best terms possible of course.

Motley Fool said...

Australian physical gold exchange

Hmm?

Motley Fool said...

Perhaps costata or Bron would be kind enough to share their opinion about this, and how it compares to PAGE.

Australian bullion exchange

TF

Alan2102 said...

Blondie wrote:
"An objective benchmark for value, however, remedies this situation and restores trust even between strangers, because it is not them that you are trusting but the media they are exchanging with you, and this media is backed by the market at a known rate via a transparent process.
Freegold.
Trust is priceless. Freegold supplies it for free."

Right and wrong. You've done a little sleight-of-hand there. "It is not them that you are trusting", and hence the trust that you say is priceless is a fundamentally different kind of trust; we should not even be using the same word. The "trust" of which you speak seems like a fake trust, or a synthetic trust, RELATIVE TO the real deal that you are saying is replaced.

Mind you, I'm not saying this is bad or wrong; note the upper-case "relative to". I'm just insisting that the two (very different) things not be confused. "Objective benchmarks of value" cannot substitute for intimacy or implicit bonds. I think it likely that both are necessary, in a world where we are related in groups of 10, 100, 1,000, 10,000... and on up. That is, intimacy and implicit bonds are adequate for relationships at the lower levels (numbers), but lose efficacy at the higher.

Alan2102 said...

Michael H (re Börjesson):
"the steps that they outlined -- interest rates through the floor, rising gold price, the front lawn dump, etc. -- have played out, only instead of happening over several months they might happen over a couple of decades."

Yes, and it sure makes a difference in planning one's life! Things have not gone according to "plan" -- the plan outlined by Another/FOA in the late 1990s, when I first started reading them. Now, granted, the POG has gained in a most gratifying way, and I have no complaints (not many, anyway), but still. Going by their blueprint, I was expecting the Great Event by now, or for that matter by 2005 -- at the latest. So, the question becomes: how long to play the waiting game? That is, if you are not holding as a transgenerational pass-forward, but rather as something for your own work in this life. The fact that gold (and, more so, silver) is making substantial annual gains is a great help, to be sure; without that, the waiting might prove intolerable, beyond a few years.

The Dork of Cork said...

@JR
FOFOA : GRECCE IS THE WORD
"Many pundits and analysts have been speculating that this "Greek debt crisis" could mean the end of the euro, the end of a broad-based euro, the break-up of the Eurozone, or something along those lines. But this analysis flows from the shallow and short-sighted thinking that has become the very hallmark of Wall Street and Washington. The euro was and is a POLITICAL movement (remember I said that politics is one of the three key forces to watch) that spans decades if not centuries, and encompasses much more than just a transactional currency. It is comical to watch some of these Wall Street hot shots criticizing what is really quite an impressive accomplishment in the euro."
FOFOA then goes on to quote Jim Rickards - I assume approvingly , Rickards mentions that the Euro club will not throw Greece under a bus , it has 100+ tons of Gold which back then at Euro M1 price could retire at least some of the countries debt , now not so much even at M3

The ECB governers are using debt as a weapon of war with traitors working inside Greece also - Greece even if well run could not afford to pay this debt like all countries with such a absurd interest rate , they are hard workers but unproductive relative to the North.( their collapse has much to do with northern workers not traveling so much abroad now)

Many of Euro masters hold Willem Buiter like views prefering to use seigniorage games - playing out the debt rather then retiring it.
Their agenda is the total destruction of the nation state (which was a compromise between Princes & Bankers) and the rise of the market state which gives banks total control of all utilities.

I hold Grave doubts about Freegold - the SNB sale of Gold some years ago is striking - who did they sell it to ?
He who controls the quanity of money controls it , there is nothing free about freegold - it lurks in the shadows.
Only Kings should control the stuff , not banks.
The precious has corrupted the minds of many who inhabit this forum , they cannot control their greedy desires.
It will destroy them.

Alan2102 said...

PS: The foregoing was written from the standpoint of an Another/FOA partisan who has bought-in, 100%, to their story. That's not me. For me, the Another/FOA story, and prospect of a Great Event, was a relatively minor consideration. There were numerous fundamentals evident in the late 1990s that made gold and silver a fantastic, essentially sure-fire opportunity, quite apart from any expectation of a gigantic overnight revaluation of gold (to $30,000, as per A/FOA/s original). Approximately the same situation obtains today. Gold and silver have numerous powerful fundamentals driving them, fundamentals that are not likely to be exhausted for some time to come. And, if the Great Event transpires, then so much the better! Hence when I said I have "no complaints" (except for trivial grousing), I do mean that.

DP said...

"Pricing is set by the real-time international spot bullion market."

Interesting little detail. Seems divergent to the GBI model, even moreso from BullionVault, but very similar to say GoldMoney.

http://www.abx.com.au/page/retail-investors/Trading/

mrbeyond said...

http://youtu.be/HpxEv7wmnIg

All Lined Up :

Tired of all this crawling around
Realising the joke was on us
Reaching out to the obvious
Starting with an answer not a question
Our most acceptable businesses
All aligned in just one direction
Organised on the same lines
With one face - one side

We got all lined up
We got all lined up
We got all lined up
All lined up
All lined up

Back at the all night party
We're getting clearer all the time
Refined to one shape - frozen like crystal
It has the symmetry of perfect design
One line leads to another
They cross at the corners run straight at the sides
It reads the same way in any direction
Two red circles and a thick black spine

We got all lined up
We got all lined up
We got all lined up
All lined up
All lined up

Let it fall into place we could tie it to a tree
We could point it at you we could make it a habit
We could leave it outside or we could give it our food
Understand it or we could ignore it

Holding all our past in the one hand
We showed those people in a way they understand
Shiny little eyes on a big red bus
The ones we point at work for us
One sharp point between distinction
Going this way for X amount of time
Frame - line - and convergence
From the first to the final
This intention is mine

We got all lined up
We got all lined up
We got all lined up
All lined up
All lined up

(repeat chorus)

Biju said...

The DoC,

"Only Kings should control the stuff , not banks.
The precious has corrupted the minds of many who inhabit this forum , they cannot control their greedy desires.
It will destroy them.".

I partially agree that Gold is corrupting minds of many now. But I guess one cannot help it.

By that same logic - does it mean all Indians have been corrupted by their forefathers and their culture/tradition ?

JR said...

Hi DoC,

Yes, FOFOA explained why the peanut gallery is comprised of dunces. And he explained that instead of their tortured understanding, there was a different perspective. And given this different perspective, one could understand why the Euro would **probably not** hyperinflation.

You have no support for your silly strawman claim:

You have changed your tune since "Greece is the word"

So now we may lose some members............. for the greater good......destroy Europe....... - fair enough.


FOFOA never said the some members wouldn't leave. Indeed, FOFOA went even further and *explicitly* recognized the possibility (but not probability) that the Euro hyperinflates and basically, "destroys Europe" collapses too). So yeah, you have no support for your crazy claims.

********************************

Now you go even further and say you question Freegold because of your Euro misgivings. WTF are you talking about? You have fundamental misunderstandings of elementary aspects of Freegold that suggest cognitive deficits and/or dishonesty.

Freegold is independent of the Euro and is coming whether the Euro survives or not. Remember the whole idea about "if the euro fails, gold will be the currency of oil?" You can argue against Freegold if you wish, but you can't just lie/make up nonsense about FOFOA's positions on these matters.

While I enjoy good fiction, your penchant for "fantastic stories of modern day all-powerful overlords enslaving the serfs to their graves" tires me and leaves me longing for a more entertaining dystopian vision ... oh have you heard about the "Organization of North American Nations" - now that's a **fantastic story**!!!!

"Alas, poor Yorick! I knew him, Horatio: a fellow of infinite jest, of most excellent fancy: he hath borne me on his back a thousand times; and now, how abhorred in my imagination it is!"


Cheers, J.R.

jojo said...
This comment has been removed by the author.
The Dork of Cork said...

@Biju
I was stumped for a second with your question - thinking not of the Indian subcontinent but the North American plains
I am totally at sea with the Indian culture and do not know the relationship of debt with Gold - especially more modern bank credit.
But if I was in a position of creating credit & goverment money such as the many older institutions in Europe I would seek to use and find dupes to further my aims - although FOFOA is far from a dupe I persume.
I have been reading Willem Buiters recent pieces and I find his brand of elitism distastful.
His policey is a form of zoo keeping , a tired bit forceful foppishness.
He wants to reengineer the already solid base but crumbling nation state institutions into easily manipulated market state vassals.
His policey has been very successful from capitals standpoint over the years but is reaching a tipping point in stability now.
The destruction that the EU has done to the core basic functions of Europe has been immense - the entire shell is a hollow structure now , completly decapitalized to service these mens dark ambitions.

Indeed the words of Carrol Quigley always come to mind when I listen to his musings

"The powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent meetings and conferences. The apex of the systems was to be the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the world's central banks which were themselves private corporations. Each central bank...sought to dominate its government by its ability to control Treasury loans, to manipulate foreign exchanges, to influence the level of economic activity in the country, and to influence cooperative politicians by subsequent economic rewards in the business world."

And yes it does corrupt - most of my liquid assets are in Gold with some silver ,cash and bonds.
But this is Smeagol speaking now and I merely wish to warn all those Gollums that dwell in this cave - be careful what you wish for.

jojo said...
This comment has been removed by the author.
The Dork of Cork said...

sorry should read :a tired BUT (not bit) forceful foppishness.

Crack said...

OMG he thinks RPG is Role Playing Game

The Dork of Cork said...

@JR
When one empire collapses another will take its place , what makes you think freegold will inhabit the new power vacuum ?
The world has never operated under such rules - and when it has gold has been useless because there was no rules - think of all those Roman coins buried in Roman backyards.
Freegold is a illusion - I am selling almost all of mine when it reaches M1 because if / when it reaches M3 it will be useless anyway.

JR said...

DoC,

After how long you have been commenting here, and all the criticisms you have lobbed at FOFOA, you now ask:

When one empire collapses another will take its place , what makes you think freegold will inhabit the new power vacuum ?

Seriously? Its even more clear why I wrote:

"WTF are you talking about? You have fundamental misunderstandings of elementary aspects of Freegold that suggest cognitive deficits and/or dishonesty."

If you haven't bothered to seek to understand even the most basic ideas of Freegold yet, why should anyone feel inclined to think you will deviate from this path. I certainly expect you to **continue** to ignore what I and everyone else writes in favor of "OMG I hate Freegold even though i don't know what it is because I hate the Euro socialists."

Have fun with that!

Cheers, J.R.

jojo said...
This comment has been removed by the author.
JR said...

Jojo,

Some comments and excerpts from Greece is the Word to help you as you ponder the forces that will impact gold's price in Freegold.

The current system of **infinite** debt growth with no couterbalance. As FOFOA explained in the above post, with gold as the reserve, credit grows and contracts based on the flow of real capital. There is balanc eon credit growth.

But under the current system, where "paper promises" are the base reserves, credit aka debt could now expanded "without ever having to contract, at least not because of the unwanted flow of gold." And this process of "obstructing the adjustment mechanism of real gold settlement set the world up for periodic busts, economically destructive punctuations and regular currency devaluations."

A systemic problem, like a a run away debt train!

=================================

From Greece is the Word

"Imagine that I am the debtor in the above diagram and you are the saver. I am going to keep living off credit as long as you keep buying my debt repackaged by the banks as a bond. The more you buy, the more the banks are going to offer me credit cheaper and on easier terms. Can you really blame me? Who should know better? Little ol' negative-net-worth me or super-producer giant you?

You see, by buying my debt from the banks you have become my enabler...

The current system of infinite debt accumulation is unsustainable and has been destined for collapse from the very beginning. There is no device in place for a periodic reset, and there is no automatic counterweight to balance ongoing trade deficits, correct imbalances and hold profligacy accountable...

The depressed price of gold did many things for this failing debt system. It kept the savers, that didn't feel like braving the equity markets, going to the debt markets instead of physical items... "for a yield". It kept the heat on the debtors of the world, forcing them to pay off their debt in real, difficult terms, even though the same system made it ironically easy to get into debt. It made the dollar appear strong, as the numéraire of the debt markets."


So we have this unsustainable debt system, fueled by savers buying this unsustainable debt. And related, a low price of gold, that helped keep the savers saving in this unsustainable debt system.

cont.

JR said...

cont.

So currently runaway debt used as a store of value, with no "check" on its growth, no counterbalance, is a prime issue:

"...This is where physical gold comes in. I have shown you what is wrong with the system when viewed from outer space. And I have shown you what is missing, and what will be found. And I have shown you how the really big money with really big foresight has prepared....

... So the question is, just how high would the price have to rise in order to balance out the demand of the world with the supply, in a physical-only official price discovery market?

Chances are that what would be revealed by such a market would have an eye-opening and breathtaking effect on the rest of the world and demand would skyrocket. What passes today for enough demand to almost break the paper markets would quickly shift all players from paper to physical and add new savers that hadn't even considered gold before. Literally, the entire world would shift its view to gold."


So debt is flawed and will fail and the true value of gold will be revealed as it fills the role of being the savings medium of choice and a new equilibrium price of gold is reached. So what happens **after** the equilibrium?

********************************

"...Instead it will finally plateau once the Thoughts of all the giants and savers of the world reach their Nash equilibrium. And the price will be high enough that it becomes a coin toss as to whether you'd rather be in cash or gold. What it will come down to is your own time preference and your appetite for investing back into an economy that must be rebuilt."

So gold explodes as the debt based economy collapses. But the economy must be rebuilt. And the price of gold **after this new equilibrium is reached** will reflect the trade-off between gold and re-investing in the re-building economy.

You can see jojo that growing confidence in the rebuilding economy will tend to, all else equal, pull savings from gold and back into the economy, no? And reduced demand for gold as a savings medium in lieu of an increasing demand to save via investing in the economy will tend to bring gold's price back down, no?

Cheers, J.R.

The Dork of Cork said...

@JR
Other thoughts can move in your head besides freegold.
This entire forum is a belief system rather then a discourse.
I dislike cults although I am open to all ideas.... The power of Empire and money go hand in hand.... a system of freegold stasis is not a stable equilibrium - it would require a level of homogeneity not present yet.

enough said...

WSJ- Trump, Apmex, and Goldilocks

In the latest development in the growing surge of support for a return to some form of gold standard, Donald Trump has decided to accept gold bullion as a deposit on a commercial lease.

This follows a news story reported on earlier this year where Utah became the first state to legalize gold and silver coins as currency.

On Thursday, the newest tenant in Donald Trump’s 40 Wall Street, a 70-story skyscraper in Manhattan’s Financial District, will hand Mr. Trump a security deposit worth about $176,000. No money will change hands, rather three 32-ounce bars of gold.

The occasion will mark the first time the Trump Organization has accepted 99.9% pure gold bullion, rather than cash, as a deposit on a commercial lease.

The tenant, precious-metals dealer Apmex, will sign a 10-year lease for 40 Wall’s 50th floor at a leasing rate of about $50 a square foot, according to Apmex Chief Executive Michael R. Haynes. The company is promoting the use of gold as a replacement for cash in some situations.

“Gold has been a valuable asset class for the last 10,000 years, but the world has drifted away from it,” Mr. Haynes says. “I figured, Trump is a smart guy, and he’ll realize that taking gold is a better idea than taking cash.”

Mr. Trump said he sees the deal as a repudiation of the Obama administration’s economic policies, of which he has been a vocal critic.

“It’s a sad day when a large property owner starts accepting gold instead of the dollar,” Mr. Trump said in an interview. “The economy is bad, and Obama’s not protecting the dollar at all….If I do this, other people are going to start doing it, and maybe we’ll see some changes.”

To view the entire Robbie Whelan article: Trump’s New Gold Standard

victorthecleaner said...

Blondie,

during the past few years, the CBs went from a net sales of 400 tonnes/year to purchases of 200+ tonnes/year. All this in a 2500 tonnes market (I don't count scrap because that's equivalent to somebody selling bullion stock which does not appear either in these 'commodity' type statistics). In addition, a number of countries are capturing the local mine supply (China, Russia, now Venezuela and others).

Edwardo,

on the front lawn dump. I think FOA basically said "they will buy debt outright for cash and then dump it on your front lawn".

The first, buying debt for cash, has already happened. It started in fall 2008 in the US (> 2000bn US$ by now) and in spring 2010 in the euro area (about 650bn euros by now). So far, however, the cash has been lying still in bank reserves and has not yet been delivered to your front lawn.

Börjesson,

My understanding is that Another expected the London bullion market to blow up right with the Washington Agreement in 1999 (he must have known in 1997 that the Europeans were heading in this direction). That would have accelerated the collapse of the reserve function of the US$.

For some reason, the bullion banks survived 1999. And they also survived the period of 1999-2005 during which the mining companies wound down their hedge books.

In my opinion, the latter is extremely important. Now that the mines no longer owe bullion to the banks, it is no longer obvious how the bullion market can have a small reserve ratio (physical reserve per outstanding unallocated balance) such as the 1:10 to 1:40 that is often mentioned (without citing a source).

Either, someone supplied a huge amount of physical bullion around 1999-2001 and allowed the BBs to reduce their reserve ratio. Or, someone keeps lending them physical which _is_ then allocated to private holders and he is net short a huge amount in the forward market. In other words, without borrowers (mines or carry traders), there cannot be credit (unallocated gold).

This is related to my question of who is selling all this gold.

DoC,

on a possible Greek default. If the euro zone want to avoid a huge inflation, possibly hyper, then they have to make people go bankrupt and have to take down more than just a few of the big banks. This is what Duisenberg means when he says the Euro severed its link to the nation state. The voters of one country may just not tolerate it if the ECB bails out the government of another country with freshly printed money. The ECB has been printing for more than a year now, but as I understand it, the public opinion in the surplus countries Finland, Germany, Netherlands is turning, and there may be quite some debt written off soon.

You see, somebody has to take a loss. The debtors are so much indebted that they cannot work it off in real terms. So either the creditor takes a hit, or they dilute the currency and inflate the debt away. If they do not want to (hyper)inflate, they have to start writing it off (and hurting the banks).

Victor

Motley Fool said...

Hiya DoC

"The world has never operated under such rules - and when it has gold has been useless because there was no rules - think of all those Roman coins buried in Roman backyards.
Freegold is a illusion - I am selling almost all of mine when it reaches M1 because if / when it reaches M3 it will be useless anyway."

You illuminate a lot about yourself in these words.

"The world has never operated under such rules"

Quite correct. Conceptualizing FreeGold requires some imagination and logical deduction.

Nothing has been, until it was for the first time.

If you are absolutely convinced that FreeGold is a illusion, then permit me to ask why you are posting here?

Surely if you write it off as a cult or belief system, then there is no sense in coming here.

I certainly don't hang out at Intelligent Design blogs, as a example.

TF

Blondie said...

jojo,

DOC is no troll.

(some readers may find the following off-topic, so please scroll on by this comment)

Most/almost all people when absorbing new knowledge/ideas relate to and understand them through the lens of their existing beliefs, their baggage. We all have some. DOC appears to have constructed his Freegold perspective on a foundation of other pre-existing beliefs. One will tend to cling to those beliefs which are more dearly held, and reject those which conflict... essentially beliefs whether about one's past or the rest of one's perceptions of reality form one's identity, and to relinquish closely held beliefs is very threatening to this sense of identity. This is a subconscious emotional and entirely subjective process, so rationality does not apply.

Every individual is subject to it to some degree. It is the basis of the individual's perception of their separateness, and is often referred to in passing as confirmation bias. Here's an excellent description of what ultimately occurs when it (the need for, or in this case the option of having, beliefs) is vanquished, whether by design or in this case nature: stroke of insight.

The whole underlying effect of Freegold is that it supplies the objectivity with which to relate equitably with others, with which to transact in our flow of value, the lifeblood of society... instead of being isolated by our subjectivity as we are currently. Alan points out that this is qualitatively different from the trust one can have in those with which one is more intimately connected, and I would agree. I would also point out though that this objectivity differs from our present reality far more than it does from this trust.

The nature of one's perceptions change radically when one begins to consider the how and why of the fact that we perceive at all.

To be rigid in ones beliefs is to resist what is, assuming to know better.

******

jojo said:
"I don't think gold COULD continually go down in price. (*in freegold)."

Sure it could, if the currency in question was diminishing in quantity fast enough. But the value involved in any such exchange would not be diminished, and this is ultimately what any transaction is about. Who cares what the price does in Freegold... it is always equitable.

I do agree that over time there may be a tendency to store value for longer and longer time periods in (stable) currencies rather than gold. This is natural and good, but it is for the individual to decide and be responsible for the consequences. This is freedom. The option of gold is always there, and this will keep currencies in check.

******

@VTC,

Were the CB gold sales to which you refer physical or paper gold? Were the IMF sales paper or physical? If they were physical sold at spot, why was Sprott's bid dismissed?

The Dork of Cork said...

@Motley
I am open to all ideas - and need a discourse or argument to tease out the thoughts that run through my head.
I do not believe you can have trade without the commons - I guess that makes me a communist to some - so be it.

Motley Fool said...

Hi DoC

I don't feel you adequately addressed my question.

I am going to be presumptuous.

I think you are here because deep down in your subconscious mind you sense the nugget of truth. I think you are looking for someone to rid you of your baggage.

As Blondie so eloquently point out, we all have some.

There is unfortunately only one way to do it. Coming here looking to validate your point of view is not the path.

Truly open your mind and entertain ideas presented and you can start changing your views, if they need to be changed.

I too came here full of my own opinions and argued spectacularly.

However. After that I went and reread the whole blog and reconsidered all of my own ideas in contrast to what was presented here.

It was a long hard struggle. Admitting I am wrong does not come easily to me, or anyone. Especially if the beliefs are closely held.

I see your mind shrouded in dark imaginings.

That makes objective analysis nigh impossible.

I would like to present you with a gift :

On Truth

Peace

TF

Edwardo said...

Obama isn't protecting the dollar, says Trump. Every time I think that old wrap around hair has descended to the lowest depths of idiocy he manages to, um, trump himself.

It isn't the job of The President to "protect the dollar" of course.
But since The Donald wants to operate on that fanciful plane one has to wonder why Donny boy didn't notice how abysmally the dollar performed during the last Presidential administration.

In the meantime, I hope Apmex gave him Tungsten.

mike said...

Michael H,

I'm currently reading Graeber's book, Debt: The First 5000 Years. (unfortunately I don't think it's that well written). At least so far (I'm about half done) he uses the term money almost exclusively to discuss mediums of exchange and and barely mentions store of value. However, my interpretation of his book is that money is used in early societies almost exclusively as a store of value. Instead of 'store of value', he terms it 'social money', because it's mostly used for status and social arrangements like marriage; and not used in everyday exchange.

mike

The Dork of Cork said...

@Motley
No - I work on the assumption that a plan or model almost never survives contact with the enemy - thats all really but we all have emotional baggage , that does not conflict with my argument in the main.
And please don't bring Stefan Molyneux in this discussion - his thoughts are very linear & do not take into account real power dynamics.
I am very sceptical of fiscal conservatism in this monetory system of private bank credit - perhaps you must consider that certain actors have skin in the game of capital destruction.
Interesting section begins at 6.00 and lasts for a minute or so - its how empire collapse really happens , not too much spending but a lack of spending on the commons to further private greed.
http://www.youtube.com/watch?v=qMMU6_CjQtQ

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

Kyle Bass's view.

http://dailybail.com/home/kyle-bass-with-david-faber-greece-will-default-and-its-going.html

A key (if somewhat cryptic) quote from Mr. Bass. "They will find a way to recapitalize."

Motley Fool said...

Hey DoC

Haha, and proving my point exactly with that kneejerk reaction.

The link has nothing to do with his views on economics or politics.

It had to do with the baggage we have been discussing.

If you are going to brush off my honest attempt to reach you, that is your choice. However that makes this conversation pointless from my point of view too.

Keep thy baggage then good sir. :)

TF

The Dork of Cork said...

@Motley
Fair enough Motley - you are perhaps a hard Austrian while I like to follow different paths - Irving Fisher and others.

We are speaking in different tongues.
I am only holding Gold because I think the Austrians will win.
Such is life.
So Gold will explode to whatever level.

victorthecleaner said...

Blondie,

Were the CB gold sales to which you refer physical or paper gold? Were the IMF sales paper or physical? If they were physical sold at spot, why was Sprott's bid dismissed?

I am not an insider, and so I have to guess. I guess the sales were physical and they served to relieve pressure from the forward market. When the forwards mature, the holder of the forward initially gets an unallocated balance. But if they immediately requested allocation, this would drain too much physical reserve from the BBs. Thus the official sales, trying to protect the BB system from blowing up. Still. In 2008/9.

Sprott didn't get it because
1) if he wanted 200 tonnes of physical immediately, he would have to pay a considerable premium over spot - spot physical is way less liquid than spot unallocated (the LBMA system by purchasing unallocated first and then requesting allocation, is designed to obscure this fact)
2) he is less important than those who did get the physical
3) some other CB bought it and they paid 30k US$ per ounce - the LBMA price is just fake and managed to rise at about 20-30% annually to make sure not too many people in the financial sector get heart attacks.

I don't believe (3) though - it would involve too many people to keep it confidential for long.

Victor

Alan2102 said...

observation and comment:

What the Dork seems to be saying, in a nutshell, is that he sees the immediate future (at least) as a continuation of the past, with respect to power politics and relations. It is not hard to see why. People who believe this are proved correct about 99.99% of the time. Whereas, the freegold thesis proposes a drastic departure -- the End of History, if you will. I don't know who is right. But I do know that the freegold story is not the first time that the End of History has been announced. Not long ago it was Fukuyama, who thought that the end of the cold war represented a decisive departure, and that liberal democracy had won -- apparently forever. Things have not turned out as he outlined, and he has since recanted.

But, we ARE, I believe, living in a time of radical novelty -- a time when change itself has changed, and intensified. As such, I remain open to the possibility of a sudden actualization of the freegold scenario. The people who are right 99.99% of the time might well be proved wrong.

I do have one question: Does the understanding of freegold mean that one believes in the inevitability of the freegold scenario? At the point that one "gets it", does one become convinced that the freegold scenario is unstoppable or deterministically fated? Or: does any residue of doubt indicate that one does not "get it"?

Full disclosure: I don't get it. I'm an idiot, refractory to remedial efforts.

Jeff said...

I found MF's link less than interesting; no man has a monopoly on the truth. Plus it was predictable when he started bashing Jesus.

Edwardo, that was a good link. Thanks.

slvrbull75 said...

Oh. My. Fucking. God. These are the longest blog articles I've ever seen. It's like War and Peace. I will have forgotten more than most will ever know by the time I reach the end LOL

Texan said...

VTC,

I have been asking the same question, who is selling, all year. FT Alphaville had an incredible set of articles today on the GOFO rate that I skimmed and did not understand, but the gist of which was one possible reason for the abnormal GOFO rates was the CBs were flooding leased gold into the bullion banks. The second article then discussed how at zero-bound Treasuries were "the new gold" since there was more demand for them than leased gold per interest rate differentials or something like that. They also showed the drawdown in GLD, though I am not sure what that was trying to prove. Anyway, if you want to read those and maybe even explain them I would be much obliged.

I think FTA totally missed that it is perfectly rational to prefer Treasuries over leased gold because, well, the gold doesn't exist. It's leased. It's a counter party contract. They also missed the structural element of who can buy what. Most "professional money" just can't buy gold in any fashion. The drawdown in GLD is people taking physical possession I would imagine.

I think in a way the articles tie into the recent discussion as well, because unless there is some seriously "super secret double feint trickery" going on, no one, not even the Chinese, are interested in Freegold. Various parties may be "all in" on fiat, and others may be "I will buy a bit more gold just in case", but the whole RPG discussion that surfaced a few months ago just feels totally dead among officialdom. I don't get the sense anyone is really interested in it, or even in "gold backed" fiat. Combine that with the constant gold bear raids, and I don't TPTB are getting close to a reval, at least not in an orderly way.

I still maintain they are managing gold price as a "dirty float", with a kind of gradual step function appreciation permitted over time. When the curve steepened on them, they smacked it over and over and over, because they simply cannot allow it to start gapping higher or the whole IMFS could freeze up.

Just my highly conspiratorial and uninformed two cents!

Edwardo said...

Texan,

If I had just word available to me to utter in response to the FT Alphaville article it would probably be the following: NOMINAL.

To wit:

From the article in question.

"Because US Treasury securities (and other high-quality debt) became zero-yielding, meaning these sorts of bonds began to rank pari passu with gold as a store of value."

-Yes, investors, aka scared rabbits, will get their capital back... in NOMINAL terms. If that's the sine qua non of (SOV) SAFETY, then, yes, Treasuries rank step for step with gold. But, alas, one is hardly safe, except nominally that is, with nominal returns.

-Then we have this gem.

"After zero-hour, however — since both Treasuries and gold now rank pari passu in terms of yields — other qualities and factors have come into play in terms of preferences. Namely costs and risks."

-The zero hour has passed, has it? I'd say that's debatable, imminent Greek default-and then some other EU sovereign defaults notwithstanding. I think we need to wait a tad longer before we can pronounce the zero hour to have passed.

"For example, because gold carries a vaulting charge as well as *possible* government intervention risk (confiscation, for example) it might actually become less desirable to hold than a Treasury security. That’s despite preferences being aligned from a yield perspective."

-Folks are wary of gold because of confiscation risk? That's rich, and I call foul for invoking the hoary old ghost of 1930s Depression era confiscation.

"Of course, from a central bank’s point of view, it’s hugely important that, if and when a battle of preferences does begin to impact paper-money and gold, it is paper-money that wins the day."


-With that statement, and the following one:

"Luckily in the battle of preferences, it’s Treasuries that are winning the day so far. (Not that that doesn’t create a whole new bunch of problems.)"

-a definite misunderstanding of gold's SOV function, and an anti-gold bias are revealed.

Finally, I will posit that nothing will better seal the deal in gold's favor as a superior SOV mechanism than when all these folks who are presently choosing officialdom's paper money find out in unmistakable terms just how poorly that paper money performs. When that recognition occurs, I think the zero hour may have passed.

Paul I said...

DoC

"its how empire collapse really happens, not too much spending but a lack of spending on the commons to further private greed."

read Jared Diamond.
Most collapses result from natural resource exaustion, which is really too much spending on the wrong thing, such as giant stone heads.

For me, one of the benefits of freegold is the end of the current outrageous malinvestment. We are literally raping the planet in a desperate effort to maintain nominal returns on exploding fiat, fed by cheap debt. You said it yourself, look at what the developers did to Ireland's countryside. Look at China desperately spewing out worthless junk, cash for clunkers, madness.
Let's stop raping the commons first, and then work out where we need true investment.

As one poster brought up many months ago, one unfortunate side effect of freegold will be unchecked prospecting and all the destruction that entails. But there's badness everywhere, and I'd rather live in a world where badness can at least be measured accurately.

victorthecleaner said...

Texan,

thanks for pointing me to FT Alphaville. I find the article

http://ftalphaville.ft.com/blog/2011/09/14/677021/why-gold-forward-rate-inversion-is-important/

rather confusing, but I get the impression that this is not all my fault. I do have an opinion on the funny GOFOs though.

On the meaning of GOFO. As long as term structure arbitrage happens, i.e. there are big players who swap US$ for gold and back in order to optimize their own return, the market is efficient, and there is only one explanation for an inverted GOFO (i.e. far months being cheaper than spot or near months). This is counterparty risk in these swaps, namely that the gold will not be returned. Since unallocated gold is easy to return, in my opinion, this always indicates an issue with the market for physical bullion. This has been the case with silver ever since January 19 this year with a brief exception of the hot weeks in April.

A brief spike down in GOFO indicates that one party is under pressure and needs to borrow gold now, driving GOFO down. If the market as a whole is still liquid, it goes away after a few days. This happened many times in 1997-2001, but not ever since, not even in 2008.

Until a few weeks ago, August 22, 2011. The following is LBMA GOFO for 1,2,3,6,12 months maturity:

19-Aug-11 0.40000 0.41600 0.42600 0.48800 0.51000
22-Aug-11 0.48250 0.43000 0.35000 0.25000 0.08750
23-Aug-11 0.40800 0.41600 0.42250 0.50000 0.52600

On Aug 22, GOFO was inverted from 1 month on, but it happened only on that day. Even funnier, they quote a negative LIBOR for that day and for that day only.

How could you get a negative LIBOR? The US Fed pushing a huge US$ for Euro swap into the FOREX market in order to relieve the run on the eurodollars? I am sure they are doing this, but certainly not limited to only one day. Since I do not understand the negative LIBOR, I assume that GOFO is real and LIBOR is fake (it had the effect of not showing a spike in the Gold Lease Rate, but keep in mind that GOFO and LIBOR are measured and the GLR is calculated, i.e. if LIBOR does not match GOFO because it involves different banks, then GLR is meaningless). Also, there are charges against several banks for allegedly rigging LIBOR. I think this (banks understating LIBOR) explains a good part of the negative lease rates.

Then, this week, GOFO slowly inverted again:

09-Sep-11 0.48500 0.49250 0.50000 0.52500 0.53750
12-Sep-11 0.61800 0.62200 0.62400 0.61200 0.61850
13-Sep-11 0.69500 0.69667 0.69667 0.65833 0.62500
14-Sep-11 0.71333 0.71200 0.70600 0.67600 0.64200

But the inversion is now by increasing GOFO over 1-3 months and not by a decrease over 6+ months.

Therefore, I don't think that counterparty risk is necessarily the explanation. Izabella Kaminska might be right on this one: banks who own gold and are squeezed for US$, use their gold as collateral in order to borrow US$. And they are under pressure, driving the contango up where the squeeze is, apparently between spot and 2 months.

If this interpretation is correct, the GOFO inversion beyond 2 months should go away because of arbitrage over the next couple of days. If it persists, either arbitrage is broken - this might be true if some banks indeed go belly up in the near future. If not, then I would still conclude counterparty risk between 3 and 12 months today, i.e. in the first half of 2012.

I am not sure that after 2001 there was any true stress in the bullion market. Even the period of backwardation from November 2008 might be because of reduced arbitrage, just because many banks were panicking and reducing their non-essential activities.

Therefore, I suspect that the London gold market has continuously been fed physical gold from some official source(s), avoiding any serious problems with the physical reserves since late 2001.

Victor

victorthecleaner said...

Texan and Edwardo,

the second article by Izabella Kaminska,

http://ftalphaville.ft.com/blog/2011/09/14/677286/treasuries-are-the-new-gold/

contains jewels such as

The answer is possibly because US Treasury securities (and other high-quality debt) became zero-yielding, meaning these sorts of bonds began to rank pari passu with gold as a store of value.

Wow! I wonder what she has been smoking.

It is true though that there is presently a run on the eurodollars. It is also true that it makes sense for banks that still have gold to use that gold as collateral for obtaining US$. I wonder what this says about the question of which one is the ultimate collateral?

On the loss of GLD inventory. The GLD arbitrage mechanism gives you a glimpse of the market for physical gold which you cannot see when you watch the spot price because spot is a mixture of unallocated and physical.

When GLD shrinks, this means that either there was more selling pressure in GLD than selling pressure in the market for physical gold, or that there was more buying pressure in the market for physical gold than buying pressure in GLD.

Since the GLD puke indicator was triggered, but gold did not rise, I conclude it was selling pressure in GLD that lead to its shrinking inventory. So what?

Victor

The Dork of Cork said...

@PAUL 1
Sure Paul I agree - Giant Easter islands etc.
But the practical example of Ireland has been great for my understanding because it is so in your face - the solution is easy without Gold but it would involve the total destruction of the fractional system.
The Banks however don't want this - and since they are in control they will run to Gold to clear the debt and stay in business.
Such is life - even for us who don't believe in the system - we must protect ourselfs , its pure game theory really.

mortymer said...

http://www.snb.ch/en/mmr/reference/pre_20110915_1/source/pre_20110915_1.en.pdf

mortymer said...

...the above decision is a connected to this:

http://anotherfreegoldblog.blogspot.com/2011/09/snb-view-on-switzerland-in-run-up-to.html

Edwardo said...

The DOC says,

"The solution is easy without Gold but it would involve the total destruction of the fractional system."

The solution may appear easy, but the effects of what I imagine your solution amounts to would be anything but easy. The Law of Unintended Consequences would exert its power with a force that no one can foresee and that no sensible person wants to tempt into exertion. You might admit at least the possibility that many, if not most high level banks and their operators are as concerned about avoiding the TLOUC acting ferociously as they are about anything else.

Alan2102 said...

Paul I wrote:
"one of the benefits of freegold is the end of the current outrageous malinvestment. We are literally raping the planet in a desperate effort to maintain nominal returns on exploding fiat.... Let's stop raping the commons first, and then work out where we need true investment.
As one poster brought up many months ago, one unfortunate side effect of freegold will be unchecked prospecting and all the destruction that entails. But there's badness everywhere, and I'd rather live in a world where badness can at least be measured accurately."

Excellent points.

However: the badness associated with gold mining, and oil and coal as well, might (MIGHT) be of an enduring and civilizationally-significant kind, due to arsenic buildup in the biosphere. See items below. I have not retrieved or read the full texts, just the abstracts. I'm skeptical. The claim below that "anthropogenic arsenic [is] an invisible weapon of mass extinction" seems extravagant and doubtful to me. On the other hand, there is compelling evidence from many sources (of which the author of the item below is surely aware, and probably cites) that even modest arsenic exposure, typically in drinking water, results in lower measured I.Q., similar to the effect of fluoride. The developing brain (fetus, infant) appears most vulnerable -- no surprise. The claim below that arsenic is related to Alzheimer's is striking.

This thesis echoes the one that attributed to lead to decline and fall of Rome. It was supposedly discredited, but I wonder.

[...continued below...]

Alan2102 said...

[...continued from last...]

vis:

http://www.ncbi.nlm.nih.gov/pubmed/19846256
Med Hypotheses. 2010 Mar;74(3):534-41
Gold, coal and oil.
"Jared Diamond has hypothesized that guns, germs and steel account for the fate of human societies. Here I propose an extension of Diamond's hypothesis and put it in other terms and dimensions: gold, coal and oil account not only for the fate of human societies but also for the fate of mankind through the bodily accumulation of anthropogenic arsenic, an invisible weapon of mass extinction and evolutionary change. The background is clear; arsenic species fulfill seven criteria for a weapon of mass extinction and evolutionary change: (i) bioavailability to all living organisms; (ii) imperceptibility; (iii) acute toxicity; (iv) bioaccumulation and chronic toxicity; (v) adverse impact on reproductive fitness and reproductive outcomes and early-age development and growth in a wide range of microbial, plant and animal species including man; (vi) widespread geographical distribution, mobility and ecological persistence on a centennial to millennial basis and (vii) availability in necessary and sufficient amounts to exert evolutionarily meaningful effects. The proof is becoming increasingly feasible as human exploitation of gold, coal and oil deposits cause sustainable rises of arsenic concentrations in the biosphere. Paradoxically, humans are among the least arsenic-resistant organisms because humans are long-lived, encephalized and complex social metazoans...."

http://www.ncbi.nlm.nih.gov/pubmed/20123147
Sci Total Environ. 2010 Mar 15;408(8):1842-6
Arsenic for the fool: an exponential connection.
"Anthropogenic arsenic is insidiously building up together with natural arsenic to a level unprecedented in the history of mankind. Arsenopyrite (FeAsS) is the principal ore of arsenic and gold in hard rock mines....
environmental concentration of total arsenic in topsoils - in the 7-18ppm range - is exponentially related to the prevalence and mortality of Alzheimer's disease and other dementias in European countries...."

http://www.ncbi.nlm.nih.gov/pubmed/14561078
Rev Environ Contam Toxicol. 2004;180:133-65
Arsenic hazards to humans, plants, and animals from gold mining.
"Arsenic sources to the biosphere associated with gold mining include waste soil and rocks, residual water from ore concentrations, roasting of some types of gold-containing ores to remove sulfur and sulfur oxides, and bacterially enhanced leaching. Arsenic concentrations near gold mining operations are elevated in abiotic materials and biota...."

DP said...

@Edwardo, "TLOUC"...? :)

FWIW, IMO, TDoC spends a little too much time searching for how the priesthood can f^*k over the congregation rather than looking at what is actually happening.

Paul I said...

Alan2102

Oh bloody hell, as if we didn't have enough to worry about.
Now we have cyanide induced brain rot.

Doc

If we don't use gold, and we don't fractionalize,
what are we not fractionalizing? (and you can't say base money. That's MMT and is strictly forbidden here)

Edwardo said...

DP,

TLOUC = The Law of Unintended Consequences. I need to stop with the acronyms, but I thought since I had already spelled out that mouthful of a phrase once that I could get away with a shortening.

The Dork of Cork said...

@Edwardo
OK Edwardo - I am sure you are familiar with the money as a token concept , not money shadowing a asset such as a Mortgage or other security (credit money)
Goverment money and goverment money only is given value by the tax raising powers of the state although in a modern monetory system tax revenue does not pay directly for anything - it just gives the paper a value.
Now in the Irish example credit money created a hyperinflation and that was expressed in a crazy settlement pattern with huge externalties.
But people are locked into paying their mortgages & paying taxes - which means they cannot move to reduce their expenses.
In a goverment money only system the credit hyperinflated assets would return to their cash price - however consumer inflation would result if these people were not taxed , a goverment could tax consumption - lets say oil , this tax could be avoided but would drive a huge trade surplus & current account surplus.
The flow of oil money to Arabia would become a trickle.
Once you accept that private debt is a form of rentier tax that has adopted many of the traits of goverment debt - I.e., the ECB ruled out default on these instruments because they are of systematic risk - what the ECB means by this is that if we default on these private bonds inflation will rise - therefore these are quasi goverment paper but the money does not go back into creating utilties for the commons.
Austerity drives default in a credit system - this is what the ECB wants , as the energy must flow somewhere as it does not disappear.
Unfortunetly it will destroy the commons so that certain big fish can remain on top.
OPEC meets in Switzerland for a reason - the banks wish to retain the control of the oil spice , its the modern day slave trade - if they lose this they could lose control.
You have some old style rebel republican bankers such as those who created the French nuclear industry but they are in a minority - bankers want modern market states , not old style nation states where they did not have full control.
@PAUL
MMTers accept the right of private banks to create credit and use goverment defecits to cover up their losses.
They are essentially modern day Keynesians.
I do not believe in such a system - only a full money system where the money supply and not credit increases with lets say population or at a fixed rate of lets say 2% a year can really work to increase wealth.

Alan2102 said...

Paul I: "Oh bloody hell, as if we didn't have enough to worry about."

That's what I thought, too!

"Now we have cyanide induced brain rot."

Not cyanide; arsenic. Though cyanide doesn't help, either. It is a powerful goitrogen, i.e. it screws up the thyroid gland, badly, and brain and cognitive development depend heavily on normal thyroid function.

In case anyone is interested:

http://www.ncbi.nlm.nih.gov/pubmed/19107329
Biol Trace Elem Res. 2009 Summer;129(1-3):88-93
The association between arsenic and children's intelligence: a meta-analysis.
"This present study was undertaken to investigate whether arsenic exposure increases the risk of children's low intelligence quotient (IQ) in China.... children who live in an arsenicosis area or a slight arsenicosis area have lower IQ than those who live in a non-arsenicosis area, and there may be a strong association between arsenic and children's intelligence." [Study found an average loss of 6-9 I.Q. points in areas of higher arsenic exposure. In practice this is not evenly distributed; instead, it represents a much higher incidence of varying degrees of mental retardation, or I.Q. <80 -- alan2102]

Michael H said...

VtC,

We could add a (4) to your list of reasons why Sprott didn't get the IMF gold:

(4) The CB purchaser agreed to keep the gold in London, or in a sight account at the BIS, while Sprott wanted to remove the gold to Canada.

Does this sound reasonable?

Edwardo said...

Michael H. I am on board with reason #4 which gets closer to what I think is the real reason that Sprott wasn't allowed to buy the gold-he wasn't going to play by the old rules.

DOC, your post needs more parsing and time than I have at the moment, but I will respond.

JR said...

FOFOA from above on how the evolution of the reserve from gold -> paper gold/US dollar lead to the ability to greatly expand credit, as credit growth was no longer constrained by the amount of reserves:

"What the 1922 Genoa Conference did was to institutionalize the "sterilization" of gold for the rest of the world through the reserve structure of the international banking system. And this bit of genius was decided by a "committee of experts" from 34 different countries. They did this by introducing paper gold—or paper promises of gold—into the international banking system as reserves equal to the gold itself. This wasn't the first paper gold, but it was the first time that specific paper gold (that from New York and London) was used as an equal reserve upon which credit can be expanded. What is acceptable as international reserves is critical because trade settlement is a function of the reserves. This conference was the birth of the $IMFS...

With the gold mostly staying put in London and New York, and paper promises of gold flowing as equal base money elsewhere, the monetary base was effectively duplicated. Credit could now expand without ever having to contract, at least not because of the unwanted flow of gold...

The US exorbitant privilege began at the International Monetary Conference of 1922 when for the first time international banks were allowed to accept not only physical gold, but also US dollars (paper gold) as reserves. But all US dollars held by foreign banks were put on deposit back in New York City banks. And there they were counted as local US deposits, the same as if you and I put our gold into the bank, in addition to being counted abroad.

These deposits were used as the basis for credit expansion in both the US and in the foreign countries claiming them as reserves. This process doubled the money supply paid out through the US balance-of-payments deficit for the last 88 years (except that money which France demanded in gold). US deficits never contracted the aggregate purchasing power of the US after 1922, the way deficit settlement is supposed to. It also exported US inflation outward. And it continues today."


==================================

Now see the unlimited dollar funding liquidity operations just announced by the ECB, BOE, BOJ and SNB in conjunction with the FED - The Global Liquidity Bailout Arrives: World Central Banks Announce Global Dollar Shortfall Funding Resolution. No limitation on the availability of the reserve here.

==================================

Basically the same idea as discussed in Via Email

"...Think about it this way. Think about Eurodollars. Think about European banks outside of the Federal Reserve System making dollar denominated loans or simply issuing dollar liabilities to FX traders. Sure they have a few physical dollars in reserve. But they don't have direct access to the Fed lending facilities. So if they find themselves short on reserves, they will have to go into the market to buy some dollars, just as you say. Which, in aggregate, could drive up the price of the dollar versus the euro. Which is why Ben arranged a $500B currency swap in 2009. To keep the dollar from spiking. .."

jojo said...

JR and Blondie,

Thanks.

I made the mistake of thinking of freegold with only one currency (the euro in my head) and so a continuously falling price for gold could not happen as it would mean the paper (euro) was losing all value and only gold would be left.( i mean, it could happen but thats not really freegold anyway...i think ;) )

Bad thinking.

Anyway,
When freegold gets here, there could very well be dollars, euros, yen etc. being used still in everyday transactions but the SoV function would be with gold.

I picture this as gold being like the bladder in my well pump- it inflates and deflates. The gold bladder initially would inflate quite a bit i would assume as it absorbs everything that was dollars. The world, at this point, is looking at gold in a whole new way. Now things are valued against gold.
As the new economy starts to take shape, the gold bladder could deflate a bit as some gold leaves and migrates into dollars due to the US having hung all politicians and is looking like they have their shit together. It could deflate a bit more as another country gets their ducks in a row and people feel safe enough to switch from gold to, say, yen.And inversely, it could rise again if an economy starts heading the wrong way.

So in freegold, the "price" (thinking of it in terms of price confuses one a bit i think too or maybe my default to dollar terms when thinking of price...) would fluctuate up and down depending on economies around the world. SO this means then that when FOFOA talks of the new plateau in gold value, that that plateau is not exactly FLAT, it will go up and down a bit, just never back down to these fake cheap "prices" we have today.... right?

JR said...

Excellent, you're well on your way jojo!

Evolution!:

"Stasis

When things finally settle down, we will enter a new era of equilibrium. Some things will remain the same while others will have changed forever. Here are just a few of the changes I imagine.

Gold will trade in physical form only. No longer will the owners of gold trust the custodianship of foreign nations.

Fiat currencies will still function in trade and as a unit of account, repositioned at their new values, wherever debt is required. But they will have to undergo a process of credibility re-establishment, much like a bankrupt individual, before they will ever again be used by people as a reliable store of value.

For producing individuals and nations alike, gold will become the wealth reserve of choice for the preservation of purchasing power earned through productive labor. Believe it or not, I think that our freshly neutered governments will support this development as they will ultimately view it as the only means to slowly rebuild what has been lost, in a sustainable way."


Cheers, J.R.

victorthecleaner said...

Edwardo and Michael H,

(4) The CB purchaser agreed to keep the gold in London, or in a sight account at the BIS, while Sprott wanted to remove the gold to Canada.

Very nice. The gold sold by the IMF was indeed physical, but the CB buyers (India, Mauritius, etc) did not get it. They only got paper. The physical is in fact needed to improve the reserve ratio of the London bullion market.

JR,

yes, Ben makes sure the US$ does not rise too much or, more precisely, that the euro does not decline alone.

Victor

S said...

JR,

Have you read the 4th Turning? What makes you so confident that gold has the durability to retard the war cycle (h/t Fourth Turning, Kwave etc.) this time? Secondly, someone above talked about lacking creativity in thinking about the imposition "this time" of Freegold – in retort to DoC. My question is if the PTB – the banker class, the rentier class whoever the “them” is – are so entrenched and in opposition to a F/G transition (at least the $IMF faction and a sizable chunk in the east as well) what makes you think they, with far better information and a hand on the tiller (still), are not likewise at least working on their own creative solutions? FOFOA was clear in a previous post that the pendulum swings back and forth between hard and easy money which itself suggest F/G is anything but natural – rather cyclical (which makes good sense). As far as creativity, and I use this as a for example purposes only, it does seem like a lot of headlines are coming out of NASA and the Euro Observatories lately about inhabitable planets (imagine the mining possibilities circa Avatar). Or maybe that purported no fly zone around the moon imposed by the US comes to mind. Surely the “them” will excuse my using their “from above” as they say…or the heavy lift capabilities announced yesterday. Avatar, predictive progamming, let your imagination run wild...

“NASA's Kepler mission has turned fiction into fact. A world with a double sunset that was first imagined in Star Wars over 30 years ago in a galaxy far, far away has become scientific reality. NASA's Kepler mission has made the first unambiguous detection of a circumbinary planet -- a planet orbiting, not one, but two stars -- 200 light-years from Earth.”

http://www.nasa.gov/mission_pages/kepler/news/kepler-16b.html
http://www.thehindu.com/sci-tech/science/article2432999.ece
http://news.sciencemag.org/scienceinsider/2011/09/heavy-lifting-at-nasa-yields.html?ref=hp

And Y said...

Another wrote of the possibility of mines being nationalized or heavily taxed. The idea being that the wealth that was still in the ground would somehow account for the total gold reserves inside a nation. What's to stop the mines or governments from creating a new paper market based on these estimated reserves? Can't the mines just replace the bullion banks in RPG/FG?

Gently, JR.

JR said...

FOFOA from Money Talk Continued on currency swaps:

"12) Here is the big problem. Each of these sub-systems has its own currency which its CB can print at will... flexibility! But with the dollar being the global reserve currency, there are lots and lots of dollar-denominated assets held by financial institutions in many non-$ sub-systems. So when there is turmoil in the dollar-denominated markets, the non-dollar sub-systems run into a clearing problem because they can't print dollars to help banks that owe other banks more dollars than they have. So they turn to the BIS, who also can't print dollars. Only the Fed can. So the Fed ends up being the de facto CB to the world. But it is not the clearing house for the world, and it does not take assets onto its books from those foreign banks that got into trouble. Instead, it lends directly to the other CB's which print some of their own new currency and send it to the Fed in exchange. This is why it is called a "swap" instead of Quantitative Easing. They are swapping freshly printed currencies instead of assets for currencies. All base money! The same as cash. TWICE as potentially inflationary as QE on a global scale because two sides are now exposed to currency risk.

13) When the Fed makes these international currency swaps, it doesn't send pallets of hundred dollar bills on a plane. It simply makes a contract with the foreign CB and a book entry. The contract is a two-way promise to later provide pallets of physical cash if anything goes wrong and cash is needed. And with this promise in hand, the foreign CB makes a similar contract (promise) with the European bank that got in trouble. The foreign CB promises to later provide physical cash if necessary (if something goes wrong), and the bank submits assets to the CB as collateral. Next the troubled bank passes those dollar promises (IOUs) on to the bank it owes the dollars to and that bank credits its customer's account with dollars it doesn't have, but now has indirect access to (if needed)...

14) Base money is either physical cash or a liability (IOU) that traces directly back to the Fed, which includes reserves held at the Fed. In other words, it is physical cash, or the promise of physical cash from he who can print physical cash. The Fed is willing to issue these promises willy nilly but hopes it doesn't actually end up having to do the printing.

15) The USDX is a measure of dollar exchanges with other currencies that happen on the open market. The Fed can counteract a rise in open market dollar demand by providing a supply of dollars directly to banks within its own sub-system, or indirectly to foreign banks through swaps with other CB's...

16) So as long as there is more demand for dollars than supply, the Fed can control the price of the dollar on the USDX by its own willingness to lend dollars at zero interest with toxic assets or foreign currency as collateral. This costs the Fed nothing, except currency risk and bad PR at blogs like mine. But where the Fed loses control is when there is more supply than demand. And that is what is coming because of this very inflationary policy of providing dollars to save the system at any cost...
"

==================================

and yeah, our money is credit:

"PS. This is the big secret that George F. Baker didn't want to tell Congress in 1913. That most all of what we think is money is really just promises issued by banks to supposedly credit-worthy entities giving them the right to withdraw value from a small reserve of actual money, but at the same time praying to God that they don't! It's like saying, "here you go, it's all your's, whenever you want it come and get it" with their fingers crossed behind their backs hoping you won't ever actually "come and get it".

Cheers, J.R.

A Guy in Hainesville said...
This comment has been removed by the author.
JR said...

Andy,

One quick idea. You can create whatever kind of paper product you want, but what matters is the demand for it, no?

If people demand physical gold, you need to deliver it to have any hope of establishing confidence in your paper promises to do this, to deliver physical gold, no?

=================================

FOFOA on the dynamic closing in on the BBs (quoting bron in italics) from Via Email:

""Banks undertake risks on their books that they can only cover so long as they continue to have access to liquidity (funding, deposits, repos or central bank support). Bank capital is never enough to ensure performance without market liquidity for reserve assets. Banks are generally much less cautious about taking on risk, rely over much on incomplete models to price risk, and manage capital to optimise returns rather than ensure survival."

"Market liquidity." Now there's the real risk, isn't it? And therein lies the exchange rate exposure. A bank run on gold bullion in the 21st century will mean that all offers to exchange physical for paper have been withdrawn as zero supply confronts infinite demand. "


Gold's gonna flow - real gold, not undeliverable contractual promises. Can a new paper system have access to sufficient "market liquidity" (aka physical gold) to meet demand?

Cheers, J.R.

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

DOC wrote:

OK Edwardo - I am sure you are familiar with the money as a token concept , not money shadowing a asset such as a Mortgage or other security (credit money) Goverment money and goverment money only is given value by the tax raising powers of the state...

-And the (nation) state's economic prospects. Obviously taxing authority is only useful if there's something to tax and, equally, the ability to collect.

although in a modern monetory system tax revenue does not pay directly for anything - it just gives the paper a value. Now in the Irish example credit money created a hyperinflation

-By hyper-inflation you mean asset inflation, yes. Since, at least by my definition, there has been no hyperinflation.

and that was expressed in a crazy settlement pattern with huge externalties. But people are locked into paying their mortgages & paying taxes - which means they cannot move to reduce their expenses. In a goverment money only system the credit hyperinflated assets

-Right, you did mean asset inflation.

would return to their cash price - however consumer inflation would result if these people were not taxed , a goverment could tax consumption - lets say oil , this tax could be avoided but would drive a huge trade surplus & current account surplus. The flow of oil money to Arabia would become a trickle. Once you accept that private debt is a form of rentier tax that has adopted many of the traits of goverment debt - I.e., the ECB ruled out default on these instruments because they are of systematic risk - what the ECB means by this is that if we default on these private bonds inflation will rise - therefore these are quasi goverment paper but the money does not go back into creating utilties for the commons. Austerity drives default in a credit system - this is what the ECB wants , as the energy must flow somewhere as it does not disappear.
Unfortunetly it will destroy the commons so that certain big fish can remain on top.

-If you want to blame the tragedy of the commons on large banking interests, you are free to do so, but I think the extinction of species, wide scale destruction of habitats, and general ecological devastation the planet has suffered over the last, oh, say, one hundred years is more down to human nature writ large than anything else. In any case mankind has been hard at work despoiling the planet, generally heedlessly, for a very long time.

JR said...

Terry,

Here is a start to interest rates. But to start off, this discussion of "real interest rates" has nothing to do with lending physical gold.

Real interest rates coordinate production of time as they impact the inter-temporal allocation of real capital. Real interest rates are a means of transmitting information via the pricing mechanism about the availability of real capital to borrowers. As real capital flows in, real interest rates tend to fall, as it is more abundant. Lowering interest rates -> rising prices of real goods priced in the now more abundant real capital (your gold now buys less at home as there is more gold/goods). From FOFOA's above post:

"The inflow of real capital signals the need to consume more and produce less. The price mechanism transmits this signal to individual actors in the economy. The inflow of real capital will raise prices vis-à-vis real capital, which makes exports more expensive abroad, lowering exports and raising imports. The country with an inflow of real capital will have to start consuming more of its own production or else it will just pile up and rot."

Keep in mind one to way to "consume more" is to purchase "higher order goods," or those goods that you use to make new stuff. Like less t-shirt factories and more computer manufacturing. There is a time component to the structure of production, but the idea is if a country is frugal and produces more than it consumes, real capital flows in and the greater availability of real capital lowers interest rates and allows for capital re-investment (or for other types of immediate consumption like modern creature comforts).

=================================

Next we see "credit contract" as real capital flees. Interest rates rise -> lowering the prices of real goods priced in the now less scarce real capital (your gold buys more at home as there is less gold/goods).

"Likewise, the country with an outflow of real capital will have to start producing more than it consumes. Again, this signal is transmitted to individual actors via the price mechanism. With less real capital upon which credit flourishes, credit will contract, general price levels vis-à-vis real capital will drop, the purchasing power of real capital will rise, and real capital will become more expensive in terms of goods and services. Exports will rise because exportable goods will fetch a higher price abroad, imports will slow because local prices have fallen versus the vanishing real capital, and people will have to begin producing more than they consume in order to survive.

Cheers, J.R.

Paul I said...

"Not cyanide; arsenic." Oops, there you go. Brain rot setting in already. Must be the cyanide.

DoC

I see where you’re coming from now. Public taxes become private bonds. Legitimate concerns indeed. Don’t forget that the rentier class is only part of the story. A huge chunk of these private bonds are owned by the renters in the form of pension funds. To a certain extent we have become our own slave masters, older me has enslaved younger me. Let my people go!

With regard to non-fractionalizing, it sounds like you are advocating http://www.positivemoney.org.uk

Which is really a gold standard without the gold. Instead of money supply constrained by mining it’s constrained by a politically independent committee targeting inflation. A better system than the one we have now, I agree. Political abuse is a worry though. Wasn’t this system used to fund Hitler’s military keysianism? (although not as efficiently as Team America, World Police).

However, I think what history tells us is there is no such things a steady state ideal growth rate. Economies need to breathe naturally. In and out. Inflation and deflation, especially as we starting hitting resource boundaries. Another tick for Freegold, using peoples’ seemingly innate desire for the precious to regulate what should be natural cycles, de-correlating them geographically.

One question I have for the experts. Let’s assume our current system evolves into Freegold, either abruptly or gradually, and we start from a position of gold holdings greatly concentrated in a few hands.

Will these market driven gold/fiat/gold cycles result in gold becoming more or less concentrated. Will entropy spread the wealth, or will we end up with another version of what we have now?

My gut says it will spread the wealth, because the US is so anti, and the Chinese and European Communists are pro. (O Lord, bless this thy Hand Grenade...)

Wendy said...

FO/FOA,

Have the rains come, is the ground swollen enough??

Alan,

re:Alheimer's .... I heard an interesting radio broadcast today interviewing a medicaal specialist in new York stating that 25% of patients with altzheimer's have the bacteria associated with lyme's disese.........
FWIF

Wendy said...

btw it's pissing down here :D

FOFOA said...

Déjà vu?

1922 Cannes Conference - The conference took place on January 6–13, in Cannes, France; it was a preparatory stage of the Genoa Conference of 1922. Link (full text below)

2011 Cannes Summit - November 3–4, 2011 - Priorities of the French presidency: …Reforming the International Monetary System Link (partial text below)

1922

Warning! The following article is from The Great Soviet Encyclopedia (1979). It might be outdated or ideologically biased.

Cannes Conference (1922)

A conference of the supreme council of the Entente that was attended by representatives of Belgium, Great Britain, Italy, France, Japan, and Germany; members of the Reparations Commission (created in 1919 to determine the amount of reparations to be imposed on Germany and its allies and the ways of collecting the money); and an observer from the USA. The conference took place on January 6–13, in Cannes, France; it was a preparatory stage of the Genoa Conference of 1922.

On Jan. 6, 1922, the Cannes Conference unanimously adopted the resolution offered by British prime minister Lloyd George calling for the convocation of an economic and financial conference of all European states in Genoa. The Soviet government, which had repeatedly stated that it favored economic cooperation with other powers, accepted the invitation to attend the Genoa Conference as soon as it was received (it was extended by the government of Italy on January 7).

The Cannes Conference prepared the way for the Genoa Conference by approving an outline agenda and a six-article statement on the “basic terms necessary for fruitful work.” The first article of “conditions” recognized that each nation has “the right to choose for itself the system it prefers.” Lenin remarked that in this article the Cannes Conference, “by recognizing the equality of the two property systems (capitalist or private property, and communist, so far accepted only in the RSFSR), is thus compelled to recognize, even if only indirectly, the collapse, the bankruptcy of the first property system and the inevitability of its coming to an agreement with the second, on terms of equality” (Poln. sobr. soch., 5th ed., vol. 45, pp. 192–93).

The remaining articles envisaged guaranties for foreign capital and property in Russia and the recognition by Russia of all private debts and obligations of the former governments. It was especially indicated that the Western powers would recognize the Soviet government only upon the satisfaction of the enumerated conditions. These conditions were a hopeless attempt to force the Soviet government by diplomatic pressure to make serious concessions of principle to the capitalist countries.

The Cannes Conference granted to Germany a delay in making upcoming reparations payments. In the course of the conference the French and the British conducted negotiations on a prospective pact that would guarantee British assistance to France in case of an attack by Germany; however, no agreement was reached.

Cont…

FOFOA said...

2011

The 2011 G-20 Cannes Summit will be the sixth meeting of the G-20 heads of government in a series of on-going discussions about financial markets and the world economy.

Host Nicolas Sarkozy considers his plans and expectations for the upcoming summit to be ambitious, but realistic. He anticipates that international monetary system reform will involve working closely with the IMF Director General.

In 2011, the summit leaders are expected to tackle several mid- and long-term policy issues, many of which remained unresolved at the end of the previous summits in Toronto and Seoul. The agenda has evolved over time:

2010 Projected summit goals:

Ensuring global economic recovery
Framework for strong, sustainable, and balanced global growth
Strengthening the international financial regulatory system
Modernising the international financial institutions
Global financial safety nets
Development issues

2011: Priorities of the French presidency:

Coordinating economic policies and reducing global macroeconomic imbalances
Strengthening financial regulation
Reforming the International Monetary System
Combating commodity price volatility
Improving global governance
Working on behalf of development

The final agenda for the summit has not been determined, but it can be expected that each leader of the G-20 will bring his or her own agenda to the summit.

mortymer said...

This is nothing new, France is leading the way for already a very long time...

http://www.banque-france.fr/home.htm
->
http://global-currencies.org/smi/gb/home.htm
->
latest:
http://global-currencies.org/smi/gb/telechar/news/Agreed-terms-of-reference-G7.pdf

mortymer said...

Lagarde Urges Collective Action to Restore Confidence

http://www.imf.org/external/pubs/ft/survey/so/2011/NEW091511A.htm

Motley Fool said...

Hi Paul I of Antioch

It will do both. It will concentrate it in the hands of the savers, and remove it from the hands of the debtors. :P

Yes, yes. Gold could flow west again, the US has promise.

Tf

The Dork of Cork said...

@Paul 1
Well there is a major difference between a gold standard and a full money system - a gold standard typically backs only M0 or M1 - a full M3 gold standard would be a joke because the standard would move in constant flux - therefore it would not be a standard.

I am talking about merging both money and credit into money and expanding it at a moderate pace every year - it will be self regulating if banks destroy money through malinvestment.

However the elegance of freegold is that it separates itself from both credit & money - it just is.

It becomes like the freefloating currency pairs of today rather then linked to the dollar only.

However I hold grave doubts about freefloating pairs - it has created great instability in the world since the 70s - preventing long term investment plans.

Something lurks in the shadows of freegold that I can't quite put my finger on.

Perhaps its the anonymity of the gold holders - the sale of CB gold etc.

But I believe my full money beliefs are a academic fancy - they will never be implemented certainly in Europe although there maybe a outside chance in America.

But even if America had a full money system tommorow it would need Gold to balance external trade.

jojo said...
This comment has been removed by the author.
mr pinnion said...

http://www.commodityonline.com/news/Austria-restricts-gold-purchase-by-individuals-42329-3-1.html

To stop money laundering.Good idea.
No more laundered money then.

Regards
Ozzy

victorthecleaner said...

Ozzy,

I thought the 15k euros is the limit up to which you can purchase gold (or anything else) for cash in an anonymous over the counter transaction.

If I were Austrian, I am sure I could still walk into my own bank and take out physical gold for 100k euros as soon as I either show them an ID or have it charged to my own bank account (which in turn gives away my identity).

Further, from the Blog at the Telegraph by Ambrose Evans-Pritchard:

A key rate setter-for China's central bank let slip - or was it a slip? - that Beijing aims to run down its portfolio of US debt as soon as safely possible.

"The incremental parts of our of our foreign reserve holdings should be invested in physical assets," said Li Daokui at the World Economic Forum in the very rainy city of Dalian - former Port Arthur from Russian colonial days.

"We would like to buy stakes in Boeing, Intel, and Apple, and maybe we should invest in these types of companies in a proactive way."

"Once the US Treasury market stabilizes we can liquidate more of our holdings of Treasuries," he said.


Victor

Edwardo said...

In case anyone was unaware, cash purchases of gold coins and bullion in the U.S. above a certain amount-I forget the exact figure, but it's far lower than the dollar equivalent of 15k euros- must be reported by the dealer as per the Homeland Security Act. I will refrain from further comment in the interest of avoiding a rant.

The Dork of Cork said...

PS - I believe Irving Fisher wanted to just nationalise overnight deposits - therefore correcting the Peel bank act.
But given time deposits were outside this I imagine a private bank could still create private credit.
I imagine you could come up with a offical legal system where term deposits are destroyed with every period of malinvestment but it would become politically messy I guess.
People would scream for a Central bank to save their deposits.
In the final anylasis its going to be Gold much higher I guess.
The default position is always Gold.

Motley Fool said...

Doc

"The default position is always Gold."

A joke?

Wordplay is fun. :D

Robert Mix said...

Motley, I would say that the default position should also be gold. I do not see how gold cannot but go way up in value.

Too much paper for each real oz. Too many dollars (Monetary Base here in the USA) for each oz. I have now read two different arguments (other than FOFOA / freegold) that contend that gold should go MUCH higher, not the just the humdrum $5000 / oz.

Jeph said...

FOFOA, in this post you’ve discussed the history of sterilization in what seem like a few different ways. Please forgive my ignorance, but please clarify:

“… its central bank could sterilize the effect of the gold inflow on the monetary base by selling securities on the open market…” (for gold, or cash?)

“What the 1922 Genoa Conference did was to institutionalize the "sterilization" of gold for the rest of the world through the reserve structure of the international banking system… the first time that specific paper gold (that from New York and London) was used as an equal reserve upon which credit can be expanded.” Does “through the reserve structure of the international banking system” mean mostly the same-as-above “by selling securities on the open market”?

“To use a modern buzz word, they expanded the 500 year-old international monetary base into a more flexible "basket" that included US dollars, British pound sterling, and gold. As dollars began to accumulate abroad, they would be deposited back in the New York banks in exchange for a book entry reserve on the foreign country's balance sheet.” How does this basket relate to the new use of paper gold?

“But all US dollars held by foreign banks were put on deposit back in New York City banks. And there they were counted as local US deposits, the same as if you and I put our gold into the bank, in addition to being counted abroad.” Was the double-counting in US and foreign banks an additional or inevitable result of the sterilization policies?

Jeph said...

I meant to say, great stuff! But, most importantly:

“The flow of gold today is still sterilized by the paper gold trade within the LBMA bullion banking system that, by a recent LBMA survey, was around 250 times larger than the flow of new gold from the mines.” How do you know that similar ratios don’t pertain to other markets, e.g. paper oil or copper? What if traders of all “commodities” write and buy most contracts with the knowledge that most of those will be settled w/ cash, rather than via demand of delivery?

Paul I said...

MF

Yes, I can see that it could move West again.
Or any direction from savers to debtors. But would the mere ownership of gold give an entity a savings advantage over one who didn't? It's a capital versus labour question.

I think Freegold is neutral on this, possibly positive as it removes the automatic usury and stealth inflation taxation in the current savings system. And at least the poor slaves toiling in the gold owners' sweatshops know that some gold went to the slaves who built the factory, and any wages they scrimp together can truly be saved without forced investment and perpetuation of whatever system the slave finds themselves in.

Paul I said...

I mean debtors to savers ...

Paul I said...

DoC

I don't think Freegold necessarily needs to be ideal. It just needs to be better. The anonymity of evil Goldfingers is not ideal, but I actually prefer Goldfinger to Goldman Sachs. At least everyone agrees he's a villain and not intrinsic to the system.

(actually Lloyd Blankfein is more like Goldmember)

Edwardo said...

Blankfein's a member for sure.

M said...

Does anyone have any comments or concerns about the incoming ECB chief, Mario Draghi ?

Wiki quote- "then earned a PhD in economics from the Massachusetts Institute of Technology in 1976 under the supervision of Nobel Laureates Franco Modigliani and Robert Solow"

Franco Modigliani and Robert Solow are neo keynesians.

I don't like it.

costata said...

M,

The Italian CB has a long track record of resisting attempts by politicians to force them to sell their gold in order to fund budget deficits.

My gut feeling is that Draghi will turn out to be a good choice as Trichet's replacement but only time will tell.

Paul said...

Gold's function in the monetary system is changing. And as FOA also said, "None of the other metals will play a part in this."
Note even silver ?

Jeph said...

“What the 1922 Genoa Conference did was to institutionalize the "sterilization" of gold for the rest of the world through the reserve structure of the international banking system… the first time that specific paper gold (that from New York and London) was used as an equal reserve upon which credit can be expanded.” Since it was not until 1974 that the first gold futures contract was traded in New York, please say the form in which this paper gold was used (to sterilize gold): only redeemable paper currencies, or could other securities (e.g. gold bonds) be involved? Is Rothbard's view of this history (see http://mises.org/resources.aspx?Id=539e8031-cc4f-4874-a888-dacd54b9f9b5 ) correct?

JR said...

Hi Jeph,

Good thoughts!

Does “through the reserve structure of the international banking system” mean mostly the same-as-above “by selling securities on the open market”?

Basically. When the FED sterilized gold, they sold "paper promises" redeemable in gold. FED notes redeemable in gold. These were sold to banks in the federal reserve system, not among the general public. These banks in the federal reserve banking system in the US traded them as paper good as "gold" and used them as reserves.

The Genoa conference institutionalized this process internationally through the reserve structure of the international banking system "by introducing paper gold—or paper promises of gold—into the international banking system as reserves equal to the gold itself." Just as US banks took FED paper promises of gold, so too did foreign banks in clearing international transactions. The British pound was part of this too transactions.

FOFOA is using basket as a euphemism - reserves used to have to be gold, but the classical gold standard ended in 1914 with the advent of WW1. Here is RS on why:

"Because once a nation deems itself engaged in a struggle for its very survival, there is no power on Earth that can compel such a nation to cling fast to its metallic currency standard if the legislators deem that a fiat currency would be expedient to facilitate the war effort."

================================

The goal of the money manager's sterilization program was to control prices -> the "obsessive compulsion to centrally control the price mechanism" and sterilize "the vital signals that would otherwise be transmitted to billions of individual market participants keeping the monetary and physical planes connected."

Establishing a system of accepting FED and British paper in lieu of gold expanded the reserve base of credit available, and that's what these folks wanted to do to mute the natural pricing mechanism and gain greater control over economic affairs. Power over credit expansion is important stuff in this regard.

Cheers, J.R.

Jeph said...

Regarding my question about the ratio between paper and physical "commodities", would I be right to guess that gold's ratio does dwarf those of other commodities, this because CBs and BBs care much more about inflating the paper gold supply than anyone cares about inflating the paper supply of other commodities?

bdubblog said...

Forgive me if I'm a bit ignorant, just new to all this, but I was curious how silver fits into the equation?

You mentioned in the article, "None of the other metals will play a part in this."

What does this mean exactly?

Would I be taking it out of context to understand you're saying silver wouldn't go up to such high extremes, or do you believe silver will go along for the ride right along with gold?

Just curious. Thanks!

Motley Fool said...

bdubblog and Paul

It is the position of this blog that silver will not go along for the ride.

During the collapse silver should hyperinflate along with everything else, but ultimately this will be a bubble and silver will collapse to it's current price in real terms, or more likely lower.

TF

Motley Fool said...

Kicking the hornets nest

Costata's silver open forum

Here are the two most relevant blog entries here that deals with silver.

TF

Blondie said...

Jim Rickards interviewed on KWN

After discussing the pegging of the swiss franc to the euro, the lowering of interest rates in Brazil to assist Brazilian exporters (but also like the SNB move opening the door to higher inflation), and how the Chinese will let the yuan appreciate against either the dollar or the euro but not both as they too are attempting to protect their exporters, Rickards’ opinions on the currency wars move on to address gold-

Jim Rickards: “This is what the currency wars are all about - not everybody can devalue against everybody else, you have these sequential or partial devaluations of one currency against the other, but somebody has to be the strong guy, somebody has to be the currency that’s going up so all the others can go down, and this kind of brings us back to gold, Eric, because gold is the one thing in the world that everybody can depreciate against.”

Eric King: “Then given everything you’ve said Jim, what are the implications for gold?”

Rickards: ”Well the implications for gold is, gold has the unique role, because since its not a liability, (I think its the ultimate form of money because its not issued by any government) when I say that all the currencies cannot depreciate against all the other currencies, that’s true, but they can all depreciate against gold.

You know as gold is the one thing that allows every currency in the world, every paper currency, to depreciate against it, and that’s how kinda everybody wins the currency war at once, and of course the big winner is gold.

But in order to do that, you need some kind of gold standard, you need an international monetary conference, you need an agreed peg to gold, and then we can reset all the currency values against each other in ways that reflect the relative terms of trade and existing surpluses and deficits in the global trading system, and yet not have the currency wars because basically gold would have won the currency wars because it’s the one thing that everybody can depreciate against at once. It’s exactly what happened in the 1930s, it’s exactly what happened in the 1970s, and my view is it will happen again - in fact it’s in the process of happening - but nobody really wants to talk about it.”


Where is the reasoning behind the need for a peg???

And who decides upon these "relative levels"???


These are both the functions of the market, not central planners, functions performed naturally by Freegold.

One functions in a sterile environment, and the other in a fertile one... which do you intuitively suppose will spontaneously serve the interests of all?


cont/

Blondie said...

/cont


A peg is an artificial device, whose level is set as a means to the ends of the setter.
FOFOA has eloquently described above (and I have no doubt Rickards has read it already) how and why the market is the only entity capable of setting the exchange rate of any currency with gold. Rickards has left the door ajar for himself previously by talking of a “sliding peg” (that’s not a peg at all; a “sliding peg” is a contradiction in terms), so he may yet pronounce that gold should just float at whatever level the market requires (aka freegold).

Either that or Rickards is following somebody else’s agenda.
He makes perfect sense except on this peg issue, the one issue that if implemented would see the true function of gold crippled once again. A big devaluation to a new peg is to just kick the can exactly like FDR and Nixon did... I don’t think ROW are naive enough to have the wool pulled over their eyes once again, not by any stretch of the imagination. This repegging every 40 years is the equivalent of raising the debt ceiling.

Rickards: ”...sometime in the next couple of years we’ll see that radical transformation of the international monetary system in the direction of gold.”

Indeed we will Jim, but on whose terms? Looking at this graph, I wouldn’t be counting on the US extending their hegemony much further.

It's just time.

Jeff said...

Rickards always irks me for the reasons you say, Blondie. He obviously follows FOFOA, but keeps the hand of TPTB dealing the cards. He is unable (or unwilling) to go all the way to freegold. Interestingly, he seems to have backed off the SDR idea in this interview, finally. Without that control tool I wonder how he sees a peg being implemented.

Blondie said...

That's well phrased Jeff, "keeps the hand of TPTB dealing the cards"; that is exactly the aspect that differs from Freegold, and it is achieved via the artificial peg. That is the difference between night and day.

It is the thing that grabs my attention, and that I would like Jim to explain his reasoning for.

Perhaps he has explained the reason for the peg elsewhere, and someone can point me toward it? ;)

bdubblog said...

Thanks Motley Fool, much appreciated!

costata said...

Great comment Blondie,

Razor sharp.

Cheers

tunc k. said...

Thanks for everthing you write Fofoa.
my rulue is simple; who will you trust: politicians or gold?

tunc kar

Edwardo said...

Blondie wrote,

" I wouldn’t be counting on the US extending their hegemony much further."

In fact, I would count on the U.S. as a going concern, namely a nation state comprised of a lower forty eight, and outer two, and some territories, to not persist, though the timing of the dissolution of the union is likely quite a ways off.

burningfiat said...

Excellent, excellent bulletin from the leap2020 guys:

http://www.leap2020.eu/GEAB-N-57-is-available-Global-systemic-crisis-Fourth-quarter-2011-Implosive-fusion-of-global-financial-assets_a7640.html

Refreshing antidote to the normal Euro-bashing we see in the financial media.
Actually, this is a well-deserved healthy dose of $IMFS-bashing.

BTW: I think these guys are in on Freegold/RPG. If I remember correctly leap2020 once used one of FOFOA's illustrations. Was it the inverted waterfall or something?

/Burning

M said...

Jim Rickards.

I am not sure that Jim Rickards follows FOFOA. He likes to be known as a financial visionary but he seems lost for answers on what the post Bretton Woods 2 world will look like. I wonder what the last few pages of his book says...

M said...

Dutch parliament asks about their CB gold. (on ZeroHedge)A few interesting questions.

2 Why are gold and gold loans stated as one line item in the annual report 2010 instead of mentioned as 2 separate items?

4 Where IS the physical gold of DNB? At which locations and how much is where? What is the reason that the gold is still at these locations?

8 What is in your opinion the present function of the gold stock?

AavengerBen said...

Gold at $5000.00/OZ within 18 months?

http://www.zawya.com/story.cfm/sidZAWYA20110915084455/Gold_Rush

Paul I said...

Thanks for the link Burningfiat.

That was a great read. It felt absolutely spot-on and crystalized a lot of vague thoughts for me.

The one unifying popular mood in the air is "make the bankers pay for their risk taking". European politicians must see that they can satisfy this popular mood by avoiding taking constitutionally contentious actions.

"Sorry $IMF, our hands are tied"

Win. Win. Protect deposits and nothing else. Force the poison back where it came from, US and UK.

Story today about rising tensions between Geithner and Trichet.

"Jean-Claude Trichet, President of the European Central Bank, defended the eurozone’s financial position arguing it was better than other "major advanced economies".

"If I take the European Union as a whole, or the euro area as a whole, you have a situation that is quite encouraging if you compare [it] with other major advanced economies," Mr Trichet said.

Mr Trichet suggested the eurozone as a whole had handled its public finances better than some advanced economies, reiterating that problems were restricted to individual countries and were now being corrected."

He made the comments a day after Timothy Geithner, the US treasury secretary, joined EU ministers at the meeting and urged the eurozone to act quickly and decisively to resolve the region’s sovereign debt crisis."

http://www.telegraph.co.uk/finance/financialcrisis/8771032/George-Papandreou-cancels-US-trip-as-Ecofin-meeting-reveals-heightened-tensions.html

Butt out Geithner, and prepare for Operation Blowback

victorthecleaner said...

Zero-Hedge was speculating that September 20 was a good date for Greece to default (because there is a large interest payment on bonds due on that day that would be worth skipping).

Let's see what's at stake for the main actors here.

1) Greek government. So far, they have needed a 10% of GDP budget deficit just in order to pay their (inefficient) administration and state owned company staff. In turn, they do not seriously enforce taxation on anyone else.

No, I don't think they will default voluntarily (although I do think this would be the best solution for the average Greek citizen in the medium to long run). The Greek government certainly wants to preserve the status quo.

2) If someone can trigger a Greek default it is the combination of IMF, ECB, and euro group. They can withhold the next bailout payment (first week of October if I remember correctly) so that the Greek government simply runs out of cash.

The question is do they have an interest in a Greek default. Who is running the show? I suppose it is the French (IMF and ECB), in particular now that the two Germans at the ECB have given up.

On the other hand, if Greece defaults, it would be primarily French banks who would take the losses (total assets of the French commercial banks are about four times French GDP if I remember right - that's certainly somewhat Icelandic) on a total Greek exposure of around 60-70bn euros.

So do the French have the balls to let Greece fall, and in turn let the French commercial banks fail (just bail out the depositors perhaps)?

If yes,
A) this might trigger the collapse of the international banking system - in particular in the case of a Greek default, there would be some 20+bn US$ in CDS payments from the US to Europe.
B) this would temporarily trash the euro in the FOREX market
C) the Fed would feel forced to lower the US$, but how?
D) certainly by starting QE3. It would be the joke of the century if the Fed were forced to buy and monetize euro zone government bonds just in order to keep the US$ low in the FOREX market.

Will the French have the guts to pull Ben's leg? Or is it all about kicking the can down the road once more? Who knows?

Victor

victorthecleaner said...

addition: It is very easy to light the fuse. According to John Hussman,

According to Fitch Ratings, the ten largest U.S. prime money market funds had total assets of $658 billion as of July 31, 2011. Of those assets, $309 billion - an unsettling 47% of the total - represented debt obligations issued by European banks. It is unclear what level of subordination these debt obligations take, [...]

Victor

Paul I said...

Vtc

I get the sense that the ECB and assocs are going to do everything by the book, slowly and deliberately follow all the correct procedures, while Geithner hops around like an impatient customer. They won't necessarily force a default, but if one results from following the rules, so be it.

Panelproli said...

I wonder if it is what you would expect from physical goldprice.

I've seen the actual price on "finanzen.net" (a german business info site; EUR 1331) and compared it to the physical bullion prices of (Unicredit) Bank Austria for today: BA pays EUR 1355 for a 1OZ gold Philharmoniker coin and BA sell the same coin for EUR 1393.
According to "finanzen.net" the today's daily actual price has been between 1327 and 1337.

I would expect today's actual price between the daily top and bottom price.

Paper vs. physical? Also at the "lower" (bank's buy)price?

Jeff Snyder said...

bdubblog,

Motley Fool said to you,
"It is the position of this blog that silver will not go along for the ride.

During the collapse silver should hyperinflate along with everything else, but ultimately this will be a bubble and silver will collapse to it's current price in real terms, or more likely lower."

FOFOA has made very clear that only gold can carry wealth through the collapse to subsequent generations. However, as Motley Fool's note indicates, this does not mean that silver may not have a good use during the coming hyperinflation. At that time, if like me you are just a worker bee collecting your bi-weekly wages, you may not be able to get your hands on those hyperinflated tens of thousands or millions. (Those who can get their hands on it will probably be out on one of the fastest, most intense buying sprees in the history of the world.) But if you have some silver, which is "skyrocketing" in terms of those hyperinflated dollars, you may be able to (i) pay off your debts, and (ii) use it to buy some assets like land you would not otherwise be able to get your hands on, all without touching your gold.

There's obviously risk in this play, but given the relative cheapness of silver, some, like me, think it a gamble worth taking, and think it worthwhile to own some silver.

JR said...

Some thoughts from FOA
"FOFOA: I do not wish to pick a fight with silver. On a weight basis, I personally own more than a pound of silver for every ounce of gold. But I will confess that I stopped purchasing silver quite a while ago. The way I look at it, go with the guaranteed winner...

Perhaps in the paper market game, silver will see some wild fluctuations soon that will reward the bulls with paper profits. I hope so. And perhaps silver will play an important role in a future (temporary) barter economy. But in the end game, I tend to agree with FOA. Silver may well be "the poor man's gold". But just think about that statement."


=================================

Kicking the Hornets' Nest

"Yes, silver will run with inflation just like all physical assets. But it will not have the additional boost of being the new system's official reserve asset. This probably doesn't seem so significant to the silverbugs, but then again, most of you who have taken the time to understand Freegold now call yourselves ex-silverbugs...

...Yes I still have some physical silver. But I am a seller today and have been for a year now. And I was only a buyer before I discovered the wonderful archives linked above. And for the record, I am not playing the GSR. And I won't sell ALL of my silver. I plan to keep a little bit of it. And if I didn't have any silver, I would probably buy an amount equal in weight to my gold position, as Desperado said in his comment. That means, if I had 100 ounces of gold, I'd also buy 100 ounces of silver. But that's just me (and Desperado)."


Cheers, J.R.

Jeff Snyder said...

In a post above, Blondie said:
" A big devaluation to a new peg is to just kick the can exactly like FDR and Nixon did... I don’t think ROW are naive enough to have the wool pulled over their eyes once again, not by any stretch of the imagination."

Sorry, but could someone please define the ROW acronym?

«Oldest ‹Older   1 – 200 of 287   Newer› Newest»

Post a Comment