Wednesday, October 5, 2011

RPG Update #4


On New Year's Eve I dubbed 2011 "Year of the RPG" in deference to Robert Zoellick's recent editorial in which he described gold as "a key reference point to allow people to assess the relations between different currencies." This description was so close to Freegold that Zoellick's FT editorial led us to an additional name, "Reference Point Gold" or Freegold-RPG.

Throughout the year I posted "RPG Updates" every time the ECB published its quarterly Consolidated Financial Statement for the Eurosystem in which it revalues the system's reserves to market value denominated in its own currency, the euro. Such "marked to market" (MTM) revaluation is an important first step in allowing gold to be "a key reference point to allow people to assess the relations between different currencies." Here are the links to my first three updates:

Update #1
Update #2
Update #3

There has been some confusion about the details and the relevance of this quarterly, system-wide or consolidated revaluation of reserves and the ECB's role as the system's aggregator. In the beginning, each participating country had to "buy in" to the system with a specified, euro-denominated value of foreign currency/gold reserves.

On April 18, 1998, eight months before the launch of the euro, ANOTHER explained that the idea of any gold being part of the initial buy-in had been a recent development. He wrote that it was initially discussed that gold would be only 5% of the buy-in, but that the BIS had decided that making gold 15% to 30% would render a euro that was stronger in oil. Less than three months later, on July 8, 1998 at a press conference, Willem Duisenberg, President of the ECB, announced the final decision:

Ladies and gentlemen, the Vice-President and I are here today to report on the outcome of the second meeting of the Governing Council of the European Central Bank held yesterday.

…The Governing Council decided on the size and form of the initial transfer of foreign reserve assets to the European Central Bank from the national central banks participating in the euro area. This transfer is to take place on the first day of 1999. It has been decided that the initial transfer will be to the maximum allowed amount of EUR 50 billion, adjusted downwards by deducting the shares in the ECB's capital subscription key of the EU central banks which will not participate in the euro area at the outset. The transfer will thus be equal to 78.9153% of EUR 50 billion, i.e. approximately EUR 39.46 billion.

The Governing Council furthermore agreed that this initial transfer should be in gold in an amount equivalent to 15% of the sum I have just mentioned, with the remaining 85% being transferred in foreign currency assets. I should stress that the decision on the percentage of gold to be transferred to the ECB will have no implications for the consolidated gold holdings of the ESCB.

The precise modalities of the initial transfer will be finalised before the end of the year.

Before the end of the current year the Governing Council will also have to adopt an ECB Guideline pursuant to Article 31.3 of the Statute of the ESCB, which will subject all operations in foreign reserve assets remaining with the national central banks -including gold - to approval by the ECB.

In connection with the setting-up of common market standards, the Governing Council also reached agreement on a number of issues related to the quotation and publication of reference exchange rates for the euro. Specifically, it was agreed to recommend to market participants the "certain" method for quoting the exchange rates for the euro (i.e. 1 euro = X foreign currency units) and to have daily reference exchange rates for the euro computed and published by the ECB.


It should be noted that this initial transfer was not a surrender of assets to a third party central bank, but instead it was a buy-in, a purchase of equity in the system itself. So while a country might have contributed 8% of the ECB's gold, that country now owned 8% of the interest in the system. And being part of a system, that country also agreed to all operations in foreign reserve assets, not just those transferred to the ECB, being centrally coordinated by the system aggregator, the ECB.

So all this early talk about "gold backing" and various percentages—5% or 15% or 30%—turned out to be quite confusing in the beginning. Soon after the very first quarterly revaluation one astute reader asked FOA about it:

Goldfly (5/8/99; 22:04:55MDT - Msg ID:5787)
FOA - 15% backing?
http://www.ecb.int/press/pdf/wfs/1999/fs990430en.pdf

Actually, it looks like they're at 30%

From the Eurosystem Weekly Financial........

Asset 1 Gold: 105,323

Liability 1
Banknotes in Circulation: 332,280

Asset 1/Liability 1 = 31.69

$1000 gold would equal 100% backing(!?!?!)

GF


FOA (5/8/99; 22:24:54MDT - Msg ID:5790)
Reply
Goldfly (5/8/99; 22:04:55MDT - Msg ID:5787)
FOA - 15% backing?

Goldfly,
Hello again. Truly the ECB percentage as a number does not mean much at this time. It's the concept that is 180 degrees against the IMF / dollar system. For anyone to measure the value of Euro backing at present, is like looking at gold at today's price. It's out of context.

The beauty of the ECB ploy, is that it doesn't lock them into a rigid gold exchange standard. With gold trading in the open, all currencies are free to be exchanged for gold at any given point in time. The old IMF / dollar manipulation of gold, used from the early 70s gained nothing and cost the world dearly for the benefit of the fictional US living standard it created. Had they just allowed gold to rise from the beginning, commerce would have been much more balanced, nation to nation.

Prior to the Euro, Europe had to play the IMF game. The same game that has now backfired on the US today. They truly don't need the IMF and may pull out later. FOA


Now there is an interesting note in this exchange to which I would like to draw your attention. Goldfly was erroneously looking at the consolidated value of Eurosystem Central Bank gold versus the total number of euro bank notes. This is not what we look at, and it is not even particularly relevant since they aren't running a "rigid" (as FOA called it) Bretton Woods-style gold standard, but what Goldfly observed at 31% in 1999, has today grown to 50%.

We don’t look at the gold on the asset side of the balance sheet versus the euros on the liability side. And we also don't look at the present value of only the subscription fee to the system, the reserves held by the ECB itself. We look at the aggregate reserves for the Eurosystem as a whole (lines 1 and 2 on the asset side only) and how the proportion of gold in those reserves has evolved over time.

On a CB balance sheet there is a distinction we can make between assets in general and those assets that qualify as reserve assets. At the central banking level such as the ECB, its institutional liabilities largely take the form of issuance of currency banknotes and deposits held on behalf of commercial banking institutions (such as those being held to meet a commercial bank's reserve requirements, and to facilitate check-clearing between institutions) which are denominated in its own domestic monetary unit (i.e., the euro.)

The requisite assets to balance against these liabilities are largely in form of euro-denominated claims on commercial credit/banking institutions. As these claims are often collateralized by government bonds, at the very end of the rope it is fair to say a large portion of assets held by the central bank take the form of government bonds even though they were (largely) acquired indirectly through typical financing operations to extend credit to the commercial institutions.

These euro-denominated claims (assets) are suitable for offsetting euro-denominated liabilities, but they do nothing in regard to your rare "rainy day" when it is found necessary to defend the euro's stature against its foreign peers. For that purpose a central bank needs to have either gold (which is a universal asset) and/or a position in foreign currency claims against non-resident (foreign) institutions. It is this combination of gold assets and foreign currency assets that constitute the official "reserves" of a central bank.

The proportion of RESERVE assets among the central bank's TOTAL assets is normally a judgment call. Generally, the more unstable or insecure a central bank deems its national government and economy to be on the world stage, the larger the proportion of assets it will hold in the form of reserves. (Recall the expansion of reserves among Asian countries following the 1997 Asian Contagion crisis.)

And regarding the make-up of the reserve assets specifically, it is ultimately a central bank's own internal management decision that determines what proportion of reserves are in the form of gold versus foreign currency. At launch, January 1, 1999, the make-up of the Eurosystem's reserves was 30% gold and 70% foreign currency claims on non-euro area residents (mostly dollars, in fact, probably mostly US Treasuries left over from supporting the US trade deficit for 20 years to buy the time necessary to launch the euro).

In addition to the distinction I just explained, another key definitional aspect of CB reserves is that they are "readily available to and controlled by monetary authorities for direct financing of payments imbalances, for indirectly regulating the magnitude of such imbalances through intervention in exchange markets to affect the currency exchange rate, and/or for other purposes… the concept of reserve assets should encompass those assets over which authorities exercise direct and effective control." (my emphasis, quote from the IMF BOP Manual)

So aside from being either gold or foreign currency-denominated claims on non-residents, the two main criteria for assets to qualify as reserve assets for central banks are availability and control. This official definition ought to translate loud and clear into an institutional preference for in-house physical gold holdings over the alternatives. (After all, try to truly consider and assess the concept of "control" insofar as it applies to an asset defined as a mere "claim" on a foreign entity denominated in a foreign monetary unit! Does anyone remember Nixon?) That we have not yet fully attained this operational reality despite the logical preference for it is what our long-winded discussions regarding the slow evolution from dollar-centric toward Freegold tries to explain in a rational political context.

There is one other nuance in CB reserve reporting standards that I should mention. The reason the ECB makes its "net position in foreign currency" (claims minus liabilities regardless of residence) so prominent in the commentary portion of its ConFinStats is explained in Chapter III of the ECB's Statistical Treatment (Oct. 2000):

"Since the monetary crises which took place in most of the Asian countries in the late 1990s, international organisations have gradually become more concerned with the availability of reliable information on the capacity of a country to contend with potential financial crises. Consequently, the IMF ... requires additional details on international reserves and other foreign currency claims and drains from those presented so far in international standards, addressing, for the first time, the compilation of figures on reserve-related liabilities."

In other words, taking the liability side into account for the "net position in foreign currency" came into vogue thanks especially to the experiences of the Asian contagion crisis wherein it was shown how quickly and easily a nation could be stressed by its liabilities denominated in foreign currency. So the net position in foreign currency is now a fundamental part of any CB's overall Health-O-Meter. And so with this view in mind, it is clear that a value shift away from foreign currency reserves toward gold, the universal reserve asset, is also a shift in the overall quality of a portfolio.

But the strict definition of reserve assets within the Eurosystem is simply the GROSS total of the qualifying asset items and foreign-denominated claims on non-residents of the euro area as summed from the asset side of the balance sheet, without any further adjustment for items on the liabilities side. In other words, the official reserves are calculated through the simple addition of asset items #1 plus #2, which is what I use in these updates.

The De Facto Ascent of Gold

It is a common misconception that any retreat from dollar-denominated CB reserve assets would, in itself, destroy the value of the CB's portfolio of reserves. This canard is often used by the anti-gold financial media to explain the dollar's apparent strength, claiming that the world is trapped in perpetual dollar use by the existence of its humongous dollar reserves. Here is Randy Strauss from my post Gold: The Ultimate Hedge Fund:

[article] ...Even in light of all of this shifting by central banks into other currencies, the dollar still comprises 2/3 of global reserves and attempts to shift away from the dollar would destroy the value of central banks’ portfolios.

Randy's Comment: Although I should be well used to it by now, it still amazes me every time I see comments like the final remark here regarding any significant shift from dollars will lead to the destruction of central banks’ portfolios. It’s almost as if the commentator is trying to help indoctrinate a paralyzing fear as a means to prevent any such attempt on the part of the CBs, and to also create enough grass-roots doubt against such an attempt ever being made that we the people won’t perceive any benefit in trying to front-run with our own flight out of dollars and into gold...

It is an error in thought or judgment, however, to believe that a “destruction” of the dollar portion of the portfolio would therefore proportionately destroy the portfolio as a whole. That would only be the case if all other things remained unchanged, but life seldom works out so neatly as that. Sometimes an action can set forth an immediate chain reaction that literally changes EVERYTHING you thought you knew about the situation!...

In the world of the “new normal,” it is indeed possible (and someday soon desirable) to let the fuse be lit and allow the CB store of dollars be consumed. And to be sure, it is singularly the latent potential energy of the gold component that allows us to make this analogy with gunpowder. The natural chain reaction in the tiny open market for physical gold would immediately bring to bear massive “heat” and “pressure” upon its price… **POW** thus swelling the “volume” of its value relative to all other things. So even without radical changes to the quantity of physical holdings, a simple expansion in golden value will more than compensate the average portfolio of the central banks against the destruction of the dollar component.

Still can’t wrap your head around it? Bear in mind that the gold price is not a simple one-to-one inverse relationship with the dollar. There is a great leverage lurking in there, but it has been largely masked by the artificial abundance of paper gold which weighs down upon the equilibrium price. And even so, since 2002 the dollar value has decline by just 20% on a trade-weighted basis, whereas the gold price has responded with a 300% gain. And the moreso that the public and private parties of the world rightly gravitate toward physical gold instead of the illusion of paper derivative gold as the solid foundation of their savings and diversifications, the moreso you will see this price leverage grow in favor of larger multiples of gold price gains against modest dollar losses....

Central bankers will increasingly prefer gold reserves over the paper reserves created by other countries. Not only for the reasons of reliability/trust as cited in this article, but moreso because in choosing predominantly gold over foreign paper for central banking reserves will give those various national monetary officials an improved degree of latitude in their pursuit of an independent monetary policy.

WITH gold reserves, a central banker in a vibrant national economy can choose to enjoy a strong currency relative to gold, but, importantly, it can still alternatively choose to exercise loose monetary policy (for economic or political reasons) in which its currency is made weak as measured relative to gold. But regardless of choice for the relative strength or weakness of the national currency, the abiding benefit of choosing gold reserves is the superior stability — the systemic strength against procyclicality — that gold offers to the asset side central banking balance sheet.

WITHOUT gold reserves, pursuit of a national currency policy that is (according to their preference) generally strong OR generally weak is made less expedient either way because the health of the central bank’s balance sheet is subordinated to the quality of its foreign paper reserves which are themselves subordinated to the particular monetary policies being pursued by those foreign governments. Generally this structure of foreign paper reserves offers only the option for national monetary weakness built upon other international weaknesses, and worst of all it exposes the national monetary balance sheet to procyclical systemic failure — a domino whose fate is written largely in the hand of its neighbors.

When you understand how it is that it is economically (and therefore politically) undesirable for other major currencies to appreciate against their peer currencies (which is exactly what would happen to any currency replacing the dollar’s reserve status), you will subsequently know why gold shall continue to emerge as the de facto solution to the international reserve question.

And here I emphasize de facto rather than de jure because this has become a global phenomenon driven by a natural evolution (survival and ascent of the fittest) and does not require any additional international treaty or enabling legislation as a prerequisite or for motivation.

The breeze is fair and the road ahead is clear for the ascent of gold.


R.


From my post Your Own, Personal, Freegold, here's how the leverage in gold as a reserve asset behaves. This is what the Eurosystem's quarterly MTM parties reveal, and it can work on an individual level the same as it does for central banks, thus the title of my post. BTW, the pivot point in these illustrations is the physical plane of real goods, real services and real world capital:



Whoop There It Is

And now let's have a quick look at the results of the latest MTM party:

In the week ending 30 September 2011 the increase of EUR 56.8 billion in gold and gold receivables (asset item 1) reflected quarterly revaluation adjustments.

The net position of the Eurosystem in foreign currency (asset items 2 and 3 minus liability items 7, 8 and 9) increased by EUR 13.2 billion to EUR 191.1 billion. This change was due to the effects of the quarterly revaluation of assets and liabilities, the customer and portfolio transactions carried out by Eurosystem central banks during the period under review and US dollar liquidity-providing operations.

Quarter-end revaluation of the Eurosystem’s assets and liabilities

In line with the Eurosystem’s harmonised accounting rules, gold, foreign exchange, securities holdings and financial instruments of the Eurosystem are revalued at market rates and prices as at the end of each quarter. The net impact of the revaluation on each balance sheet item as at 30 September 2011 is shown in the additional column “Difference compared with last week due to quarter-end adjustments”. The gold price and the principal exchange rates used for the revaluation of balances were as follows:

Gold: EUR 1,206.399 per fine oz.

USD: 1.3503 per EUR

JPY: 103.79 per EUR

Special drawing rights: EUR 1.1564 per SDR



In other words, the decade-long trend continues, even in the face of all that "dollar strength." Last quarter gold made up 62.7% of the Eurosystem's reserves. This quarter it rose to 65% of the reserves. This is especially remarkable given not only the dollar's recent "strength" which accounted for most of the rise in currency reserves, but also the dramatic price plunge in gold just a week before the party.

You'll find much more on the Euro-MTM/Freegold-RPG model in the earlier "Updates" listed at the top as well as the other posts I linked including this one: Gold: The Ultimate Wealth Consolidator.

Conclusion

Don't make the mistake of assuming central bankers are stupid, or anti-gold, or that they are not fully aware of the concepts and principles I am writing about. When I write about the "logical preference" for gold, or the "de facto ascent of gold" to global IMFS reserve asset par excellence status, or gold as "the de facto solution to the international reserve question," these are logical, de facto realities of which central bankers are acutely aware. So when you hear them talking about complex solutions requiring massive[ly unlikely] global cooperation, new international treaties and enabling legislation, realize that they are talking about ditching the dollar in the most diplomatic terms they can, and then recall Randy's words:

When you understand how it is that it is economically (and therefore politically) undesirable for other major currencies to appreciate against their peer currencies (which is exactly what would happen to any currency replacing the dollar’s reserve status), you will subsequently know why gold shall continue to emerge as the de facto solution to the international reserve question.

And here I emphasize de facto rather than de jure because this has become a global phenomenon driven by a natural evolution (survival and ascent of the fittest) and does not require any additional international treaty or enabling legislation as a prerequisite or for motivation.

The breeze is fair and the road ahead is clear for the ascent of gold.


And after you think about it for a while, maybe you'll start to understand why gold was the asset chosen to occupy the #1 spot on the Consolidated Financial Statement of the Eurosystem, and why this is a key driving force (along with impartiality and systemic stability) behind the evolution to a 90+% gold proportion of reserves in the new international "Freegold-RPG" monetary system. And then, as Randy suggested above, you might want to front-run the CBs with your own flight out of dollars and into gold. Randy ended with this, and so will I:

"Again, on average the central banks have 10% gold. The ones who have less are scrambling. How about you? Do you have enough gold to put a suitable *BANG!* in your portfolio?"

Sincerely,
FOFOA

455 comments:

1 – 200 of 455   Newer›   Newest»
Michael said...

Giants:
The "catastrophe portfolio" allocates one third of money to gold, one third to defensive and internationally diversified blue chip company shares and a third to the debt of ultra safe developed countries.

Michael said...

the above from:
http://www.reuters.com/article/2011/10/04/us-wealth-summit-investment-idUSTRE7933LS20111004
Rich Run for Cover as Turmoil Hits...
some worried Giants are getting advice to put a good deal into gold.

Michael said...

Fofoa said
"even in the face of all that "dollar strength." Last quarter gold made up 62.7% of the Eurosystem's reserves. This quarter it rose to 65% of the reserves. This is especially remarkable given not only the dollar's recent "strength" which accounted for most of the rise in currency reserves, but also the dramatic price plunge in gold just a week before the party. "

yes that is remarkable, it'll take a while for me to understand that one. I expected that gold would decrease in percentage.

As I watch the gold market fumble up and down the past several weeks though, it is becoming easier to convince myself that it does not matter. Yes I feel a little richer when gold is at 1900 but this price is just the silliness of traders, worried about the very short term opinions of other traders, It has little to do with the value of gold....and we wait...

78Rubies said...

comments...

Texan said...

I for one am in no rush for RPG and I hope they keep this "managed deval" thingy going. In addition to you FOFOA, Jesse's Cafe does not appear optimistic on that score and frankly neither am I, but one can hope.

J said...

From my comment on FOFOA's previous post

"Gongmei Gold Trading, the company that installed the ATM, expects to install an astounding 2,000 more of such gold-vending machines across China."

They plan on accomplishing this within 2 years! Sounds optimistic but anyway you look at it that is a much faster pace than the German company is deploying them. I wonder what the minimum size is. When I used a Gold to Go ATM in Dubai the smallest available was 1 gram bars.

costata said...

FOFOA,

Timely reminder about the relentless march of this process. Interesting to see that the ECB's gold reserves held up so well in this quarter.

Hi Texan,

Amen, but......

I'd like to point out to any newbies reading the comments that "hope is not a strategy" for those who have not acquired their target level of physical gold.

Michael,

I'm afraid a lot of the mini-Giants will be way too late to this party.

As Bron pointed out when demand exceeds supply the Perth Mint rations its retail product with a limit per customer.

Picture someone with a wheelbarrow load of cash walking away from the Mint's sales counter with a wheelbarrow load of cash and two ounces right alongside shrimps holding the same weight of gold.

FWIW I expect rationing to become the norm at some point.

;)

intuitivereason said...

@Costata - Bron would also clarify that he is talking retail forms of gold being constrained by manufacturing, not by material availability.

DP said...

Newbies! Just buy gold and relax.

The more you read, the more you'll relax. And buy.

mortymer said...

BdF -> IMS web page -> WSJ

"Guest Contribution: How to Value a Currency"

http://blogs.wsj.com/economics/2011/10/03/guest-contribution-how-to-value-a-currency/

(http://www.banque-france.fr/home.htm
http://global-currencies.org/smi/gb/home.htm
http://global-currencies.org/smi/gb/home.htm
Mrt: A bit surprising that it was put up.)

Crack said...

DP, #32,771

mortymer said...

DP:
Too much reserves is not good either:

http://anotherfreegoldblog.blogspot.com/2011/10/lbs-reserve-accumulation-other-side-of.html

or

http://www.project-syndicate.org/commentary/yu2/English

To get to the RIGHT amount of the reserves is a long term process and requires knowledge and understanding of one´s situation. It is different for different people.
Also depends on the amount of surplus one is able to create, cash-flow, etc.

costata said...

Intuitivereason,

@Costata - Bron would also clarify that he is talking retail forms of gold being constrained by manufacturing, not by material availability.

With all due respect - wrong perspective. He is talking about material availability AND manufacturing constraints relative to demand. Same result if you want to buy product. But the point of my comment is that Perth Mint will not sell you all of their production just because you can buy it.

IMHO the mini-Giants will not be allowed to convert any significant amount of their wealth into gold without dealing with the Giants' representatives. And they will pay through the nose I suspect.

DP said...

@Crack, you appear to have skipped over Tiny Dancer in your count? :>

"you already are home". I sure am.

Just for you, #32,723 then:

Rhythm Collage seamlessly blends two diverse art forms. Kathak - the classical indian dance and contemporary western music. :)

DP said...

@Mrt,

"Reserves", or "foreign exchange reserves"?

Are you suggesting having too much gold is problematic?

Michael H said...

comments ...

again ...

mortymer said...

Its not good to be over-leveraged even in this gold market, the latest correction is a clear example.
Was it Ender or Ari who wrote something like this:
"Save in gold, enjoy life"
It should not strangle your daily life.
Well, e.g. for SwissCB it was a bit problematic to have too much.

DP said...

Interesting. So you're saying that if I am 95% into gold in my reserves, I will suffer on corrections I guess. In which case, I should be only 20% into gold and then I won't suffer the corrections... or the gains.

I see what you're saying though, that a CB has a different problem than me. Nobody is going to bid up DPbucks on the foreign exchanges and strangle my one-man economy, rendering my one-may workforce uncompetitive on the world labour market.

Then again, if they did I don't think I'd mind too much. I'd print up a megabunch more for them (idiots!) and use their inflow of other currency that I don't really need to just go and buy more and more gold.

Weeee! This reserve-management stuff is easy!

Bron said...

"Perth Mint will not sell you all of their production just because you can buy it"

Whoa, hold on there. We ratio coins because we have limited factory capacity, but do not ration wholesale bars. If someone is willing to outbid anyone else's offer for our fabrication premium, then we'll sell them as much as we got :)

By way of explanation, while we have a fixed premium for retail sales, sales of one tonne lots of kilo bars are done on a deal-by-deal negotiation of the premium. So a bullion bank can get all our output if they are prepared to outbid everyone else.

When I see bullion banks every week trying desperately to outbid each other to get hold of our output, then I'll tell you we have a real bull market. We get spikes of interest, but over the past few years the wholesale demand is just not consistent and the premiums are low. We are just moving from awareness phase to smart money phase.

By the way, we "only" refine around 150,000oz of gold a week, which is small in terms of global demand. When this gets going, and existing holders are not willing to sell into price rises and are hoarding, it isn't going to take much for this output to get bid up.

Too bad you can't buy shares in a refinery/mint. Consider if gold prices are $3000 per ounce and all you have to do to secure physical is just pay an extra $5 an ounce premium. Who is going to care?

That's why I find all this talk of people who can't get physical very amusing. It just means they were not prepared to pay what was required to get it.

Aquilus said...

DP,

You just described the only solution available to the Swiss National Bank to deal with the huge inflows of euros :p

JR said...

Indeed DP,

CBs and their reserves are different than gold held by private citizens. From Go Go South Korea

Date: Sat Apr 18 1998 19:18
ANOTHER (THOUGHTS!) ID#60253:

But, how can this be, you ask? It is done, "right before your eyes" and we see it not! I ask you, if you have one ounce of gold, and sell it on the market for $300, it is worth $300, yes Now, what if CB hold one ounce of gold, and sell it twenty times, that one ounce is now worth $6,000, no? The difference between you and CB? The persons that hold "interbank" IOU for gold, value it at the multiple of leases/sales made against reserves. This leverage, it is held for performance on bank part. The BIS, it force performance, on any economy! You ask Korea about gold, yes?


As discussed above, CBs use reserves to defend their currency against foreign currencies, for a "rainy day":

"These euro-denominated claims (assets) are suitable for offsetting euro-denominated liabilities, but they do nothing in regard to your rare "rainy day" when it is found necessary to defend the euro's stature against its foreign peers. For that purpose a central bank needs to have either gold (which is a universal asset) and/or a position in foreign currency claims against non-resident (foreign) institutions. It is this combination of gold assets and foreign currency assets that constitute the official "reserves" of a central bank."

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

I think mortymer is getting at one of the ideas from Go Go South Korea, which is that the apparent utility of gold as a reserve at prevailing public gold market prices is not great, because gold is still "in the background" in such a situation.

"In 1997 it was believed that South Korea's $25 billion in foreign reserves was enough to defend the won...

But as it turned out, only about $9 billion of the $25 billion was liquid enough to be deployed in defense of the currency. The rest was tied up in, among other things, government guarantees on foreign debt lent to Korea's debt-addicted industrial titans—family-owned companies like Hanbo Steel, Daewoo and Kia that soon went bankrupt and were dismantled or sold off. So, finding its foreign reserves sorely lacking, the government asked its citizens to chip in and defend the won with the last line of defense, their gold jewelry!

As my regular readers know, any gold inside a currency zone, public or private, is a viable reserve. And as the won was tumbling on the foreign exchange market, gold priced in won was rising. So the desperate government implored its citizens to dig out their gold and sell it into the rising price. Millions of patriotic Koreans literally lined up around the block to sell their rings, necklaces and other gold trinkets which were melted down and sold into the international gold market in defense of the won."


cont.

JR said...

cont.

"In all, the people of Korea spewed around 250 tonnes of gold to the outside world, about a quarter ounce for every adult in Korea. But it did no good other than to rid Korea of her reserves. That's ten times the amount of gold the BoK just purchased last month. But at $300/oz. in 1998, it was barely a drop in the bucket. That was a mere $2+ billion in US dollar value to add to the $9 billion in foreign currency the BoK was able to deploy.

Here are some quotes from ANOTHER during the Asian crisis:

Date: Fri Dec 12 1997 21:33
ANOTHER (THOUGHTS!) ID#60253:

Even Korea will find out that oil is all that counts. Their paper will die! Gold would have helped them in a different world, but for now gold is in the background as the IMF tries to add more paper to this inferno. If one owns real gold, it will be with ease to view the world currency developments. They will be truly of biblical proportions!"

...

5/26/98 ANOTHER (THOUGHTS!)

Understand, all value judgments today are as subject to "exchange rate competition"! It is in "this exchange rate valuations" that the private citizen does denominate all net worth! A safe way to hold the wealth for your future, yes? You should ask a Korean or the Indonesian ?

One should grasp that "today, your wealth, is not what your currency say it is"! In this world, paper currency is for trade, only! It is for the buying, selling, earning and paying, not for knowing the value of your family holdings! Know this, "the printers of paper do never tell the owner that the money has less value, that judgment is reserved for the person you offer that currency to"! Again, I ask, how can we know a true value for our assets, when they are known only in currency that finds it's worth, as in the exchange rate for another currency?"


Cheers, J.R.

DP said...

re: "Save in gold, enjoy life"
It should not strangle your daily life.


I don't read this to mean "don't strangle yourself with too much gold", but instead "with your available income enjoy life, with whatever is left over save it in gold".

i.e.: don't curtail your standard of living below how you would desire it and your income allows, just to keep back cash for buying gold.

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

JR,

Yes, gold was almost useless to the Asians back in the day. I think this time maybe things will be different. Even 20% will be more than enough to stay even I guess.

DP said...

Oops

J said...

CARACAS (Reuters) – Venezuela will begin repatriating its gold reserves from Western nations by mid-November, the central bank head said yesterday.

Merentes said the first boat laden with reserves would be back by mid-November. “It will be here as soon as possible, no later than in a month-and-a-half,” he said.

Venezuela says gold repatriation to start soon

I wonder why it takes so long

Crack said...

DP,

Shuddah setup ma own CB and jus believe in maself?

DP said...

Sure Crack. But could you handle the success?

Well can ya?

Pete said...

@Bron

Really appreciate your response, it has cleared up my thinking on the matter.

Thank you :)

JR said...

Yes,

One idea is that there are reasons why a CB, who certainly would want to hold gold as a reserve, does not want all of their reserves to currently be gold. For example, they still need to clear transactions and defend their currency, no?

This is sorta a theme of the RPG posts - the ECB put had a portion of its reserves - 30% - in gold:

At launch, January 1, 1999, the make-up of the Eurosystem's reserves was 30% gold and 70% foreign currency claims on non-euro area residents

but look at it go

Last quarter gold made up 62.7% of the Eurosystem's reserves. This quarter it rose to 65% of the reserves.

Thus:

...here's how the leverage in gold as a reserve asset behaves. This is what the Eurosystem's quarterly MTM parties reveal, and it can work on an individual level the same as it does for central
Start
Leverage at work


And like a CB, who may have reasons to not hold all their reserves in gold, so to it is perhaps true of private citizens. Gold isn't valued correctly now, so there can be seen some utility in gathering other reserves that help "protect" one's gold, no?

Both in bidding time till we get there (cash), and lasting the "transition" (got some barter) however difficult that may be (supplies)?

Cheers, J.R.

Gary said...

Just been watching a recording on video of Jean-Claude Trichet at his final press conference.

I like him a lot, unlike Bernanke whom I despise.

A few comments he made on the Euro, which is so often misunderstood in the mainstream media:

'The Euro currency should not be confused with the issue of financial stability in the Euro area as a whole'

and

'The Euro currency has delivered price stability better than in the previous 50 years. That fundamental feature is backing the credibility of the Euro. Second, the Euro is credible for keeing its value over the next 10 years, and you can see what other countries and central banks are doing, I mention en passant the Swiss central bank. We are very proud to have issued the Euro.'

Hear, hear, and on a day when my central bank (BoE) announces yet more currency dilution via QE, I am sure the Euro will only strengthen in the years ahead.

Goodbye Mr Trichet, I'll miss your press conferences.

DP said...

Sure, 100% isn't my optimal number either. And one mustn't forget those non-monetary reserves, as you rightly say.

Who got the number? Only you got your number.

Motley Fool said...

Comments...

Michael said...

Costata
What I got from the article was that many wealthy folks had to be TOLD to buy gold. It was not part of their ancient family plan. I suspect we will arrive at Freegold because it is the best way to store wealth rather than because it has been part of a grand conspiracy of the giants. The CBs, yes, they may have had it as part of their plan since 71...the small giants...not so much. Like most people they probably have their money people tell them what to do. And we know how most money people think.

Börjesson said...

Of all the complexities and intricacies of the Freegold concept, this constantly positive view of the Euro is the one I find the hardest to comprehend. There's a good article series in Der Spiegel (recommended read - and it's in English!) about what a complete and utter shambles the Euro has been ever since the beginning. What does it matter if the currency itself is technically well-constructed, when the participating countries are all coming apart at the seams trying to cling to this currency that doesn't work for them? Or are you saying that the Euro is somehow disconnected from the fate of its countries, that it can go on and thrive without them?

Motley Fool said...

Hi Börjesson

The Euro was designed to thrive irrespective of the underlying countries.

Both the link to the nation state and gold was cut.

I'm sure JR will provide a more relevant and quoted answer though.

Unfortunately politics has become involved at the ECB, we shall see how it turns out. The underlying structure remains good enough to save the world when America falls, despite this.

Just my 2 cents.

TF

mortymer said...

"don't strangle yourself with too much gold", but instead "with your available income enjoy life, with whatever is left over save it in gold"
Indeed

Börjesson said...

Thanks, Motley! But if, in Freegold, all currencies are backed by gold, and constantly being revalued against gold and thus against each other, why would anyone need a supernational currency like the Euro? Wouldn't it become redundant? And I also don't understand how Freegold would do away with the basic flaw of the Eurozone, namely that the countries in it are too diverse to all be in the same currency. They need to be able to revalue against each other, and I don't see how they can do that within the Euro, with or without Freegold.

Motley Fool said...

Hi Börjesson

I agree. The Euro is superfluous. However, when the dollar collapses a uniform alternative of sufficient size much exist to absorb that flood. The euro satisfies this.

To be fair, I think after FG the Euro should be broken up. Perhaps a argument can be for it beforehand. I will think on this.

I am enjoying the article you linked. Thanks.

TF

Max De Niro said...

I think that the biggest danger with the euro, pre-Freegold, is that due to its inflexiblity, the lack of the exchange rate adjustment tool, the individual countries are forced to take the hit on unemployment and reducing of benefits etc.

Now, of course, if they have been profligate with their spending, eventually this needs to happen, but it is being forced too quickly.

There is real danger of massive social unrest and history tells us what this brings.

Freegold needs to happen fast in order to avoid this. If it doesn't, then life will get very ugly indeed.

Gary said...

My understanding is that the Euro will be 'strong in gold', perhaps getting to 95% plus gold reserves, so it'll become the new oil trading currency.

If the Euro fails before the dollar, then when the dollar fails, we will get no oil...unless gold itself changes hands. Global trade would grind to a halt.

As Trichet says, price stability is important. We all need to hope the Euro survives.

Motley Fool said...

I don't claim understanding.

I am curious though, if all currencies will be valued in real time by gold, would there be a need for a one oil currency?

Gary said...

Maybe not a need, but I imagine 'oil' would rather trade in a strongly gold-reserved currency. And who can blame them.

Motley Fool said...
This comment has been removed by the author.
Max De Niro said...

Yes, the euro is strong in gold and will, therefore, be attractive for oil, but before that point arrives - the point of the dollar dying - the austerity measures in the euro are in danger of causing massive societal breakdown. At that point, Freegold won't help.

Motley Fool said...

Wouldn't every currency be strongly reserved in gold though?

At least as far as their consumption goes.

As far as FG helping the average man. Right. FG now would do the same to them as FG then.

Gary said...

Some countries hold far less gold in their reserves than the ECB does, and I believe FOFOA has mentioned previously, Euro countries themselves hold plenty of gold too.

I think plenty of countries will have very little gold, I saw a table on here somewhere, from the WGC or maybe the BIS. Those currencies wouldn't be viewed as 'strong in gold', but perhaps will aim to run their economies to attract more gold from overseas. We can hope eh?

Patrick said...

As Corey Feldmans character informed us in "The Lost Boys" - "No two Vampires die the same way" ...and so we can expect it to be very difficult to predict how this current Monetary System will finally be put to the (Golden) Sword.
One indicator I've been watching over several years and I might add recently elevated to uber-importance via Federal Reserve Open Market activity, is the Short-Long Treasury relationship.
By that I mean - the "Graphical" reluctance of the Market to hold longer dated T's in preference to the short end of the curve.
The ultimate implication is that Mr Market bids the 3mo at Parity ...and beyond! ...whilst treating the Long end with utter contempt.(Yield skyrockets)
At that point the entire shooting match moves to Here and Now assets en-masse.
We get closer and closer to this inflection point with every minute.
3mo Bill Yield - http://stockcharts.com/h-sc/ui?s=$IRX&p=W&b=5&g=0&id=p99988300991
Ratio - http://stockcharts.com/h-sc/ui?s=$TYX:$IRX&p=W&b=5&g=0&id=p30910286464

Aiionwatha's Nation said...

Wow, great piece! Intuitively I know there are a lot more questions answered in there than I have figured at the moment. Have to get to work finding them all. Great musical selection. Forgiveness. Right behind Tangerine at the end. Redemption.



"We live in a world of transgressions and selfishness, and no pictures that represent us otherwise can be true, though, happily, for human nature, gleamings of that pure spirit in whose likeness man has been fashioned are to be seen, relieving its deformities, and mitigating if not excusing its crimes."

James Fenimore Cooper

Maybe it is so that gold will be the thing that brings this all back into balance. Simplistic equilibrium from the edge of chaos.

Thanks again. I'll be sure to hit the jar shortly.

Gary said...

http://pragcap.com/dear-jean-claude

The easy money camp aren't going to go down without fighting are they!!

Bravo JCT, bravo.

Edwardo said...

The latest in the Hugo and his (okay, Venzuela's) hoard saga


http://af.reuters.com/article/metalsNews/idAFN1E79423620111006?pageNumber=2&virtualBrandChannel=0&sp=true

JR said...

From Dilemma, contrasting the dollar and the euro on the severing of the link to the nation state and gold:

"the dollar still has two fundamental flaws. The first flaw is that it is a national currency, not a supranational one, and the second is that it once tried to be as good as gold. So much so that even today the dollar cannot sever its link to gold...


Back to that first flaw, the dollar is the national currency of a single nation-state, yet it is also held globally as a reserve currency to serve all of its global uses, which in turn give it value even today through the global network effect. So how is this a flaw? Well, it leads to a conflict of interests between the issuing nation-state's internal and external obligations as manager of the currency. This is called the Triffin Dilemma...


President of the ECB, the late Dr. Willem F. Duisenberg said this about the euro:

The euro is the first currency that has not only severed its link to gold, but also its link to the nation-state.

My hope is that I have now armed you with what you need to understand the meaning of this powerful statement. The euro solved dollar flaw #1, the Triffin dilemma, by severing its link to the nation-state, and dollar flaw #2, trying to be as good as gold, by severing its link to gold. It did the latter through the Eurosystem quarterly mark to market reserve policy...


Please think back to what the rise in gold during the 1970's did to the dollar and the international monetary system. It panicked European central bankers to the extent that they confronted Paul Volcker in October 1979 at an IMF meeting in Belgrade, Yugoslavia with "stern recommendations" that something drastic had to be done immediately to stop the dollar's fall. The fear among the European central bankers at the meeting was that the global financial system was on the verge of collapse.

Now compare that to today. As the gold price rises, the euro's monetary reserve assets rise in both value and confidence. They know that even if the dollar collapses today, the gold portion of their reserves will more than compensate for the loss of dollar-denominated assets. And they also know that today, unlike in 1979, there is an alternative currency of sufficient size and scope to pick up the global financial slack. No need to panic like 1979."

JR said...

From Dilemma on the Euro:

"I'm sure that right about now some of the noobs (and a few regulars) are scratching their heads thinking, "why is a gold bug like FOFOA praising the euro? It's just another fiat currency, isn't it?"

First of all, I'm not a gold bug. Second, my praise has nothing to do with Europe's Socialist infrastructure or its politics, which are a mess. As ANOTHER said, Europe's politics are "a side show," easily subservient to the monetary structure which evolves on long-line cycles. Politicians like to pretend things can change on short cycles, with their help. But the euro has been in the works since 1962. And to those that believe short-line politics will break countries like Greece away from the euro, all I can offer is "time will reveal its long-line nature… in time."


The alternative to the euro is not so hot:

"We need a fiat currency like the euro that structurally supports Freegold in order for gold to perform its highest and best role in the international monetary and financial system. The alternative is global economic chaos upon the denouement of the dollar. This is why I praise the euro."

JR said...

Euro Gold on the distinction of the Euro being severed form the nation state:

"The point is that the Eurosystem's response (volume expansion) to its current systemic threat (the debt crisis) is not surprising. Does this mean the euro will collapse (experience hyperinflation)? No. Because, for one reason, it has severed the link to the nation-state. The euro is behaving perfectly predictably in maintaining the nominal performance of its system through expansion, but it cannot be forced to fund the future government profligacy of the PIIGS through volume-only expansion. That link is severed.

But the dollar, on the other hand, is nominally on the hook not only for the debt mistakes of the past, but for all future dollar-denominated liabilities, obligations, entitlements and promises of the biggest debtor in all of history, on top of a debt mountain that is probably another $100T in size depending on your measurement criteria. That's a big difference. The dollar is an old currency in the winter of its life, linked to the greatest profligate debtor the world has ever known. The euro is a young currency that has severed its link to the nation-state. The ECB can save its own system, but the member states cannot force it to fund perpetual profligacy...


Back Across the Pond

Now in your mind's eye I want you to take a bird's eye view of this fair, looking down on all the colorful tents, and then zoom way out as if you were using Google Earth, spin the globe and zoom back in on a different fair "across the pond." We'll call this fair the USA.

On the surface, this new imaginary fair looks very similar to the other one. There are many different tents, tables, goods and services, buyers, sellers, debtors, creditors and, of course, a fair operator who we'll call the Fed/USG. And that's the first difference you'll probably notice, probably because I will point it out. The Fed/USG is not only the fair operator, but also a participant, just like Sy Sperling. At this fair, the link is not severed.

Here are a few more differences. The fair operator is not only a participant, but he is also the biggest debtor this fair or any other throughout all of human history has ever seen. He is literally printing up scrip to buy things from the fair. He is not only funding his ongoing (perpetual) trade deficit by printing and spending scrip, but he is also paying the interest on his past debt by printing scrip. And whenever his creditors start to worry about him paying his debts, he simply prints more scrip to buy back the promises to pay at face value. And he does all this without ever telling the fair participants that his scrip now has less value.

But it gets worse. This fair operator is truly cashing in on the reputation of his forebears. He's emptying his bank of credibility like there was no tomorrow. You see, for a long time his scrip has been used as the inter-fair clearing system instead of gold. So he is not only able to purchase goods and services with his freshly printed scrip within his own fair, he is also able to shop at far away fairs with his printed scrip, simply on the basis of squandering past credibility. And don't think this isn't getting noticed. Ooh baby, you better believe it is getting noticed!...


Some of the participants in the USA fair, like California, have lots of debt just like Greece. But unlike the ECB, the Fed/USG can't really deal with that right now because it has its own debt problems it is dealing with (printing away)."

JR said...

Synthesis

What happens if the Euro project fails?

5/22/98 ANOTHER (THOUGHTS!)

If the Euro does fail, gold will become the "world oil currency". We do know this full well, "the Central Banks will hoard all gold and buy any offered if this new European currency does not work" and "debt currencies fail". If this does come, no paper asset of world economic system will survive, nothing! Not a good thought, no? Thank You

6/4/98 ANOTHER ( THOUGHTS! )

The last small gold war ended in the early 1980s, as the choice was to use the US$ or go to a gold based economy. No other reserve currency existed, and gold lost the war as all continued to buy dollar reserves.

But by 1980, Europe was working with the BIS to implement a new "reserve currency".


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.

Motley Fool said...

*gets out his pom-poms*

rah rah euro!

:D

JR said...

A comment from Hair of the Dog on the Euro:

"The dollar system should have collapsed between 1971 and 1980, but it didn't. It received an assist from Europe, the Middle East, and later from the Far East. The purpose of this assist was to buy the time necessary to build another currency large enough to lubricate international trade in the event of the disappearance of the dollar. That ended in 1999 with the launch of the euro. What kept the dollar afloat since then is anyone's guess. I have a few theories. But they all seem to be expiring in 2010.

The euro was special in two ways. And by special, I mean special on an astronomical time scale. It was the first man-made circulating medium to separate itself from the nation-state, from the very ones who always crush a currency to zero. And it was also the first to sever its ties to gold. In other words, it was the first unbacked, irredeemable paper currency that not only acknowledged but supported an external store of value, gold. This can all be found in a famous speech here.

I don't know how much of my blog you have read, but I don't find the euro's present troubles overly alarming or existentially threatening because I understand why it is the way it is. Some European politicians and political appointees today are doing it great harm, but not existential harm, yet. The currency exchange numbers today are meaningless because all mediums must devalue against the debt paradigm. "It's the debt, stupid" is more than just the title of one of my posts."


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

Debt is what the $IMFs system is all about - everybody has debt issue. But as FOFOA explained in Synthesis, the Euro was built to attempt to deal with this issue of debt by being built to be hopefully be able to be devalued *WITHOUT* a concurrent hyperinflationary hell:

"The hyperinflation of the dollar is already a done deal. It has been since the 90's at least. Massive quantities of perceived dollars already exist stored in debt held globally and inside the US. Europe knows this. They have known this was inevitable since at least the mid-90's when they changed plans and went with higher gold reserves for the new ECB. They have always been willing to wait for it to happen naturally, unless the EU itself faces an existential threat from debt brought on by the $IMFS. And in this case, I believe their only option is a targeted hyper-depreciation of the euro.

By "targeted", I mean that the euro devaluation would be targeted to go only into gold. Gold can absorb a devaluation if you do it carefully, and in turn devalue the debt without causing inflationary havoc."

JR said...

A second comment from Hair of the Dog?

"As you all know, I don't expect the euro to fail. The euro is designed for transition. It is designed for Freegold. And the specific value of a currency doesn't matter in its primary role as a medium of exchange. Only stability matters, and the euro could handle a big one-time devaluation to a more stable level. It will have to devalue at one point or another. Devaluation is inevitable for all fiat currencies today. The European politicians apparently understand less about this than the central bankers do.

Even still, exiting the euro would be a Herculean task for any country. They'd have to reissue currency and re-denominate all long term private contracts, and then face the old risks of war and hyperinflation once again. For this and other reasons I am highly skeptical about reports of politicians making boisterous threats to leave the euro. They seem pretty empty to me.

Jim Rickards: "Now, political unification has had modest success. Military and foreign policy unification has really had no success at all. But the crown jewel of European unification is their monetary system, the euro and the European Central Bank. So that's the pinnacle of their world historical efforts to unify the continent. They're not going to give that away lightly. I mean, they view it in a much broader historical context than Wall Street and Americans. And so it's of the utmost importance to them. And they're going to do everything they can to preserve it."

Jim Sinclair: "If the EU fails so does the USDX. With no mirror image to hold up the dollar artificially, the US dollar will fall faster than Greece's credit."

ANOTHER: "...If the Euro does fail, gold will become the "world oil currency". We do know this full well, "the Central Banks will hoard all gold and buy any offered if this new European currency does not work""

JR said...

A final comment from Hair of the Dog?

"what everyone is getting wrong is that a shared currency is simply a standard. Like a meter or a foot, or a minute. It's how you use that standard that matters. If you have less "standards" flowing in then you spend less "standards."

Expenditure is the adjustment mechanism in a fixed exchange rate zone like the eurozone. It is Goldman Sachs and the 66-year old $IMFS that has enabled the circumvention of the adjustment mechanism in Europe, not the euro. The same goes for the US states.

The Privateer writes, "The claim is that the obvious message of the European debacle is that a sovereign government must have full control of ALL aspects of monetary and fiscal policy if it is to prevent the type of sovereign debt debacle now engulfing Europe. As yet, no argument has been put forward for the opposite proposition."

Here's one: Under the $IMFSystem when relatively small currency zones have control of "ALL aspects of monetary and fiscal policy," hyperinflations are relatively common. Hyperinflation is the adjustment mechanism in floating exchange rate zones under the $IMFS. This is exactly why the euro severed its link to the nation-state... Because a) we are still living under the $IMFS and b) Europe has a living memory of hyperinflation.

If you think austerity riots are bad, you should see hyperinflation riots!"

JR said...

Mises from the Theory of Money and Credit about the desirability of a single medium of exchange:

"Of course, if two or more economic goods had exactly the same marketability, so that none of them was superior to the others as a medium of exchange, this would limit the development toward a unified monetary system. We shall not attempt to decide whether this assumption holds good of the two precious metals gold and silver. The question, about which a bitter controversy has raged for decades, has no very important bearings upon the theory of the nature of money. For it is quite certain that even if a motive had not been provided by the unequal marketability of the goods used as media of exchange, unification would still have seemed a desirable aim for monetary policy. The simultaneous use of several kinds of money involves so many disadvantages and so complicates the technique of exchange that the endeavor to unify the monetary system would certainly have been made in any case."

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

"8/10/98 Friend of ANOTHER

The Euro will not replace gold, it will evolve into a gold transactional currency.
"

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

No Free Lunch

"Modern fiat currencies are not going to disappear, no matter how hard Obama and Bernanke try to destroy them. They are simply too good of a medium of exchange. The ease with which labor is divided over the whole globe and capital exchanges are transacted across thousands of miles, instantaneously, is a planetary first! It is a marvel of the modern computer age!

Even in collapse, man has shown his resilience in using these modern fiat mediums. Just look at Mexico. Still using the peso, albeit in a slightly different form. Mexico is proof that in most cases there is a riverbed somewhere down the waterfall. Zimbabwe is proof that this is not always the case.

The electronic form of fiat digits occupies no physical space whatsoever. Think about this. And even the paper form can explode in face value and continue holding only the same amount of space. So as a medium of exchange, it does not really matter the value of each individual digit. I can do a good day's work for you and you may pay me $100 or $1,000,000,000, depending on the value of each digit. The value of the digit doesn't matter. The currency still functions fine as a medium of exchange."

JR said...

Focal Point Gold

""Money's most vital function in our modern world is lubricating commerce, or more specifically, keeping the essential supply lines flowing – supply lines that bring goods and services to where they are needed. Without it we would be reduced to a barter economy, eternally facing the intractable "double coincidence of wants." This is the problem whereby you must coincidentally find someone that not only wants what you have to trade, but also, coincidentally, has what you want in return. And in the modern world of near-infinite division of labor, this would be a disaster. [2]

So we need money, and lots of it. In fact, we need money in unrestricted amounts! (I'll bet you are surprised to see me write this!) Yes, I said it, we need unrestricted money in order to fulfill this most vital function in our modern society – lubrication! But here's the catch: we need the right money in order to perform this seemingly impossible task. Let me try to explain.

Money is debt, by its very nature, whether it is gold, paper, sea shells, tally sticks or lines drawn in the sand. (Another shocking statement?) Yes, even gold used as money represents debt. More on this in a moment.

For this reason, the money used as a store of value must be something completely separate and different from the medium of exchange. It must be so, so that the store of value unit can expand in value while the medium of exchange unit expands in quantity and/or velocity. You may be starting to encounter my thrust. Expand… and expand. Unrestricted by artificial constraints.""

JR said...

Discussion of Mish's criticism of FOFOA's statement about needing a medium of exchange in unrestricted amounts (that is also separated from the store of value, such as with a floating, multilateral, reference point gold) from Windmills, Paper Tigers, Straw Men and Fallacious Fallacies:

"FOFOA Fallacy #1: "So we need money, and lots of it. In fact, we need money in unrestricted amounts!"

Mish says, "No we don’t." Then he quotes Murray Rothbard and sums it up with, "The key point above is that an increase in money supply confers no overall economic benefit. Over time, money simply buys less and less."

"Tolbiny" offers the following excellent rebuttal:

Imagine an economy with a single dollar bill as all the currency. Could this dollar act as money and "lubricate" the economy? The answer is clearly no. Only one person could hold that dollar at any one time- there is a basic minimum amount of money that is needed for something to even function as money. Take the quote that Mish uses from Rothbard and compare it to FOFOAs quote.

Rothbard Quote:
Like all commodities, it has an existing stock, it faces demands by people to buy and hold it. Like all commodities, its “price” in terms of other goods is determined by the interaction of its total supply, or stock, and the total demand by people to buy and hold it. People “buy” money by selling their goods and services for it, just as they “sell” money when they buy goods and services.

FOFOA Quote:
"So we need money, and lots of it. In fact, we need money in unrestricted amounts!"

There is no contradiction between the two. Mish is interpreting FOFOA as saying that we need money in UNLIMITED amounts, but FOFOA clearly says we need it in UNRESTRICTED amounts. The difference here is clear- for FOFOA the money supply needs to be able to react to the demand on money freely. The changing of a money supply (be it in volume or velocity) is important for the efficiency of an economy. This does not mean that expanding or contracting causes more economic growth, but that it allows for economic growth."


In my post I addressed "two simple, but seemingly, apparently impossible-to-comprehend concepts." The first was the splitting of the concept of "money" into separate units for separate roles. And in the medium of exchange role, I did use the term "unrestricted." But I also clarified it in this way: "Unrestricted by artificial constraints." A fixed, unilateral gold standard is an artificial constraint. A floating multilateral "gold standard" is a natural, free market constraint that allows for currency flexibility while, at the same time, exposing the exchange value (in gold) of a currency to the judgment of the marketplace."

ozmium said...

Hello: I emailed Martin Armstrong and inquired if he had heard of Freegold and "Another". To my surprise, he replied (copy/paste quote): Gold is a great hedge against government. But it is not money.
It cannot practiclly serve as currency,
When it was monet, it was still a fiat becuase government
said this is what it is worth.
It is better to be indepenent store of value. Make it money
and we have problems with the politicians (end quote). Obviously, he has no idea of Freegold. Perhaps we should educate him?? (Might get him to use that spell checker too) Regards

J said...

In an interview with IMF advisor Robert Shapiro, the bailout expert has pretty much said what, once again, is on everyone's mind: "If they can not address [the financial crisis] in a credible way I believe within perhaps 2 to 3 weeks we will have a meltdown in sovereign debt which will produce a meltdown across the European banking system. We are not just talking about a relatively small Belgian bank, we are talking about the largest banks in the world, the largest banks in Germany, the largest banks in France, that will spread to the United Kingdom, it will spread everywhere because the global financial system is so interconnected. All those banks are counterparties to every significant bank in the United States, and in Britain, and in Japan, and around the world. This would be a crisis that would be in my view more serious than the crisis in 2008.... What we don't know the state of credit default swaps held by banks against sovereign debt and against European banks, nor do we know the state of CDS held by British banks, nor are we certain of how certain the exposure of British banks is to the Ireland sovereign debt problems."

http://www.zerohedge.com/news/bbc-does-it-again-absence-credible-plan-we-will-have-global-financial-meltdown-two-three-weeks-

holdinmyown said...

Thank you Borjesson for your initial question. And THANK YOU J.R. for the compilation of materieal that answers this important question! Thank you, thank you, thankyou thankyouthankyouthakyuthkuthks!!!!

This series of posts was as enlightening (if not more so) than any one of FOFOA's posts. (No offense meant FOFOA ... after all, most of what J.R. quoted were either your words or those of Another, FOA or Mises).

Wow! I have to bookmark this page for future reference anytime that someone tells me that the Euro is doomed to fail (where they usually add... UNLESS Europe combines into a political union with a separate Treasury ... What a bunch of crap!)

Borjesson (and MF) I hope that you were paying attention to all of JR's quotes. You will find your answers to all questions about the future of the Euro in these words. The simple answer is that the Euro was made for spending and lending ... not for saving.

A while back, Edwardo posted a link to an economist who was predicting that Germany may decide to leave the Eurozone. I thought about this quite a while and decided that it was impossible! WHY? Because if they did so Germany would need to reintroduce the DM for the purpose of spending and lending (transactional medium) while turning to gold as a medium for intermedieate and lont-term savings. But if they did this they would immidiately destroy their economy as their spending/lending medium (the DM) would immediately be bid up by the rest of the world as a safe haven for savings (much as the CHF was bid up recently from the low US$0.80 to over US$1.30 before they were forced to peg to the Euro). Reverting to the DM would kill the German economy. Then I thought ... why would they do that when what they really need is a higher level money (a "hard money") for saving long and intermediate-term? You see, the Euro already serves very well as a means of exchange and can also be relied upon for short-term savings (to buy that jacket or watch that you wanted). But can it really be trusted for those longer term needs such as saving for the down payment on a house, or for your children's/granchildren's education, or your retirement, or as an estate to leave to your heirs? You see? FOFOA/FOA/Another are all bang on! We all need two forms of money. One for spending/lending and one for saving. The current dispute within the Eurozone is just a sideshow. It is a political dispute between Germany (who wants a hard currency for saving but really wants a soft currency for trading) and Greece (who already has a hard currency for saving [either the Euro or gold] but wants a soft currency for spending and borrowing). This will ultimately get resolved as all political disputes do ... one way or another. (Hopefully cooler heads prevail and it does not come to violence.) But the crux of the matter is that the Euro already serves the purpose of a transactional medium. Why re-invent that wheel? The Euro is well designed to survive that role (transactional medium) since it has been severed from both the state (whose leaders are simply seeking personal gain). And gold is perfectly designed (evolved?) for saving (a medium for the storage of wealth long-term).

The Euro will see a number of crises in its lifetime, but as a purely tranactional medium it can expand or contract easily to meet those needs as the economy expands or contracts. Will there be inflation in the future of the Euro? Of course there will be! Will there be deflation in the future of the Euro? Of course there will be! Does it matter if your lon-term savings are held in gold? NO! Does it matter if that jacket that you wanted ends up costing you a bit more (or less)? No, I don't think so. You see it is all about risk/return. The further out in the future that you are planning for, the greater the risk that you will be wrong. So save in gold and spend (and lend) in fiat currency. Don't worry about the current politics. Its all a sideshow.

J said...

Gary,
"I think plenty of countries will have very little gold, I saw a table on here somewhere, from the WGC or maybe the BIS."

I think this is what you were referring to

LBMA PM Conference 2011 Keynote Speech

Page 4/8

holdinmyown said...

In the second last paragraph of the above comment, second last sentence, I meant to say: "The Euro is well designed to survive that role (transactional medium) since it has been severed from both the state (whose leaders are simply seeking personal gain) as well as being severed from gold (the ultimate reserve or savings medium}."

Blondie said...

re: gold “backing” currencies in a Freegold system, discussed earlier in this thread.

CB gold reserves are for the management of the currency; this is really a CBs only mandate, good stewardship of the currency.

CB gold reserves do not “back” the currency, although the CB in question may use some of their gold (provided they have some) to purchase their currency from the market, lessening the quantity of currency in circulation and thus “strengthening” their currency. In doing this they are injecting the value from the gold into the currency.

A CB may also do the opposite and print currency (increase the quantity) and use this currency to buy gold from the market. In this way the CB weakens their “overvalued” currency, by extracting the value they regard as excess to requirements and storing it in their newly acquired gold.

Any currency for which the market is willing to exchange gold for is “backed” by gold... by the market’s gold, not the CB’s. The gold a currency is exchangeable for is the gold that "backs" that currency. Any currency should find gold backing at some level, unless the market judges it to have no value at all.

Any currency is only ever backed by the goods and services (value) it is exchangeable for, and in a Freegold system gold is the proxy for all of these, the proxy for value, thus when one knows the current exchange rate of any currency for gold the relative values of all else becomes available.

A CB can use its gold to keep these relative values stable, this stability making their currency more reliable and therefore useful, increasing usage demand for the currency from the market. The market is thus requiring an expansion of currency volume, to cater for increased usage, and the CB issuing such a stable and in demand currency accrues gold reserves as a result.

Ultimately, it is the market driving this process, and the responsible CB is merely responding to the market’s prompting. This is a feedback loop. A good one. There are a number of very positive side effects... I would be interested to see how many of these effects other commenters can think of? Are there any negative ones?

Blondie said...

ozmium,

Martin Armstrong said:

”Gold is a great hedge against government.”

Agree.

” But it is not money.”

Agree.

”It cannot practiclly serve as currency,”

Agree.

”When it was monet, it was still a fiat becuase government
said this is what it is worth.”


Agree.

”It is better to be indepenent store of value.”

Agree.

”Make it money and we have problems with the politicians.”

Agree.

ozmium said:

”Obviously, he has no idea of Freegold.“

Disagree. Martin Armstrong has just given you a rudimentary synopsis of Freegold.

mortymer said...

First a bit intro about Christian Noyer:
http://anotherfreegoldblog.blogspot.com/2011/10/chhn-christian-noyer.html

and now his latest:

http://www.banque-france.fr/gb/instit/telechar/discours/2011/Speech-Christian-Noyer-tokyo-3-october-2011.pdf

from which I report this part to get you interested:

"...Will our virtue be rewarded at the end? I believe so and, to explain why, I need to take a longer-term perspective. In the next decade, the world will be divided into two: on the one hand, advanced economies, with high absorption capacity, low savings and high debt with ratios between 85% and 100%; and, on the other, emerging economies, with high savings, low debt (around 30% GDP on average) and less absorption capacity. Our common prosperity will therefore depend on our ability to create stable channels and mechanisms of financial intermediation between those two parts of the world. That, in turn, will crucially depend on the existence of assets that can be considered safe stores of value. As I have said from the start, public debt may not be able to play that role to the same extent as before. The ultimate safe asset, therefore, will be the currency itself. Markets and lenders will trust those currencies that, whatever the circumstances, are managed with one overriding priority: preserving price stability and the intrinsic value of the currency unit. On this fundamental basis, we can look at the future of the euro with strong and realistic optimism. I see the recent decision by the Swiss central bank to peg the CHF to the euro as a confirmation of this statement..."

mortymer said...

Fun,... what oner can find in the BdF pages:

http://www.banque-france.fr/gb/statistiques/taux/or.htm

Edwardo said...

If one wants to go further down the road to settling the debate about whether Mr. Armstrong fully understands Freegold one had better have a discussion with him on what he believes is the significance of the existence of the fractional paper gold system.

Personally, nothing I have read by Armstrong indicates to me that he fully grasps Freegold, if he did he would not frame so much of his conjecture on gold within the confines of (his own brand of) technical analysis. He would drop that approach as being of little or no value.

Blondie said...

I'm not interested in debating what Armstrong does or does not understand, merely observing that his comments on gold are remarkably congruent with Freegold.

Blondie said...

MF said:
"... if all currencies will be valued in real time by gold, would there be a need for a one oil currency?"

IMO, longer term, as long as value to be kept by oil as stock rather than utilized as flow can be exchanged for gold, I cannot see why any currency that is exchangeable for gold would not do, but short-term there may be better currencies than others, and it may even take CB involvement to facilitate this.

Blondie said...

When I said:
"Martin Armstrong has just given you a rudimentary synopsis of Freegold."

I did not mean to imply that he intended to do so, or that he necessarily sees the comments in the context in which we see them (particularly when published here). As you say Edwardo, he likely views his "conjecture on gold within the confines of (his own brand of) technical analysis."

But to debate this would be to enter into hopeless conjecture ourselves. I take it he did not directly indicate knowledge of Freegold or ANOTHER, ozmium?

Edwardo said...

In general, Blondie, I agree about the fruitlessness of debating the position of Martin Armstrong.

The article at the link below posits that Operation Twist is for the benefit of the holders of the largest quantity of long dated Treasuries. That would be the Chinese. I choose to think of the latest Fed maneuver as one that puts the good ship lollipop that much closer to the hyper-inflation event horizon.

http://www.321gold.com/editorials/benson/benson100511.html

matrixsentry said...

Thanks Mortymer for the Noyer quote, it is quite revealing when looking through the Freegold lens. I am now officially addicted to the comments section of FOFOA's posts. Big thanks to JR and Blondie as well for expanding the discussion.

JoyOfLearning said...

@Edwardo
Wow! thanks a lot for that link. I kept reading on various econ sites trying to figure out a sense, any sense at all for operation Twist, but none made a lot of sense to me... until that article. I can totally see future historians explaining it as a large scale bribe to China (& EU?) investors so they won't be too pissed for sticking with the $ / not to skip boat (yet?). Aaamazing how such huge things can happen in total plain sight and yet be so hard to figure out even when you're trying. I can even imagine a backroom meeting with threats of leaving and the promise of the bribe to smooth things over... (of course it's a conspiratorial stretch on my part, but it's interesting to consider)

DP said...

FOFOA: another key definitional aspect of CB reserves is that they are "readily available to and controlled by monetary authorities for direct financing of payments imbalances, for indirectly regulating the magnitude of such imbalances through intervention in exchange markets to affect the currency exchange rate, and/or for other purposes… the concept of reserve assets should encompass those assets over which authorities exercise direct and effective control."

... like those $42.22 gold certificates at the Fed ...

holdinmyown said...

Hello DP

I assume that you were being sarcastic about those gold certificates? My understanding is that they are non-redemable, non-tradable certificates and therefore the Fed deos not exercise direct and effective control over these.

Do they serve merely as a bookeeping balancing account or would this be the weight of gold (at current market rates for the PoG) that the BIS could claim from the Fed in the event of default?

J said...

Oct. 7 (Bloomberg) -- Chow Sang Sang Holdings International Ltd., Hong Kong’s biggest listed jewelry maker and retailer, said sales during China’s Golden Week holidays surged more than 50 percent from a year earlier because of a drop in gold prices.

Hong Kong Jeweler Chow Sang Sang Boosts Golden Week Sales 50%

Motley Fool said...

Hey Blondie

I can think of a few positive ones. Unsure about the negative though, I would appreciate it if you could highlight those.

"IMO, longer term, as long as value to be kept by oil as stock rather than utilized as flow can be exchanged for gold, I cannot see why any currency that is exchangeable for gold would not do, but short-term there may be better currencies than others, and it may even take CB involvement to facilitate this."

Agreed.

The issue I have at present is this. Greece for example is a completely different culture to Germany. This is nicely highlighted by that link, I highly recommend, by Börjesson.

The current struggle to show the appearance of a unified front between all these vastly different countries is putting tremendous strain on the individual countries.

I'm unsure if that pressure can be contained until the dollar goes bust.

Even if it can, after Freegold these cultural differences would remain, and I would still be in favour of the euro breaking up and each country pursuing their own Freegold.

In fact, personally I would be in favour of even smaller breakups. In my country for example there are definite differences between each province. I'm sure the same can be said for every state in the USA.

Even on a smaller level, the mentality of people differ in cities of the provinces, and in the suburbs of the cities.

But now this is just the idealist in me speaking. Mustn't forget the debtors.

Peace

TF

DP said...

@hmo,

From It's the Flow, Stupid:

You see, after 1980, "oil" started trusting paper gold again, just like it did in the 1950's, as long as some of it could be exchanged for physical. But having been burned once, in 1971, they weren't about to be burned again. And what the euro CB's figured out was all that mattered to the producer/savers of the world was the guaranteed FLOW of physical gold, NOT the guaranteed price or weight/mass. (And this is why we pull it out of the ground: so it can FLOW!)

This is what the euro architecture guarantees in the case of a dollar (paper gold market) failure: that physical gold will flow… uninhibited! It does this through its "severed link" association with its own official monetary gold reserves, allowing them to float against the currency and publicly proclaiming this policy every three months in its quarterly "marked to market" consolidated statement. This is something the Fed simply cannot do because the Fed's "gold stocks" are irredeemable paper gold Treasury certificates marked at $42.22 per ounce. The US Treasury owns all the gold. The Fed owns paper (and electronic book entry, post 1935) certificates that are irredeemable to the Fed, so how can it possibly mark them to market?

Notice the Fed still quotes its "(paper) gold stock" (or "gold certificate account" as it is listed on the consolidated statement) on its own balance sheet as 11,041. That is in millions of dollars, so 11,041 is really $11,041,000,000 divided by $42.22 per ounce which comes out to 261,511,132 ounces which, surprise surprise, comes out to 8133.5 tonnes, the same amount voluntarily reported to the WGC and relayed to Wikipedia.


Have a great weekend! %<];o)8

Gary said...

Great to read that link of Christian Noyer's speech, thanks mortymer.

Apart from the potential windfall gain to those of us holding physical, isn't it reassuring that people like Noyer are around, to help see the world become a better place after the dollar's collapse.

Such a shame that the American dream is ending the way it is, the original escapees from England would turn in their graves if they could see the bankers destroying a once great country. So sad. Hopefully from the ashes something better can emerge.

sean said...

re: Der Spiegel, every second article in there seems to be anti-Euro or "anti-bailout", which I suspect might have more to do with Germany's internal politics than anything else.

Chacemanhattan said...

Is it possible that the Fed is prepared for the eventual collapse of the dollar and is prepared to capitalize the U.S. economy with Euros already? Is it even necessary to slowly build a reserve in Euros or can an electronic capitalization occur? Can/Will the U.S. adopt the Euro and abandon the Dollar? If so will they have to buy in with gold? As you can tell I'm a newb, so bear with me as I attempt to shake the cobwebs from my brain.

holdinmyown said...

@DP

"Notice the Fed still quotes its "(paper) gold stock" (or "gold certificate account" as it is listed on the consolidated statement) on its own balance sheet as 11,041. That is in millions of dollars, so 11,041 is really $11,041,000,000 divided by $42.22 per ounce which comes out to 261,511,132 ounces which, surprise surprise, comes out to 8133.5 tonnes, the same amount voluntarily reported to the WGC and relayed to Wikipedia."

Understood. But let me rephrase my question in order to clarify a bit. As you point out, the $11.041 billion on the Fed's balance sheet agrees with the total amount of gold that the Treasury claims to hold. However, the Fed is not showing 8133.5 tonnes of gold on its balance sheet. It is showing US$11.041 billion. So is this not the US$ value of gold that it is telling the world (and the BIS) that "backs" (apologies to Blondie) the US$? At today's rate that would mean that ($11.041 billion divided by $1650 = 6.691515 million oz or just over 208 tonnes). So if the Fed was to default on its obligations today, it would have to obtain 208t of gold from the Treasury in exchange for its certificates and this is the amount of gold that the BIS would claim. However this is all just an interesting excercise in arithmetic since we all know that the Fed will never default (it will simply create additional FRN as needed to avoid default) which in turn will ultimately reduce the number of ounses of gold pledged as collateral to zero as the price of gold in US$ goes to infinity. Looked at it in this way, the certificates are not merely a bookeeping balancing mechanism. They actually mean something but only in the event of a default.

HMO

Jason said...

hi Costata,hope all is well.
Can i have your thoughts on Where do you think Gold is heading now that we are in a deflationary spiral? And is it wise to sell now in order to buy it cheaper later when the storm eases?
regards

JR said...

Hi Chacemanhattan,

The dollar will ultimately have to defend itself (its new, devalued valuation) with gold. There will still be a transactional dollar in use, most likely. But it will be devalued. The US is unlikely to use euros for domestic transactions.

FOFOA comments from forum 201

"The world would not resist the US revaluing its gold. There is no reason to. FOA said the US would eventually mobilize its gold at a much higher price. That means revalued, at the floating Freegold price. The US will ultimately have to make a market for its own dollars by buying them up with physical Freegold from Fort Knox.

When the trade deficit is no longer possible, the US will have to import all that inflation it has been exporting if it wants to keep oil flowing in. Real goods going out (gold) and less real goods plus some inflation coming back in. That's the reverse of today's trade deficit.

By the way, that's post-hyperinflation I'm talking about. They may well lop 12 zeros off the dollar before making a market for it. Exchanging one trillion old dollars for one new dollar. But gold will still be at Freegold prices (e.g. 55,000 new dollars/ounce) and they will have to make a market for that new dollar or it will continue to plunge like the old one.

That's the choice. You can collapse your currency against the non-economic good gold, killing the paper gold market and driving up the price of physical in advance of hyperinflation by buying it up. This gives you some hope of avoiding the worst of hyperinflation by providing a real outlet for unwanted surplus dollars.

Or you can wait until your currency collapses against economic goods and then you will have to buy back your own currency with your gold, also at Freegold prices. Even if you start a new currency you will still have to make a market for it because your credibility will be shot by that point."


cont.

victorthecleaner said...

The BIS certainly does not have the power to take the US gold, be it at 42$ or at 1650$ or at whatever price - even if the Fed defaulted, whatever that would mean. The only thing the BIS can do is stop performing clearing services on behalf of the US.

*That* is a much more interesting question. Do the US need the BIS in order to handle the payment for some necessary imports? Would, in a crisis situation in which the US economy crashes, perhaps the Canadian oil be sufficient?

The other question is when the US are going to make use of their gold. First, they may already be in the process of doing so, selling some of it in order to manage the dollar price of gold, or perhaps selling calls on it which would allow the BBs a higher leverage. Second, even if that has not happened yet, they will use their gold at some point.

From the present arrangement in which the treasury owns the gold and the Fed just has a book entry, the obvious conclusion is that the gold will not be used to defend the dollar. I agree. There are just too many dollars per ounce or, vice versa, the price would need to be obscenely high.

Using the gold to defend the public debt would be a waste, too, and so I think they will use the gold only once the dollar has gone and the new dollar N$ has been introduced.

This raises the obvious question about the UK. Someone here figured out that the UK gold was transferred from the BoE to the government. Does this mean they have decided that the pound will have to be given up at some point?

Victor

JR said...

cont.

re: "Is it even necessary to slowly build a reserve in Euros or can an electronic capitalization occur?"

Consider Randal Strauss on the benefit of physical reserves over paper reserves from above:

"WITH gold reserves, a central banker in a vibrant national economy can choose to enjoy a strong currency relative to gold, but, importantly, it can still alternatively choose to exercise loose monetary policy (for economic or political reasons) in which its currency is made weak as measured relative to gold. But regardless of choice for the relative strength or weakness of the national currency, the abiding benefit of choosing gold reserves is the superior stability — the systemic strength against procyclicality — that gold offers to the asset side central banking balance sheet.

WITHOUT gold reserves, pursuit of a national currency policy that is (according to their preference) generally strong OR generally weak is made less expedient either way because the health of the central bank’s balance sheet is subordinated to the quality of its foreign paper reserves which are themselves subordinated to the particular monetary policies being pursued by those foreign governments. Generally this structure of foreign paper reserves offers only the option for national monetary weakness built upon other international weaknesses, and worst of all it exposes the national monetary balance sheet to procyclical systemic failure — a domino whose fate is written largely in the hand of its neighbors.

When you understand how it is that it is economically (and therefore politically) undesirable for other major currencies to appreciate against their peer currencies (which is exactly what would happen to any currency replacing the dollar’s reserve status), you will subsequently know why gold shall continue to emerge as the de facto solution to the international reserve question.

And here I emphasize de facto rather than de jure because this has become a global phenomenon driven by a natural evolution (survival and ascent of the fittest) and does not require any additional international treaty or enabling legislation as a prerequisite or for motivation."


Chhers, J.R.

JoyOfLearning said...

I would like to ask a question to all the brilliant minds here, one with which I've been struggling long while reading FOFOA's brilliant articles and the sublime comments by the community: I understand the huge windfall benefits for all those wise enough and in a position to accumulate gold now (and in the past) in the event of a huge revaluation, but my question is what happens to the little ones, or even the ones with no gold after the revaluation, but from the tone of everybody I get the feeling that Freegold isn't just an inevitable event (I love the spirit of observing, as opposed to pushing for that goal!), but also a desirable one. My question is: how will the ordinary people will be able to afford to buy gold after that revaluation? I know that theoretically gold is infinitely divizible into atoms, but other than a mental exercise, in practice I wouldn't be surprised for it to not be sold in bits smaller than say 1g (at least physically, and I think everybody here agrees paper is bad). So, the reason I'm worried is: if that minimum ammount ends up costing the yearly income for a person, how will they ever get it? We lived in blessed times when a saver can have a chance of monthly saving a bit of money and getting some physical, but in the event of a huge revaluation wouldn't that completely change?

I understand that even those who couldn't get gold would still get the benefits of more monetary stability as countries can be judged in relationship to gold... but still! Doesn't that create the absolute need for a new asset that can serve the role that gold is now serving, eg a way for the poor citizen to be able to get an inflation hedge against government printing. Will gold then be something that only governments/CBs and giants will be able to afford? My point is that there must be a price point above which gold is so expensive that ordinary people just can't afford to buy it with monthly savings, possibly even yearly savings, even in the smallest quantity available for physical sale. And if I understand things correctly, everybody here still expects that after Freegold governments will still have paper money, and probably the only way paper money will go is the way it has gone in all history: down. But even if then sometimes paper will also rise in value, there must be people who, given the rich history, will not trust governments to do that and will prefer to get a safe asset. Is it possible that those people will be locked out of gold by it's impossibly high price?

JR said...

Hi JoyOfLearning

"

WhyI know that theoretically gold is infinitely divizible into atoms, but other than a mental exercise, in practice I wouldn't be surprised for it to not be sold in bits smaller than say 1g (at least physically, and I think everybody here agrees paper is bad)."


Why do you think this? I believe you can currently get coins smaller than a gram, like the Liberian @ half gram gold coins.

"So, the reason I'm worried is: if that minimum ammount ends up costing the yearly income for a person, how will they ever get it?"

Sounds like somebody with some gold could make a nice premium by minting it into smaller amounts, no?

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

It's the Flow, Stupid

"It is that the price of gold does not matter to the producer/saver, only the flow of gold matters. I'll say it again. The producer/saver doesn't care about the price of gold, only the flow. To the producer/saver the price doesn't matter because it is a straight currency exchange, like exchanging dollars for euros...

And what the euro CB's figured out was all that mattered to the producer/savers of the world was the guaranteed FLOW of physical gold, NOT the guaranteed price or weight/mass. (And this is why we pull it out of the ground: so it can FLOW!)...

The price of gold today is unstable. Anyone with eyes can see that. Worse, it's rising. Which means the flow of physical gold in the quantities needed (at today's gold price) to lubricate global trade is drying up.

"Gold has always been funny in that way. So many people worldwide think of it as money, it tends to dry up as the price rises."

But the flow of physical gold WILL be reestablished. The world demands it. It doesn't care how high the price goes, only that the flow is guaranteed. Only the $IMFS seems to care about how high the price goes. And, apparently, that is because the $IMFS is the main printer of paper gold. Flow WILL be credibly and sustainably reestablished, which means paper gold WILL be discredited. Flow is sustainably and infinitely guaranteed at a floating, physical-only price. What that price is in today's world is anyone's guess because we haven't had such a market in centuries.


Cheers, J.R.

Motley Fool said...

Hello Joy

Being a simple minded fool, I would like to make a simple observation.

At present you can buy gold to the weight of one grain.

There are 480 grains in one ounce. So if we use a price of $60,000 for freegold in real terms, that means a minimum buying size of $125.

Would that be sufficiently small for the long term savings of a individual who doesn't earn much?

I would like to think yes. You may differ in opinion.

TF

Motley Fool said...

OT :

Here is another 'solution' being proffered. It made me sick to read.

Back to Mesopotamia

TF

J said...

You can always buy gold leaf

"The goal is a thickness of about one ten-thousandth of a millimetre."

I don't see how a small square would cost much even after RPG enters orbit.

mortymer said...

Edwardo:
"The article at the link below posits that Operation Twist is for the benefit of the holders of the largest quantity of long dated Treasuries. That would be the Chinese."

->
Look here:
"...Finally, if the US government cannot safeguard the value its securities, it should compensate China in one way or another. Only then can China and the world be certain that America’s irresponsible attitude – “the dollar is our currency, but your problem” – has become a thing of the past."..."

http://anotherfreegoldblog.blogspot.com/2011/10/yy-chinas-bad-debtor.html

mortymer said...

Btw: the above was published 2010-03-17. (Yu Yongding, currently President of China Society of World Economics, is a former member of the monetary policy committee of the Peoples' Bank of China, and a former Director of the Chinese Academy of Sciences Institute of World Economics and Politics.)

Here is another one:
http://www.project-syndicate.org/commentary/yu10/English

J said...

SYDNEY—Some banks are accepting gold as collateral for loans, and developer Donald Trump will take it as a security deposit in his new skyscraper in Manhattan. Now, a Colorado gold mining company has another idea: make dividend payments in bullion instead of cash.

Jason Reid, president of Gold Resource Corp., whose Colorado Springs, Colo., company is developing projects in southern Mexico, said Gold Resource plans to make the first dividend payments within months.

Miner Gets Physical With Payout

This is why FOA owned some gold shares. I hope it starts a trend.

Max De Niro said...

VTC,

With regard to UK gold:
I thought that the BoE is owned by the UK Govt, as opposed to the Fed being distinctly independent?

The BoE was nationalised in 1946. It was made 'independent' in 1997, but I don't think that means that it isn't owned by the British public.

If this is the case, then I don't think that the status of the gold, be it owned by the BoE or UK Treasury is of any consequence.

As an aside, I think that the UK will adopt the euro at some point.

Max De Niro said...

In his most recent King World News blog post, Jim Rickards calls China the sucker at the poker table.

He says the Arabs have more gold than they are letting on. Why does he not think that the Chinese have more gold than they are letting on?

Only a total moron would not see that blatant incongruity in his argument, so why is he making it?

Rickards' opinions should be treated as highly suspect IMO.

Max De Niro said...

I forgot to add - China has already admitted to owning a considerable amount more than was stated for many years. He didn't mention this.

The guy has very little credibility in my eyes. In fact, he is mainly useful as an indication of what his faction, whoever that may be, wants to push.

Gary said...

Max and VCT,

It would seem to make no difference, as you say the B0E is wholly state-owned.

That said, it still begs the question: why did the BoE transfer all of the gold from its accounts onto the UK Govt's accounts?

I will be writinga FOI (freedom of information request) shortly to the B0E, and the Treasury, to try to find out.

The announcement of further QE here in the UK this week (with the expectation that much more is to come), does make me nervous the pound could go the same way as the dollar. Jeez, why are the BoE and Cameron as stupid as the Fed/Obama...thought they were a bit smarter.

Max De Niro said...

Gary,

The QE is to save the banks.

What would happen to the pound if the banks went down?

Rock. BoE. Hardplace.

Max De Niro said...

Aside from a breaking of the paper gold markets, which is impossible to predict, how long till the debt markets go belly up?

We have the euro situation which can be fixed by some political wrangling, combined with some ECB intervention, which is likely to cause a rally in the markets (and a fall in the euro) once it is done. This will cause a rise in the dollar, making things cheaper for the US consumer (which is the largest part of the US economy). The Fed just keeps interest rates low, so the US banks are OK. They can get away with debasement of their currency much easier.
Continuing deleveraging keeps inflation (prices) in check. Network effect keeps dollar demand high.

What kind of event (aside from a paper gold default) would cause any shift away from this current paradigm?
I can't see something that would prevent the Japanisation road that we are on. ie, I understand the theoretical switch into hyperinflation due to currency credibility collapse, but I just cannot see the actual events that would cause it in real life. I'm not anti-conceptual mentality kind of chap, but I do like to be able to put a perceptual-level example to the concepts in order to test them.

I am struggling to do this at the moment.

Aquilus said...

Max,

I could suggest the tsunami of freshly minted paper from CDS and other derivatives and guarantees that will hit and bounce from country to country and between different financial institutions. Plus the money from bailing out insolvencies in that case.

That money needs to be spent fast by the "winners", as they know that it will give them first mover advantage in the ensuing currency devaluation/loss of confidence.

Max De Niro said...

Aquilus,

You wrote:
"Plus the money from bailing out insolvencies in that case.

That money needs to be spent fast by the "winners", as they know that it will give them first mover advantage in the ensuing currency devaluation/loss of confidence. "

Yes, this is what I thought too. However, I think that this will be a very long time before it becomes an issue of imminent importance for these recipients.

Continuing consumer and corporate deleveraging is likely to keep inflation within "reasonable" limits and therefore this will not be a pressing problem any time soon.

I think that, absent a paper gold catastrophe, this ship won't be going down for a very long time, possibly another decade or so.

For a market that was supposedly cornered back in the 90s, gold seems to have managed to flow to where it needs to go remarkably well. There is no indication that this dynamic is changing. There are developments, such as PAGE, which *may* have an effect, but this is not certain.
The Chinese will no doubt want to get as much physical as they can and are unlikely to cause the physical market to blow up prematurely. Indeed, PAGE could be a very useful tool to ensure that the physical market is controlled and gold continues to flow for a very long time under the current $IMFS.

JR said...

Hi Chacemanhattan,

"Can/Will the U.S. adopt the Euro and abandon the Dollar?"

Here's a little more color on this - FOA responding to ORO's comments from the First Archive of the Gold Trail:

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

" ORO (05/30/00; 22:58:11MT - usagold.com msg#: 31580)
Solomon - 100 fold

----A 10 fold drop in the value of the dollar has occurred in your lifetime.-----

----I grew up (in part) in a country that saw 1000 fold depreciation in the currency within the space of a few years in the 70s and the 80s, and finally reached a better than 10000 fold depreciation. -----

---The currency had some 0s knocked off and was renamed. Then the currency inflated again and again a couple of 0s were knocked off - and the currency renamed.-----------

Hello ORO,

Your background life has helped build a real working perspective about currency inflation dynamics! I wish more Western Gold Bugs could have spent some time in these "real life" countries. Or at least study their currency history. Far too many of them dismiss these awesome figures as a function of said money being in the "third world".

Most people understandably draw a complete blank in trying to see the dollar doing the same. Truly, as the dollar "reserve" function is politically removed, this real inflation will begin. Just as you witnessed, we US citizens will continue to use our dollars no matter how many 0s are added. I use Mexico as a close relation to this event because so many Americans travel there or have close business ties to that country. It's very common to use pesos but dollars are the mainstay. In the next event in our currency experience we will eventually use Euros as the Mexicans use dollars. Hard to accept but easy to prepare for."


The dollar losing reserve currency status and becoming a more local transactional currency while the Euro becomes more prominent in international trade - to use Another's words, "The Euro will not replace gold, it will evolve into a gold transactional currency."

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

FOFOA setting up a FOA quote from Deflation or Hyperinflation? on the the dollar losing reserve currency status, with the dollar being devalued to keep it alive for domestic trade, more like the peso.

"They will print for survival and they will say it was for the survival of America. The dollar will end this thing without reserve currency status, more like the peso. But at least we'll have Freegold!

"In our time and for the first time in the modern US dollar history, the US will embark into a classic hyperinflation for the sake of retaining its own lessened dollar for trade use. As destructive as that might be to players in this financial house, it is better than immediate total economic failure. It will evolve in a form much like the course of any other third world country, if its currency too was suddenly deprived of world reserve status. We will, like people the world over, learn to live with it and live in it. Truly, our dollar and economy will not go away, but its function, use and value will change dramatically.

Thank you
FOA/ your Trail Guide"


Cheers, J.R.

holdinmyown said...

Hello Max DN
Thanks for sharing your thoughts. A possible end to the scenario that you posit is another Lehman event where the banks lose faith in the ability of their counterparties to perform. When this happens the entire banking system (thus credit ... thus money flow ... thus international commerce) seizes up. All the banks believe that they are hedged against such an event because of the derivatives (CDSs) that they have bought as insurance. But we found out in 2008 (when AIG blew up)that the true risk of these derivatives is the total notional value. By some estimates the total value of derivatives in place today exceeds $1 quadrillion. I think that as soon as another major bank fails we will find out how quickly the house of cards can fall.

holdinmyown said...

@Max DN
See here:
http://www.zerohedge.com/news/chart-week-european-fear-and-loathing-hits-record-13-trillion

The banks and shadow banks are already hoarding cash (due to mutual mistrust). This mistrust has been increasing since 2008 as the graph shows. How long until the Fed and the ECB are the only source of liquidity available?

Max De Niro said...

Hey there holdinmyown,

We had the interbank credit freeze that you talk about in 2008. The reason why it was so destructive was due to the lapse in time between the event taking place and the policy response.

Now it is different. The authorities are well aware of the liquidity issues and measures are in place for any institutions who look like they are in trouble.

How would a Lehman event take place now? All counterparties understand that all other counterparties are implicityl fully funded (backed by central banks), so whilst LIBOR may be rising, there won't be the same level of fear of counterparty risk.

We are seeing, and all market participants understand, that major bank runs won't be allowed and will be papered over with more debt or printing.

Even in the very public case of a seemingly inevitable Greek default, markets are still functioning and are not having catasprophic crashes. Sure, they are wobbling, but these wobbles only hasten and legitimise the policy response.

We have then seen that markets, rather than punishing the authorities for their profligate nature, rally and optimism increases. They shrug off the potentially inflationary effects, citing the countervailing forces of massive credit deleveraging as a mitigating factor.

When this is combined with the massaging of government figures, hedonic adjustments etc, then the markets just seem to be able to carry on indefinitely with their head in the sand. This has been happening for a long time now and I don't see that changing.

I will be very interested to see how they do once this latest euro 'crisis' dealt with, which it inevitably will be, even if takes a few more precipitous equity market capitulations to force the policy response.

Please could you explain how the major bank failures that you talk of will be allowed to happen?

Jeff said...

Max,

Rickards is no fool. In that post he goes on to talk about oil's reaction to the nixon shock; that is pure FOFOA. He is well aware of chinese gold buying habits, but Rickards is a bit of an insider. He will never come out and declare freegold or mention FOFOA. He won't go all the way but if you read between the lines, he knows the endgame.

holdinmyown said...

Hey right back to you Max DN

"How would a Lehman event take place now? All counterparties understand that all other counterparties are implicityl fully funded (backed by central banks), so whilst LIBOR may be rising, there won't be the same level of fear of counterparty risk."

This is impossible. You cannot outlaw bank runs. If the derivative market is in fact over $1 quadrillion how is it possible to create this amount of base money when the world GDP is well below $100 billion per year? Well, theoretically you can but the base money becomes worthless.

"Even in the very public case of a seemingly inevitable Greek default, markets are still functioning and are not having catasprophic crashes. Sure, they are wobbling, but these wobbles only hasten and legitimise the policy response."

Just because a severe crisis has been averted to date doesn't mean that it can't happen tomorrow.

"I will be very interested to see how they do once this latest euro 'crisis' dealt with, which it inevitably will be, even if takes a few more precipitous equity market capitulations to force the policy response."

Here is a Euroland perspective on the crisis and possible effects on the Euro (and USD):

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

For what it is worth, I agree with you that the current Japanization of the US (and the ROW) could continue for some time ...perhaps a decade or more as you suggested previously. However I also can envision a complete collapse beginning as early as tomorrow and lasting only several months or quarters before a full reset of the IMFS (no longer $ based) is foist upon us. When will the fuse be lit? I don't believe anyone can predict with any certainty. My personal sense is that I give a 75% probability that it will occur sometime within the next 5 years. (Of course I just pulled that prediction out of my ass so treat it accordingly.)

Max De Niro said...

Jeff,

I accept that it is possible that he does know the endgame that you mention. However, my point was that he was speaking with a forked tongue.

Whether he called China the sucker at the table for good or for ill, he was still not talking straight.

He was attempting to push the endgame for whichever faction he belongs to.

I am not sure that it is clear that he is a member of the "FOFOA" faction.

Max De Niro said...

holdinmyown,

you wrote:
"This is impossible. You cannot outlaw bank runs. If the derivative market is in fact over $1 quadrillion how is it possible to create this amount of base money when the world GDP is well below $100 billion per year? Well, theoretically you can but the base money becomes worthless."

My bad, I'm sorry. I was referring to the kind of institutional bank run that Reggie Middleton talks of.

Sure, there are massive amounts of derivatives out there, but they only become a problem when a bank actually goes down. These derivatives are not on the balance sheet and so are not part of the solvency computation. Otherwise the crash would already have happened.

Banks only need funding to make the visible part of their balance sheet viable. This is easily accomplished through CB repo market transactions, especially if the CB is being ultra-accomodative, as it is in the current scenario.

All banks know this and hence this issue does not take place.

I agree that a classic bank run could cause significant problems, but this would only happen after a full on Lehman event, which can easily be prevented now as I mentioned above.

Max De Niro said...

holdinmyown,

you wrote:
"Just because a severe crisis has been averted to date doesn't mean that it can't happen tomorrow."

I would say that the more crises that happen and are dealt with, the more it is likely that further crises will be dealt with.

I accept that the finale is inevitable, but with each passing crisis being dealt with, the chance of the next one being the finale decreases each time. We have had plenty of major crises, financial, economic and physical within the last few years and the $IMFS has shown itself to be remarkably resilient.

Max De Niro said...
This comment has been removed by the author.
Max De Niro said...

One thing that has crossed my mind is that the European authorities are "playing dumb" and inviting a full on crisis in order to effect a Freegold transition.

I mean, it is so blatantly obvious that, on the face of it (Freegold endgame notwithstanding), the euro (as it exists within the current $IMFS) was destined to fail big time. The lack of political and fiscal union was always going to cause exactly this problem. The Eurocrats would have known this from the very start. Perhaps the individual players within the euro, the French, the Bundesbank, the ECB, planned to wait for this moment to stubbornly refuse to move from their non-negotiable demands and say "well, we ain't budging, a collapse it is then".

If this is the case, then a crash could be imminent. However, that is a conspiracy theory too far for me and far too much of an outlying event to consider taking seriously.

However, in my more brazenly sanguine moments, I do allow myself to wonder.....

holdinmyown said...

@Max DN

"These derivatives are not on the balance sheet and so are not part of the solvency computation. Otherwise the crash would already have happened."

Agreed. But the world market players are perhaps willing to allow this to continue for a short period of time in order to determine whether or not the Fed, ECB, BoE and politicians can in fact succeed and kick that can so far down the road that we just can't see it anymore. Once they (the market) lose confidence in TPTB to do so then they will all want to take measures to preserve their wealth which to date has been largely held in the monetary plane. They will now all want to move into the physical plane by converting that perceived wealth into tangible goods. This will be like someone yelling "FIRE" in a crowded theater. As FOFOA said there will be too many tickets claiming the physical goods.

"Banks only need funding to make the visible part of their balance sheet viable."

For a while, sure. But for how long?

"I agree that a classic bank run could cause significant problems, but this would only happen after a full on Lehman event, which can easily be prevented now as I mentioned above." ...and..."I would say that the more crises that happen and are dealt with, the more it is likely that further crises will be dealt with."

Here's where we disagree Max. I believe the exact opposite is true. The CBs are weakened with every successive crisis. Had the Fed and Treasury solution worked in 2008 we probably wouldn't be having this discussion. Why do you think that the Fed did not implement full-on QE3 already and instead went with a limp OT2? It is because they are feeling the political heat to refrain from printing and to see if the economy can sustain itself at the current levels. This political pressure will only mount with each successive print-fest as it will become obvious to everyone (even the Shoeshine Boy) that this doesn't help, it only makes matters worse in the long-run.

Gary said...

Max, I'm no expert, but I think it all comes down to confidence ebbing away in stages.

Whilst the central banks can implicitly back any big bank, what they can't do is create jobs, create growing corporate profits, or prevent the asset bubbles from bursting.

Bernanke will keep printing (the ECB won't, and gold can't be printed!) and slowly but surely the dollar will decline in value against both.

That'll be what leads to the hyperinflation, not necessarily a bank run.

I've been reading the archives, and the key point I have picked up is that no fiat government has EVER allowed itself to fall into a deflation, they always try to print their way out, til BANG, evetually confidence goes. And it can go in an hour, just like that.

I too think it'll happen within the next 5 to 10 years. All the while gold will be increasing in value, so there's no sweat!

Max De Niro said...

holdinmyown,

In principle, I agree with what you say. You wrote:
"For a while, sure. But for how long?"

This is exactly my point. At some point, as has been well documented here, there is a tipping point and the veil is lifted.
I am simply saying that this point could be a long long way off.

You say the Fed and ECB are weakened with every crisis. Yes, you and I know that, but the markets just seem to lap it up. Being right in principle is totally irrelevant.

Bernanke knows what you said "they are feeling the political heat to refrain from printing and to see if the economy can sustain itself at the current levels." and is playing a masterful game of stringing it out, only firing his bazookaz when needed.

This is the essence of my question. Just what would it take for the market to see what you see?

The market does not see Freegold coming, they only work within the current paradigm, so we have a series of rolling crisis where everyone piles into treasuries, followed by QE, followed by a rally, then rinse and repeat.

I think that this can go on for much longer than many people think.

Jaqship said...

It's the Flow, Stupid
When FOFOA (quoted above by JR) says:

"But the flow of physical gold WILL be reestablished. The world demands it. It doesn't care how high the price goes, only that the flow is guaranteed. Only the $IMFS seems to care about how high the price goes. And, apparently, that is because the $IMFS is the main printer of paper gold. Flow WILL be credibly and sustainably reestablished, which means paper gold WILL be discredited. Flow is sustainably and infinitely guaranteed at a floating, physical-only price. What that price is in today's world is anyone's guess because we haven't had such a market in CENTURIES."

This is the first I've heard of "centuries". His recent post "Once upon a time" traced paper gold excess to 1922. Please explain the prior history.

Max De Niro said...

Jaqship,

He is referring to the fact the gold has been encumbered by paper, or by fractional lending or simply by being designated a price (by virtue of being legal tender), rather than simply being allowed to float, unencumbered as a pure wealth reserve asset - its ultimate function. It has indeed been centuries since this ultimate function was allowed to exist.

holdinmyown said...

@Max

"One thing that has crossed my mind is that the European authorities are "playing dumb" and inviting a full on crisis in order to effect a Freegold transition."

I don't know about playing dumb but according to Another/FOA/FOFOA it was always realized by the designers of the Euro that the $IMFS would fail. They wanted to create an alternative to the dollar that would survive the dollar's collapse and the loss of its reserve status. They did not intend to catalize the fall of the USD, simply to offer an alternative currency when the inevitable happened. (I am sure that J.R could dig out the relevant quotes if he cares to.)

"I mean, it is so blatantly obvious that, on the face of it (Freegold endgame notwithstanding), the euro (as it exists within the current $IMFS) was destined to fail big time."

No it was not designed to fail as a transactional medium. It was meant to thrive in this role.

"The lack of political and fiscal union was always going to cause exactly this problem. The Eurocrats would have known this from the very start. Perhaps the individual players within the euro, the French, the Bundesbank, the ECB, planned to wait for this moment to stubbornly refuse to move from their non-negotiable demands and say "well, we ain't budging, a collapse it is then"."

No. They had no intension of reaching this point. In fact the ECB was against the entry of Greece into the EU. They always knew that a financial crisis would shake the foundations but the political climate at the time would not allow for a stronger union (which is slowly erroding today according to the LEAP link that I posted above). I believe that the Euro can survive a default by Greece (whether or not Greece leaves the EU) but if contagion spreads too far to other countries then this would cause a global banking crisis that in my mind would precipitate FG/RPG.

"If this is the case, then a crash could be imminent. However, that is a conspiracy theory too far for me and far too much of an outlying event to consider taking seriously."

It is not a conspiracy but it can (and probably will) occur naturally without any help.

mr pinnion said...

http://www.youtube.com/watch?v=RnW8dmJ0Fl4

Max De Niro said...

holdinmyown,

When I wrote "(Freegold endgame notwithstanding), the euro (as it exists within the current $IMFS)" I meant precisely what you wrote about the euro surviving as a transactional medium.

The euro area, operating within the $IMFS was always going to come upon the crisis that we are having. This could have been avoided by creating eurobonds at the start. This would have at least extended the lifetime of the $IMFS. It would, of course, have been politically entirely impossible back in 1999. This can still act as a perfect excuse for not doing it now too and will lead to the only viable solution of revaluing gold, but only once all other possibilities have been exhausted.

If the euro countries could lay aside their "non-negotiable" positions, then this crisis could easily be solved - by a combo of printing money and fiscal transfers. They can bring on a final crisis by pretending to be hard headed, stubborn and stupid, but the muddling through phase in the middle can go on for a long time.

Jaqship said...

Max:

Point taken. It would be gripping to read a post by FOFOA on the history of (the start of) these centuries during which gold was encumbered in the ways you list.

My impression fron "Once upon a time" and other posts is that gold did flow quite well enough before c. 1922. Certainly fekete argues such.

Jaqship said...

I meant Antal Fekete.

Max De Niro said...

Jaqship,

Perhaps it did flow 'well enough', but the problems of the 70s and the problems we have now are a direct problem of it only flowing 'well enough'. Back before 1922, the system would have been more stable, gold would have flowed better and performed its balancing and equilibriating functions that may have avoided many of the terrible social events that we have seen since then.

Max De Niro said...

Jaqship,

This is an evolutionary process. Simply introducing a pure fiat with a global floating gold welath reserve back in 1922 would never have happened.

Motley Fool said...

Hi Jaqship

I'm a fan of Fekete myself. He does however have a blind spot, despite his brilliant theoretical work, and deductive scholarship.

This article by FOFOA should highlight that flaw, assuming you understand Fekete's work well enough to hold it as a conceptual whole.

The Debtors and the Savers

TF

Jaqship said...

Max

OK. But FOFOA's comment about centuries was in context of wondering about the unencumbered price; heretofore it had seemed that he viewed the pre-1922 price as reasonably reflecting market conditions.
Did the pre-1922 gold standard suppress the price?

Max De Niro said...

Jaqship,

Yes, pre-1922 the price of a dollar was set at a certain amount of gold, hence suppressing the market from valuing gold at a floating level and removing this all-important balancing and equilibriating function.

Jaqship said...

Hi Motley (Btw, I enjoy your site!)

I may or may not understand Fekete's work well enough; I'd appreciate any (brief) hints as to which parts I should brush up on, to contrast with the FOFOA post to which you link.

Jaqship said...

Max

It would be cool to read somewhere about how that suppression worked, e.g. how an increased flow would have brought a higher price.

Max De Niro said...

Jaqship,

You don't have to go far to understand what you want, you are already here.

I recommend reading all of FOFOA's archives, more than once.

Happy reading.

Motley Fool said...

Hi Jaqship

Thanks.

" how an increased flow would have brought a higher price."

You mean decreased.

Perhaps our local savant JR will be so kind as to help. I've spent the last 10 mins on google trying, but cannot get it to reveal relevant FOFOA posts to me.

I also don't see the point in restating it, since FOFOA does a very good job of explaining it... somewhere. :P

As regards Fekete vs FOFOA, I meant if you could hold the holistic whole of the RBD vs FreeGold in your mind to compare and contrast, then this article will show the flaw in Fekete's thinking, overall.

It simplest terms, it is : ignoring the human factor.

I cannot simply say brush up on this or that; one must compare complete ideologies. :P

To me Fekete thesis shows the history on money in exacting detail, while FOFOA's thesis shows the future. :)

Peace

TF

Motley Fool said...

Jaqship

The following FOFOA posts seem to be relevant ( from my very brief scanning of google synopsis) :

http://fofoa.blogspot.com/2011/03/via-email.html

http://fofoa.blogspot.com/2010/09/shoeshine-boy.html

http://fofoa.blogspot.com/2010/12/value-of-gold.html

http://fofoa.blogspot.com/2011/02/reply-to-bron.html

http://fofoa.blogspot.com/2009/12/gold-ultimate-wealth-reserve.html

http://fofoa.blogspot.com/2011/01/freegold-foundations.html

I'm fairly certain that in one of these(or more), is that explanation I'm thinking about. :P

TF

Gary said...

Just reading Fofoa from the very beginning....

'When will we get “there”? In my view it could be as soon as a year from now or as long as four years from now.'

This first post was in August 2008.

No one knows of course. I see one more grand attempt to QE the collapse back upwards, and a final collapse in 2013 or 2014.

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

Motley

Thanx for the links.

"You mean decreased." No, I construe the FOFOA para I quoted earlier to imply that flow was suppressed and, with the right approach, would have been increased, but that, in the coming Freegold, "Flow is sustainably and infinitely guaranteed at a floating, physical-only price."

Motley Fool said...

Hi Jaqship

It's not flow that is suppressed, it's price.

In fact TPTB do everything they can to ensure flow, whilst suppressing price.

TF

matrixsentry said...

There was some question as to where Martin Armstrong stands regarding gold, and by extension Freegold. I agree with Blondie that Martin gave a rudimentary synopsis of Freegold in his email reply. Also there is this from his latest post that strongly suggests he sees the proper and only sustainable use for gold, whether he calls it Freegold or not. He even goes so far as to say gold should be "freed." From his Occupy Wall Street paper:

"I still get emails of people who will just not stop with the gold standard stuff. They just don’t get it. BEEN THERE – DONE THAT! We had a gold standard and they still printed more dollars than there was gold at the “standard” fixed rate. It is NOT what is MONEY, but who is in charge of the system. We need POLITICAL REFORM, not some gold standard. Those who keep yelling “fiat” think money is a store of value. It NEVER has been. Gold should be free so you can buy it as a hedge. Why would you want to hand it back to government? Additionally, these ideas that somehow unless money is 100% backed it is not real is nonsense. To create a system they purport you have to eliminate credit, borrowing, and banking. If you have a $20 gold piece and deposit it in a bank and I borrow $20 in gold, we both have accounts showing $20 but there is just one coin. ALL credit leverages the money supply creating a “fiat” system constructively. To create a world where money is an IOU on a one-for-one-basis, there cannot be ANY credit whatsoever. Gold is a hedge. Leave it alone. We don’t need government getting their dirty hands on it. Hello! What’s the problem!

M said...

"...Asian contagion crisis wherein it was shown how quickly and easily a nation could be stressed by its liabilities denominated in foreign currency."

As far as I know, a capital account surplus, whether in Asia in the 90's or the USA in the 2000's comes in the front door of the central bank denominated in a foreign currency and goes out the back door in the local currency. So the US's current account deficits are just as denominated in foreign currency as the SE Asian where.

Because the bread and butter liabilities of these Asian nations where denominated in their currencies. That is why, the capital flight out of Asian debt put depreciating pressure on their currencies.

I actually just made a post about this before I read RPG update.
http://freegoldobserver.blogspot.com/
I made the blog just for fun and to hone my understanding.

costata said...

Where Are We At?

Part 1/2

Hi Max DN, HMO et al,

I read your interesting exchange of comments about banks, QE, timing etcetera. It occurred to me that it might help to clarify our thinking if we attempted to look at what has been achieved since the Bear Sterns and Lehman failures. Perhaps if we can understand the current state of the “Chess board” we might be able to understand the moves that are available to the players.

Let’s forget the precise sequencing for the moment. I think we can learn more from the effect in toto of these measures.

The first phase of this GFC was met with a (partly) Japanese style response to a crisis in the banking system – repairing balance sheets on a strictly nominal basis. The US banks were provided with reserves through the expansion of the Federal Reserve balance sheet (swapping toxic assets at face value for promises to provide FRN).

So tick step 1 in the book “Bank Bailouts for Dummies” that I imagine Bernanke clutches to his chest. Now…..

1. The banks are fractionally reserved (again).

(Note: these FRNs are held as a book entry by the Fed and they pay interest on them to prevent that “cash” flooding into the economy – sterilization – and thereby supercharging inflation. That’s ordinary monetary inflation BTW not hyper-inflation.)

Then, or simultaneously, to address the freeze in inter-bank lending the CBs put in place currency swaps and liquidity lines (repos, unlimited credit lines etc) for TBTF banks of the respective CBs. So instead of liquidity flowing between commercial banks it flows CB to commercial bank and CB to CB. Tick step 2 in Bailouts for Dummies.

2. Respond to an inter-bank credit crunch (a liquidity crisis) with liquidity.

Now the central theme of all bank bailouts in the modern era is to create conditions where banks can “trade out’. There are a few ways that you can do this but let’s focus on one for now.

3. Drop interest rates to expand the banks’ interest margins (screwing the savers and variable rate borrowers – look at the spread on credit cards for example.)

Then they adopted the Japanese zombie bank ruse. Let your banks mark their assets to myth rather than market.

4. Mark to myth accounting for assets.

Continued/

costata said...

/Continued

Part 2/2

Next inject capital into the banks. This was done directly and indirectly through a host of measures. Propping up their stock and debt instruments allowing them to raise capital. Government guarantees and direct investments (AKA partial or full nationalizations). Intervening in the markets for various asset classes to keep prices and/or cash flow artificially high. Entrenching cartels (FDIC) and backdoor cash injections (AIG etc) help the cause as well.

5. Capital injections (retained “earnings” etc).

As the saying goes “The Lord helps those who help themselves”. So the banks took increasing advantage of the regulatory capture they had achieved to expand the number of markets they could rig for guaranteed profits. Aided by the usual suspects - the CFTC, SEC and so on. This is another way to help them to “trade out”. Look at how many days in each quarter the TBTF banks have zero trading losses and bumper profits. Hence HFT, commodity market rigging etc.

6. Allow the banks to rig markets and produce guaranteed profits.

As a result of these measures the banks balance sheets should be OK on a nominal basis. Liquidity has been restored to the international trading system. (That’s the main game BTW not the inter-bank market per se.) If this banking system crisis was similar to previous crises then the banks should have been able to “trade out” or at least limp along like the zombie Japanese banks for a long time.

Unfortunately this crisis is not like previous banking crises. There are other dimensions to this crisis - currency, sovereign debt, failure of the rule of law and market failure through regulatory capture and political corruption.

Also for the first time in the modern era the bulk of the banking system operates outside the regulated sphere in the OTC and shadow banking operations of the TBTF banks. Last, but by no means least, there is a brand new architecture for a currency in the game – the Euro.

If you factor these other dimensions into the “banking system” crisis a clearer picture may emerge of where we are headed and how soon simple arithmetic might get us there if government policy maintains its current trajectory.

M said...

@ costata

"6. Allow the banks to rig markets and produce guaranteed profits."

Operation twist kinda threw a wrench into that. They borrow short and lend long but now the Fed is closing the spread with op twist. No wonder the banks are hitting 52 week lows.

Op twist is the dumbest thing I have ever heard of.

M said...

The Dutch central bank answers...

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

Answer: DNB’s physical gold holdings function as the ultimate reserve and anchor of trust in times of financial crisis. Further, gold is being held for diversification reasons.

JR said...

On monetizing metal, which is to undervalue the metal and overvalue the metallic currency:

Reference Point: Gold - Update #1

"In the past, whenever any metal has been used in a monetary function during the presence of a government or monetary authority, the metal itself has endured a trade-value distortion that is always in conflict with the market forces present at that time. This market distortion is what has melded metal into money during these past systems. Not its free market floating value, but just the opposite; the suppression of free market forces on that specific monetary metal.

For example, you can stamp a metal into coins and declare that your coin form of the metal is of higher value than uncoined metal in payments you make and those made back to you. This is a way to overvalue a portion of a commodity metal's above-ground supply to your advantage. You are marking your specially stamped metal above the rest of the market metal, or "marking it to your model."

But over time, this method of monetizing a metal has always run into the same problem. The market for uncoined commodity metal always seems to catch up and overtake the face value of your coined metal and you are forced to dilute your currency into ultimate collapse, occasionally on a civilizational scale.

So then you might declare that all of a certain metal, coined or uncoined, is the monetary base or standardized unit of another money that you can print very easily. This method becomes more of a confidence trick because you are attempting to undervalue that metal (the entire quantity of it) out in the free market, relative to the easy money that you can print."

JR said...

Same theme - Money is always fundamentally overvalued - from The Value of Gold:

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

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

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

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

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

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

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

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


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

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

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

JR said...

Gresham's Ghost

"Gresham's Law states that bad money drives good money out of circulation. In other words, debased money drives non-debased money under mattresses and into shoe boxes...

...I think it is clear from this story that Thomas Gresham was not exactly a hard money hero. In fact, he was an agent of monetary control and debasement. Which brings me to the main concept of this post, that Gresham's Ghost is still with us today, debasing our medium of exchange and unit of account and driving the evolution of money to Freegold.

Money. It is what confuses our soul and drives us to do that which makes absolutely no sense. It is only because we have been led by a chronological history, rife with warnings of debasement, into thinking that we must retain that which is only an ephemeral medium of exchange as our ultimate store of life-long value. Do the truly wealthy hold rooms-full and truckloads of paper cash? Hell no! They hold real stores of wealth, like artwork, antiques, property, collectibles and land. Why then have we, the subjects of the world, the masses, been led to only hold that one faulty medium of exchange as our main store of value? Why? Because it is the one thing in this world that is vulnerable to the collective, the government and banker debasement and the surreptitious theft of the inflation tax!"

JR said...

Does Fiat Produce an Endless Sea of Wars?

"TownCrier (8/4/06; 13:14:41MT - usagold.com msg#: 146358)
taking a HARDER look at fiat and war

...Given the structure of fractional reserve lending as the basis of our monetary system, the cold hard truth is that use of metallic (gold) currency propagates a nasty falsehood -- the coins are just a subset of the entire money supply but it nevertheless causes ill-informed participants to wrongly believe that the entire money supply is "as good as gold"...


...

In one of my favorite articles by him, The Myth of the Gold Standard, North calls "the ideal of the gold standard" "one of the movement's least understood and most futile political causes." He goes on to explain how proponents of the gold standard unwittingly "defend big government in the name of limited government. And, just like almost everything else in the conservative movement, it eventually backfires. It backfires for the same reason the other conservative programs backfire whenever inaugurated: it calls on the State to limit the State."

"The next time you hear someone waxing eloquent — and, in all likelihood, incoherent — about the marvels of the gold standard, ask him this: 'Why don't you trust the free market?' This question is intended to elicit what I like to call a jude awakening.

"Be prepared for a blank stare, followed by 'Huh?'"

"A gold standard is a promise made by a self-licensed professional counterfeiter that he will always stand ready to redeem his pieces of paper and official digits in exchange for gold at a fixed ratio. As the mid-1950's comedian George Gobel used to say, 'Suuuuuuure he will.'
"

Do you see the difference here? It's the difference between what I'm talking about and what Mish and others are talking about. Mish wants the government to affix the price of gold (fix, control, read: government price control) to its currency preventing gold from floating. They don't trust the free market. They want government control. They are unwittingly asking for big government. I on the other hand want the market to choose the price of gold from day to day, the price that is necessary to resolve the global trade imbalances and set us back on a sustainable course.

More North:

"The gold standard became universal in the nineteenth century. Because the public had the right of redemption for a century, 1815 to 1914, the price level remained relatively stable for a century. This right of gold redemption was invariably suspended during major wars, but it was restored a few years after the war ended…

"The nineteenth century was the first stage of an international sting operation. As in the case of every con game, the con man must create a sense of trust on the part of his mark. Whether it is a Ponzi scheme or a more traditional scam, if the targeted sucker distrusts the con artist, he won't surrender his money. For the con game to work, the con man must create an illusion of reliability. In short, he must present himself, economically speaking, as if he were 'as good as gold.'

JR said...

Comment to dilemma

"Gresham's law actually says that bad money drives good money out of circulation.

So to "shun" the euro would be to drive it INTO circulation using your statement. Restating your line: "Gresham’s law means people will circulate or spend Euros and save real gold." This is Freegold.

In other words, the bad money circulates and the good money goes into the sock drawer. Or, bad money becomes the medium of exchange and good money becomes the store of value.

Even more specifically, Gresham's law states that bad money drives good money out of circulation **if their exchange rate is fixed by law**.

This was a big problem in the gold standards of the past where the banking system operated with gold as the fractional reserve. This meant that the money in circulation had to be a specific multiple of the reserves in the banking system, "limiting the quantity of money," which you claim makes money a store of value. Yet when Gresham's law kicked in it was the bank reserves – not the bank notes – that would make their way out of the banking system and into sock drawers.

This Gresham's law gold hoarding may even have been the primary cause of the Great Depression. Here is an abstract from an academic paper written by Doug Irwin a couple months ago:

Did France cause the Great Depression?

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


Kinda cool for the gold bugs when their gold was forced up in value but not exactly a good argument for a fixed exchange rate between gold and transactional currency unless you enjoy depressions.

Incidentally, this paper makes the case that when gold is money it can transmit inflation or deflation into commodities and consumer price levels while it (gold) remains stable in "price". By inference if it is not money it can absorb both inflation or deflation in the sense that a shock absorber in a car cushions the ride.

Continued... "

JR said...

In this way the paper provides further evidence that gold must be de-monetized to function in its best and highest value role, as a store of value and a reserve asset. The paper makes a case that gold simply cannot perform successfully in either role when it is money without undesirable side effects.

But what about a pure gold coin standard, with no paper or electronic money? You mentioned the Roman monetary system, Lemon Thrower:

"what was the system called during roman times, before paper money, when gold coins (as well as silver and copper coins) were exchanged for goods? that seems an awful lot like Freegold to me."

Actually, it was nothing like Freegold. Precisely the opposite in fact. When the Roman rulers coined gold they actually assigned a value much HIGHER than gold's commodity value! This may sound pretty neat to a lemming gold bug, but not once you understand the huge seignorage value surreptitiously confiscated from the people by the Roman rulers in doing so.

That official Roman "stamp of approval" put on gold coins made them more valuable than gold bullion in the same way that the Fed makes cotton pulp more valuable with its legal tender "stamp of approval." Here's an excerpt from Robert Mundell, Nobel prize winner for his pioneering work in monetary dynamics, also dubbed "Father of the euro":

Many of the early empires used gold as reserves for their banking systems with exchanges being effected by means of clay notes and seals convertible – at least nominally – into one or both of the precious metals.

The introduction of overvalued coinage provided a strong economic motive for the cultivation of a mystique. From its very beginning, probably in Lydia in the 7th century B.C., coinage was overvalued; one could say that was its very purpose. The earliest coins of the Lydian kings were made of electrum (from the Greek word meaning amber), an alloy of gold and silver.

We mustn't be misled by the textbook fiction that coins were first struck to guarantee the weight, and therefore the value, of the earliest coins… The conventional wisdom that these Oriental despots stamped the coins to confirm their weight and thus provide a convenience for their subjects, is sheer nonsense. The stamp meant that the coins passed ad talum – by their face value – equal to 1/3 of a stater (the word meant "standard").

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

Coins cannot of course remain overvalued in a free market. Gyges and his successors were no libertarians. Overvalued coinage implies artificial scarcity, a monopoly and government control. To sell their coins and create the mystique, a full panoply of devices was called upon. Religious symbols helped to reinforce the mystique. Whether the symbol was called Marduk, Baal, Osiris, Zeus, Athena or Apollo, or Jupiter or Juno, or St. John the Baptist, its purpose was the same; the latter symbol made the florin the most famous coin of the Middle Ages. The gods changed but the principles stayed the same! Just look at the Masonic hocus-pocus that still remains on our dollar bills! "In God We Trust" introduced on our dollar bills in 1862 when their gold backing was dropped.


Continued...

JR said...

"So you see, Lemon Thrower, in even a pure gold coin standard the currency administrator still gets his surreptitious piece of the action. And as Mundell said, these coins cannot remain overvalued in a free market. That is because they are shunned, as you would say, in favor of a better store of value, perhaps fine oil or silk.

This "shunning" of overvalued gold coins sends them into circulation in increasing velocity, which lowers their relative value. This forces the ruler to issue new coins with less gold content. It also encourages coin clipping and many other forms of monetary debasement, both official and unofficial.

And, of course, it ultimately leads to this and this. Those links are two graphs of the collapse of the Roman monetary system in waterfall fashion due to the debasement of Roman coins, 1,275 years before Sir Thomas Gresham was even glimmer in Sir Richard Gresham's eye.

You see, it is the best and highest use of gold to be a reserve asset apart from the circulating currency, with a price that floats in that currency. This allows for something like the Gresham effect, while at the same time, diffusing its always calamitous end result.

Fiat currency has plenty enough value to serve as a short term store of value, for as long as most people hold the actual currency itself rather than the length of time people now hold bonds denominated in transactional currency. The latter is the problem, not the former. Freegold is not a perpetual state of currency hyperinflation. In fact, it will be the opposite. It will be much more stable than today because of the balancing mechanism of an alternative store of value. And if you need to see value in a purely symbolic fiat currency for yourself, simply track down a new homeowner who toils each workday to pay off his mortgage."

Blondie said...

Matrix Sentry,

In your posted quote from Martin Armstrong he moves from rudimentary (in his thoughts on gold emailed to ozmium) to precise in his description of Freegold... he not only describes it clearly, but he states bluntly that gold must be free.

" It is NOT what is MONEY, but who is in charge of the system... Those who keep yelling “fiat” think money is a store of value. It NEVER has been. Gold should be free so you can buy it as a hedge... Additionally, these ideas that somehow unless money is 100% backed it is not real is nonsense."

Freed gold puts the market in charge, giving the market a hedge against the "money" (as always, one must consider carefully what the term "money" appears to mean to the author of any opinion one is considering... here Martin appears to be equating "money" with medium of exchange and unit of account, carefully distinguishing store of value as separate from "money"). By utilizing as store of value an unlevered asset outside the monetary system (physical gold), currency ("money") is made honest, it has value only insofar as the goods it can be exchanged for. No coercive government interference, the market values the money via the gold exchange rate.

Gold is "free", and so are the users of such a system.

Gold is the non-lendable, unambiguously owned ultimate store of value asset outside the monetary system... and this is presumably the option Armstrong claims is sitting in the top drawer, to be deployed only in crisis:

From KWN, here (emphasis mine):

"When asked about what Congress is drafting with his help, Armstrong stated, “Well, unfortunately in politics you can’t get any kind of major reform passed at this stage of the game because most people are going to look at their careers and it’s really a stalemate.

So the only real option you have is to basically set down, on paper, how to revise the world monetary system, and you keep it in the drawer. Then, when basically everything hits the fan, you pull it out out of the drawer and then it gets passed like tarp within a matter of a few days.”

For clarification KWN asked, “So we will be in this manic phase, this unbelievable crisis, gold will be skyrocketing and they (Congress) will pull this thing out of the drawer and they will ram it through?” To which, Armstrong replied, “That’s the way it always is.”"

victorthecleaner said...

costata and M,

are we sure we have understood the true reason for QE1, QELite, QE2 and OT2? (and for QE1 and QE2 in the UK?)

QE1. The Fed took 1500bn in questionable mortgage bonds (Fannie and Freddie, aka agency debt). Officially to relieve the bank balance sheet and to prevent them from being marked down as a consequence of fire sales. How about China? Did the Fed perhaps also provide an elegant exit for China? Yes, the Chinese actually sold their agency debt. Check.

QELite and QE2. Ben Bernanke knows that he cannot make the commercial banks lend more. How could he? Every sucker even if he is not at all creditworthy is already in debt up the nose. This did not work in Japan, and so why would it work now. Bernanke is not stupid. Although the press wrote this was the purpose of QE2, I am sure it wasn't.

What is the guaranteed outcome when you monetize the full government deficit for 8 or 9 months? Consumer price inflation. The US official CPI is now rising at an annual rate of 3.8%. Check. At the same time a lower dollar. Check (well, until just before the second European PIIGS scare in July 2011). Finally, removing pressure from the government bond market, so that the US won't feel like Greece any time soon.

OT2. The Fed will sell 400bn in short-term government debt and purchase 400bn in long maturity debt. The press say the Fed wants to lower long term interest rates in order to make mortgages cheaper. HAHAHA. I think the right question to ask is who is selling long maturity bonds and purchasing short ones these days? It might be that the Treasure Dept wants to increase the average maturity of the issued debt, and so the treasury would sell more long dated bonds, and the Fed basically makes sure that this does not upset the market. So far, this is not happening. Who else? Perhaps China wants to get out of long dated US bonds? I suppose we will know this only with the Fed Flow of Funds report on the fourth quarter.

QE1 and QE2 in the UK? Same as QELite and QE2 in the US. With their QE1, they, too, succeeded in lowering the exchange rate of the pound and in creating consumer price inflation. Their CPI is now increasing with 4.5% annually. With interest rates of 0.5%. Nice, isn't it? And apparently this is not enough, and they are starting their QE2 now.

Summary. I wonder who is selling US government bonds. Who is selling the long bonds to the Fed, and who is selling the short bonds to all those mainstream investors who panic out of stocks and out of Europe and who buy them these days.

Once the situation with Greece is resolved one way or the other, and the dollar starts falling, then it gets interesting.

Victor

costata said...

M,

In response to my point 6 "Allow the banks to rig markets and produce guaranteed profits."

You wrote:
"Operation twist kinda threw a wrench into that. They borrow short and lend long but now the Fed is closing the spread with op twist. No wonder the banks are hitting 52 week lows."

This situation may be more nuanced than a simple error by the Fed. Let me pick up on one aspect of this sitution. Op T imvolves the Fed buying $400 billion of shorter maturity paper.

In terms of short term profits it depends on how the TBTF banks were positioned. Were they long in this paper before the Fed announcement? Ready to sell it for a profit when yields compressed.

In regard to the impact on their business model I think that the huge increase in deposits is a much more important factor. According to this report from Jim Jubak which I quoted in this comment:

Deposits at U.S. banks exceeded loans by a record $1.45 trillion in May, according to the Federal Reserve. (In the 10-years before the financial crisis in 2008, loans exceeded deposits by an average of $100 billion.)

I'll stand by those six points. The TBTF banks interests are being favoured across the board. Regardless of appearances I think it will emerge that Operation Twist favoured them as well.

Cheers

costata said...

Where Are We At? Part 2

In this comment I attempted to sketch out a number of the key steps in “Bank Bailouts For Dummies”. Some or all of these steps have been taken in bank bailouts in the modern era. Toward the end of that comment I proffered these observations:

Unfortunately this crisis is not like previous banking crises. There are other dimensions to this crisis - currency, sovereign debt, failure of the rule of law and market failure through regulatory capture and political corruption.

Also for the first time in the modern era the bulk of the banking system operates outside the regulated sphere in the OTC and shadow banking operations of the TBTF banks. Last, but by no means least, there is a brand new architecture for a currency in the game – the Euro.


It might help to build a clearer picture of where we are now and where we are headed if we attempt to flesh out some of these other dimensions. Let’s consider the currency dimension and some key differences between the Euro and the US dollar in particular. On an earlier thread I proffered some thoughts on the differences between the motivations and incentives of the ECB and the Fed/USG:

“One of the reasons that the quarterly MTM matters is because the ECB is effectively saying to the world: ’Our Euro is a medium of exchange while gold is our reserve, our store of value (and so are some of your currencies)’. Point 3: can the USG/Fed make a similar statement and expect the US dollar to survive? The USG/Fed says to the world: ’The US dollar is our medium of exchange, a superior medium of exchange for you, our store of value (gold is only worth $42 bucks an ounce) and it is your store of value too

In this comment from an earlier thread on an essay by Charles Hugh Smith I tried to highlight some of the differences in the political connotations of the Euro architecture as compared to the politics around the US dollar.

costata:
“CHS why do you assume that the ECB (and Eurosystem Central Banks) will ‘print’ the Euro to address this ‘insolvency’? Also the EFSF is a tool of governments and politicians not the CBs. Only sovereign governments can finance and fund such a fund for the precise reasons you outline in the first sentence of your next paragraph. The ‘political vassals’ not the ECB ‘control the means of taxation’.”

CHS:
”Since the political vassals control the means of taxation, then it is their job to squeeze hundreds of billions of euros out of the labor of their nation's debt-serfs. There is a fatal weakness in the Grand Scheme of European Neo-Feudalism, and the lackeys in the EU are desperately trying to fix it under the banner of "integration." The fatal flaw is that the political union of the EU vassal states did not include fiscal union in which the EU could impose and control taxation within all member states.”

costata:
“CHS have you considered the possibility that this was not a ‘flaw’ but an intentional part of the design of the Euro and the structure of the ECB Eurosystem Central Banks?”

Blondie said...

Costata,

Excellent analysis. FOFOA has long made the point that while a government can legislate a medium of exchange into place, the store of value is always the choice of the saver. The euro is constructed to accommodate this, and the dollar is not.

Perhaps CHS has not been reading his Ancient Greek philosophy?

Motley Fool said...

Hey Blondie

Thanks for that. It makes me curious if the USA will try to compete with the EU when FreeGold emerges. ( in other words when all hell breaks loose)

Let's be honest here, I get what FOFOA says about legal entanglements, but gold at $42 is a joke, and America has the military power to boot to say fuck off to the rest of the world with those old claims and simply revalue gold. Or what?

@JR

Hmm. I went looking again, still can't find it. What I can do however is tell you what I'm looking for, and hope you will help find it. I gave up looking.

I recall at one stage FOFOA explained that gold realizes it's highest function when it is lying very still, and that a increase in velocity would decrease it's price and value.

Furthermore he made a comparison saying that if we go back to say a (40%?) gold standard then gold would rise to say $10,000, while in the current system it's well where it is today, and under FreeGold it would fulfill it's highest purpose and rise to $60,000 ( or perhaps $55,000 at the time).

TF

Max De Niro said...

Costata,

Thank you for your summary and further thoughts.

I can see that the winds of change are blowing through the banking system and foundations are beginning to shift.

This, I do not dispute.

There will be further crises and the response will be precisely the same - a combo of heaping further debt on tax payers - through stimulus or bailouts and printing and when this is no longer acceptable, it will be pure printing.

I accept that this will end in the way that FOFOA describes, if the paper gold system doesn't go first. I just think that the end will be further than many think.

The forces of asset deflation, hedonic adjustments and monetary/emotional/normalcy inertia will keep people invested in the system and putting up with hardships in order to stave off the fear.

I cannot see that people are close to that tipping point, moving to an understanding that their currency and assets denominated in the currency is not a store of value. The majority of people will most likely never make this leap.

I don't know whether the time leading up to the final collapse will be characterised by inflation, deflation, stagflation, whatever, I don't know enough.

I am just going based on my perception of human psychology. I don't see the necessary mental shift coming any time soon. Indeed, the bailouts (through printing or debt) simply stave off the necessary fear (to give the impetus to make the paradigm shift) and keep people entrenched in the system for longer. The network effect, normalcy bias and fear of change are very powerful factors and not to be underestimated. The majority of people and investors are not mavericks, they have kids to feed.

Joel said...

Hi Victor,

a good article that speaks to your question on who is selling Treasuries (foreign CBs) of late:

http://www.zerohedge.com/news/did-foreigners-bail-out-us-stock-market-dumping-56-billion-treasurys

J said...

From a gold leaf-covered reception to a 60th floor inlaid with genuine flakes of gold, the building exudes wealth and excess. Its proudest feature is a one-tonne, solid gold statue of an ox

"If anywhere in China can find new areas of economic expansion it is Huaxi. But even with the political connections and business nous, it is hard to imagine that the village will reinvent itself as a tourist centre"

A one tonne solid gold ox may bring some tourists after RPG

JR said...

Here are a couple that may be close MF and talk about some of the ideas you raise - either way, Jeff will probably find the exact one.

comment to "Reflection

"The relative value of gold has been suppressed longer than any of us can even imagine. As I mentioned above, the gold-exchange standard and even the gold standard had their own forms of paper gold. And even when gold was used physically in transactions, when the common man had a piece of gold to make some payment, gold's relative value was suppressed by the velocity of circulation.

This may be hard to comprehend, but "money" that circulates loses value the faster it circulates. And being the normal medium of exchange kept gold's value much lower than it would be as solely a store of value, a wealth consolidator, and not a physical medium of exchange. Look at Zimbabwe for how this works. The faster the Zim dollar circulated, the lower its value fell.

...Back in December I wrote a short analogy to demonstrate this velocity dynamic:

..."So velocity and money supply of the currency have exactly the same effect."

The point is, that in the past gold's value as a wealth reserve has been suppressed by either circulation velocity or one form of paper gold or another. And that which is transpiring today, for the first time in all of history, will remove all of these past factors and reset gold to balance the debt as the one and only wealth consolidator...

What I have always written about, and what Another and FOA wrote about, was the free market organism resetting the price of gold when it is finally "set FREE" from the restraining factor of paper gold. Ie. Freegold...

Flow is velocity. It tends to lower relative value. But the thing about gold, as Fekete says, is that "in terms of the ratio of stocks to flows the supply of gold is far and away greater than that of any commodity." This is what sets gold apart from everything else as the only real modern wealth consolidator. Or as Another put it a different way, "spend your time in the company of truly wealthy ones, see how they make gold lie very still!"

As debt fails, what will happen is the price of gold will rise to the point that the flow of gold will be credibly sufficient to supply the exchange of any and all debt for physical gold. And this includes real debt that's hidden off the books. This is a difficult (or impossible) calculation to make, but it is very high and it has nothing to do with the total stock of gold, nor the total stock of transactional currency. It has only to do with the flow of gold (that prefers to lie very still) and the number of IOUs on the poker table.

Max De Niro said...

Costata,

This is an interview with an institutional trader.

His attitude makes my point very well.

He seems to be so close to understanding the idea of the mental concept of money and the separate store of value idea, but he is hopelessly stuck in normalcy bias.

It is implicit in everything he says that the idea of a steady state dollar is sacrosanct.

A shift away from the Treasury debt-centric monetary system to an asset-centric monetary system is just not on his radar at all.

This portends an ongoing "range-trade" - crisis to rally to crisis to rally.

The third video (part 3) was where it really showed through.

conversation with an institutional trader

Max De Niro said...

parts two and three of 'conversation with an institutional trader' for anyone interested.

part 2

part 3

Max De Niro said...

In the part 3, he says his partner in his trading firm was 'at the table' during the bailout discussions in 2008. He talks about everything seizing up, money markets drying up etc etc, then fully acknowledges that it could easily all happen again and says Europe is there right now and yet he still trades paper!

This mindset is too deeply rooted for this system to die in the near term.

JR said...

Dilemma

"I share with Aristotle the following A-HA moment which he described here:

In working on this project, I was personally shocked when I discovered that we absolutely NEEDED paper currency in order to set Gold free. Going in, I was a charter member of the Goldhearts club, and I emerged even more excited about the prospects of Gold than before.

We need a fiat currency like the euro that structurally supports Freegold in order for gold to perform its highest and best role in the international monetary and financial system. The alternative is global economic chaos upon the denouement of the dollar. This is why I praise the euro."

JR said...

The Value of Gold

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

Gold. Get you some. ---Aristotle"


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

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

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

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

Motley Fool said...

@JR

Simply astounding. You rock. :)

TF

JR said...

How is that different from Freegold?

""Return to a gold standard" advocates like Peter Schiff have a really hard time wrapping their heads around Freegold because they are so focused on monetary currency that circulates when what really matters is monetary wealth that lies very still. I think the simplest way to express the separation of these two monetary roles to the gold standard advocate is the application of Gresham's law. "Bad money drives good money out of circulation." In other words, the bad (fiat) money circulates while the good (gold) money lies very still… and floats in value relative to the circulating bad money."

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

Focal Point: Gold

"One of the argument for silver that we hear often is that it is "the poor man's gold." So I guess gold is "the rich man's gold." Well, what is the main difference between rich men and poor men? Is it that the rich have an excess of wealth beyond their daily expenses? In fact, the really rich have "inter-generational wealth," that is, wealth that lies very still through generations. The poor do not have this.

So what do you think is going to come of all that "poor man's gold" that the silverbugs have hoarded up? Is it going to lie very still for generations? Or will it circulate, to meet daily needs? Note that circulation velocity is the market's way of controlling the value of any currency. Faster circulation = lower value. Lying still for generations = very slow circulation."

Motley Fool said...

I just read this

I recommend it. Good to hear sober thoughts.

Slovakia

Read and ignore comments as per standard operation for ZeroHedge. :P

TF

costata said...

MF,

That interview with the Slovak parliamentarian is a classic. A clearheaded politician.

How am I supposed to explain to people that they are going to have to pay a higher value-added tax (VAT) so that Greeks can get pensions three times as high as the ones in Slovakia?

They have to make cuts in the state apparatus.

Thanks for the link.

Cheers

Edwardo said...

I know, I know, it's Zero Hedge, but if ever there was a joint head of state statement designed to not deliver confidence this would have to be it.

http://www.zerohedge.com/news/merkozy-reach-yet-another-agreement-adding-it-too-early-enter-details

In the meantime, there is an answer to the question below, and one devoutly wishes they would just bloody well get on with providing it.

"We have just one question: where will the $1 trillion in additional capital needed to recap said banks come from.

Franco said...

Question: how many barrels of petroleum would one ounce of gold be able to purchase after the revaluation of gold that is talked about on this blog?

Motley Fool said...

Hi Franco

That's a insightful question.

Roughly 1000 barrels.

@costata

You're welcome.

TF

Jonas said...

China about to install 2000 gold ATMs and it seems many other countries have similar plans. I know they exist in the middle east already.

http://cnbusinessnews.com/china-to-install-more-than-2000-gold-atms/

mortymer said...

Other pic of the golden bull to get into right proportions:
http://english.cntv.cn/20110906/109058.shtml

costata said...

This isn't a scintillating piece of journalism but it contains some interesting numbers from the BIS on US banks exposure to European banks and three scenarios for contagion from European banks to US banks.

http://www.huffingtonpost.com/2011/10/06/banks-wall-street-europe-crisis_n_999204.html

Some predict that a European financial crisis would spread quickly to U.S. shores. The pain would not come directly from government defaults; U.S. banks have loaned just $36.2 billion to the five European governments that are in danger of defaulting: Greece, Ireland, Portugal, Spain and Italy. But U.S. banks have also loaned $60.6 billion to banks in those five countries, and $275.8 billion to banks in Germany and France, according to data from the Bank for International Settlements.

According to Bryson, French banks' exposure to the five European countries that are in danger of defaulting amounts to 25 percent of France's gross domestic product, and the exposure of German banks to those countries is worth 15 percent of Germany's total output.

mortymer said...

First:
http://english.cntv.cn/20111009/110659.shtml
"Group-buying sites entering gold market"

Then:

http://english.cntv.cn/20110916/111564.shtml

China sets national standards for "high pure gold"

mortymer said...

Opium, gold, trade deficits & foreign exchange...

http://english.cntv.cn/program/china24/20111010/103290.shtml

jc said...

Franco,

The post entitled 'How Can We Possibly Calculate the Future Value of Gold' contains FOFOA's barrels of oil per 1 troy ounce probability curve, near the end of the article.

http://fofoa.blogspot.com/2010/06/how-can-we-possibly-calculate-future.html

JR said...

A funny

"STOCKHOLM -- Americans Thomas Sargent and Christopher Sims won the Nobel economics prize on Monday for research that sheds light on the cause-and-effect relationship between the economy and policy instruments such as interest rates and government spending.

Sargent and Sims - both 68 - carried out their research independently in the 1970s and '80s, but it is highly relevant today as world governments and central banks seek ways to steer their economies away from another recession.

The Royal Swedish Academy of Sciences said the winners have developed methods for answering questions such as how economic growth and inflation are affected by a temporary increase in the interest rate or a tax cut.

"Today, the methods developed by Sargent and Sims are essential tools in macroeconomic analysis,"
the academy said in its citation.

...

Asked how he would invest his half of the 10 million kronor ($1.5 million) award given the turbulence of today's financial markets, Sims said: "First thing I'm gonna do is keep it in cash for a while and think."..."

mortymer said...

contin_on_JR_link:
"..."Sargent has primarily helped us understand the effects of systematic policy shifts, while Sims has focused on how shocks spread throughout the economy," the academy said.

The winners developed models to measure the sometimes surprising way that people actually respond to changes in economic policy.

"People form their own ideas about what's going to happen independently of what the economists say is going to happen," said David Warsh, who writes the blog Economic Principles...."

Mrt: Whoah, I am surprised myself. :o) Thanks!

JR said...

Here's my fav Nobel economics speech. He doesn't say the word, but he is a fan of the superorganism:

"...To act on the belief that we possess the knowledge and the power which enable us to shape the processes of society entirely to our liking, knowledge which in fact we do not possess, is likely to make us do much harm. In the physical sciences there may be little objection to trying to do the impossible; one might even feel that one ought not to discourage the over-confident because their experiments may after all produce some new insights. But in the social field the erroneous belief that the exercise of some power would have beneficial consequences is likely to lead to a new power to coerce other men being conferred on some authority. Even if such power is not in itself bad, its exercise is likely to impede the functioning of those spontaneous ordering forces by which, without understanding them, man is in fact so largely assisted in the pursuit of his aims. We are only beginning to understand on how subtle a communication system the functioning of an advanced industrial society is based - a communications system which we call the market and which turns out to be a more efficient mechanism for digesting dispersed information than any that man has deliberately designed."

cont.

JR said...

Life in the Ant Farm

"In this way, humans are similar to ants! A normal IQ distribution among humans ranges from 60 to 140. To me as an average human this seems like a very wide distribution. The dumb seem very dumb, and the smart seem really smart. But in the big scheme of things the human intelligence distribution is not so far off from the ant "intelligence" distribution. In other words, the smartest ant in existence doesn't even come close to the "distributed intelligence" of a wild colony. And the same goes for humans!

But when we put ants into a two-dimensional, controlled environment, the distributed intelligence of the superorganism is stifled and nearly snuffed out. As a confined group they end up no smarter than an individual ant.

Throughout human history the division of labor, or economic specialization, has brought fantastic growth in total human output and led to the astonishing complexity of modern computers and industrialization. These vast leaps were truly the accomplishment of the distributed intelligence of the human superorganism, with a relative IQ perhaps in the thousands.

And behind each great leap of mankind was a string of important decisions made by methodological individuals. This is true capitalism. In order for the human superorganism to display its "IQ in the thousands", certain specialized individuals must be free to make the most important decision. The individuals I'm talking about are the savers, or as I sometimes call them, the "super-producers".

They are the people whose contribution to society exceeds their own daily needs, creating an excess of wealth. And the most important decision for the human superorganism is the savers' choice between hoarding their wealth, or deploying it into the economy!

It is this decision process, made millions of times at the individual level, that lends the superorganism its superior IQ. There is no single human that possesses an intelligence high enough to compete with the human superorganism, just as there is no single ant that is smart enough to make better decisions for the colony than the colony itself. In fact, there is not a single human that could do a better job running the ant colony, although man has written many complex algorithms trying to mimic and even improve upon the collective intelligence of ants.

...

a monetary and financial system that uses compounded interest cannot afford to compel all savings into the hands of debtors. It must have a means of hoarding wealth outside of the system in order to constrain the exponential growth function, or else the entire system will become retarded and then collapse. In return, this constraining function of "gold the wealth reserve" will restore intelligence to the human superorganism. Intelligence that has been sucked dry by Wall Street's systemic aggression against a free-floating physical gold price."

JR said...

"People form their own ideas about what's going to happen independently of what the economists say is going to happen," said David Warsh, who writes the blog Economic Principles...."

Unfortunately, but predictably, they then attempted to model that uncertainty, which is why they won their Nobel: "for research that sheds light on the cause-and-effect relationship between the economy and policy instruments such as interest rates and government spending.":

"The winners developed models to measure the sometimes surprising way that people actually respond to changes in economic policy...

Sims developed a method based on so-called "vector autoregression" to analyze how the economy is affected by temporary changes in economic policy and other factors, like an increase in the interest rate, the academy said....

And Sargent famously weighed in on the fight against inflation in the early 1980s. Many economists believed it would take years of high interest rates to bring inflation down. But Sargent believed that inflation could be tamed much faster if the Federal Reserve acted decisively enough to break the public's expectations that prices would continue to rise rapidly."


Sarrgent plays big in Bernanke's approach of targeting expecations - for example holding press conferences and being more open wrt to the FED policies(its not just to ease political pressure). One of BB's big points of criticism of the Japaneses "deflation" experience is policymakers were not forceful enough in communicating what they were trying to do - we see this in Bernake's helicopter drop/we won't have inflation here - Bernanke is intent on "shaping expectations" and beating the fear of deflation.

Which is sorta a key point in unfolding loss of confidence and unprecedented hyperinflation/currency collapse of the $ international monetary and financial system.

JR said...

WSJ from 2010: Fed Chief Gets Set to Apply Lessons of Japan's History

"Mr. Bernanke's first significant brush with Japanese officials was in 1999. Consumer prices had started falling, and the Bank of Japan had already pushed short-term interest rates to near-zero...

At a conference at sponsored by the Boston Fed in Woodstock, Vt., that October, Kazuo Ueda, then a BOJ policy member, issued a warning to the largely American audience: "Do not put yourself into the position of zero rates," he said. "I tell you it will be a lot more painful than you can possibly imagine."

Mr. Bernanke shot back that Japanese policy makers might be making the same "extreme policy mistakes" Americans made in the 1930s—being too timid about reversing deflation. A few weeks later, in a blistering research paper, he said even though conventional tools were expended, there was plenty the Japanese could do to boost consumer demand, business spending and prices.

Among his suggestions: Cheapen the yen by selling it in the currency markets; or buy long-term debt from the Ministry of Finance to finance tax cuts, something he said was akin to just dropping money from a helicopter....

"Japanese monetary policy seems paralyzed, with a paralysis that is largely self-induced," he concluded. "Most striking is the apparent unwillingness of the monetary authorities to experiment, to try anything that isn't absolutely guaranteed to work."

Mr. Bernanke was particularly troubled by Japan's emerging deflation. He argued that Bank of Japan officials had to aggressively manage the public's expectations, because convincing households and businesses that deflation wouldn't persist would help to spur economic activity.

Mr. Bernanke felt that Japan's central bank needed to make a commitment to get inflation higher and keep policy accommodative until it increased.
...

While a Fed governor in the early 2000s, amid rising U.S. unemployment and worries about an unwelcome decline in inflation, Mr. Bernanke backed the Fed's push to keep rates low. The "painful experience of Japan" led the Fed to decide to act pre-emptively to head off deflation, Mr. Bernanke said earlier this year.

The Japanese, Mr. Bernanke and other academics felt, had been too quick to raise interest rates in 2000 when it looked as if their economy was recovering. Mr. Bernanke had a new idea. Japan, he suggested in a May 2003 speech, should adopt something called a "price-level target."...

This approach, he said, would relieve the pressure Japanese debtors felt from high real interest rates, and also help break deflationary expectations. There was a risk of overshooting and getting too much inflation, but it was worth taking the chance, he said....

JR said...

Remarks by Governor Ben S. Bernanke
Before the Japan Society of Monetary Economics, Tokyo, Japan
May 31, 2003

Some Thoughts on Monetary Policy in Japan


"As you may know, I have advocated explicit inflation targets, or at least a quantitative definition of price stability, for other leading central banks, including the Federal Reserve. A quantitative inflation target or range has been shown in many countries to be a valuable tool for communication. By clarifying the objectives of the central bank, an explicit inflation target can help to focus and anchor inflation expectations, reduce uncertainty in financial markets, and add structure to the policy framework. For Japan, given the recent history of costly deflation, however, an inflation target may not go far enough. A better strategy for Japanese monetary policy might be a publicly announced, gradually rising price-level target....

Eggertsson and Woodford (2003) have advanced a second argument for a price-level target for Japan in an important recent paper on monetary policy at the zero bound. These authors point out (as have many others) that, when nominal interest rates are at or near zero, the central bank can lower the real rate of interest only by creating expectations of inflation on the part of the public. ...

One way to understand their argument is to imagine that the public expects the leaders of the central bank to take more aggressive actions, the further they are from their announced objective. Now suppose that, in an economy experiencing a stable deflation, the central bank leadership announces a fixed inflation target but then makes no progress toward that target during a given period. Then in the next period, the central bank is in the same position as previously, in terms of its distance from its objective; hence, by hypothesis, the central bank has no incentive to increase its effort to meet the announced target, and the public has no reason to expect it to do so. In this respect the inflation target is too "forgiving" an objective; failure is not penalized, nor is greater effort demanded. In contrast, under a price-level-targeting scheme, continuing deflation combined with an upward-sloping path for the price-level target causes the size of the price-level gap to increase over time....

As Eggertsson and Woodford show, the expectation that an increasing price level gap will give rise to intensified effort by the central bank should lead the public to believe that ultimately inflation will replace deflation, a belief that supports the central bank's own objectives by lowering the current real rate of interest.

A concern that one might have about price-level targeting, as opposed to more conventional inflation targeting, is that it requires a short-term inflation rate that is higher than the long-term inflation objective. Is there not some danger of inflation overshooting, so that a deflation problem is replaced with an inflation problem? No doubt this concern has some basis, and ultimately one has to make a judgment...."


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

Neat:

"Now suppose that, in an economy experiencing a stable deflation, the central bank leadership announces a fixed inflation target

consider:

"My friend, debt is the very essence of fiat. As debt defaults, fiat is destroyed. This is where all these deflationists get their direction. Not seeing that hyperinflation is the process of saving debt at all costs, even buying it outright for cash. Deflation is impossible in today's dollar terms because policy will allow the printing of cash, if necessary, to cover every last bit of debt and dumping it on your front lawn! (smile) Worthless dollars, of course, but no deflation in dollar terms!"

zabba said...

JR,
Since you used Another's quote above I'd like to ask what "dumping it on your front lawn" means? I'm not sure what he is *really* saying.

Also, while I'm at it... Another said, "I tell you now, when the currencies are at nuclear war, GOLD WILL NOT TRADE" (Date: Sat Nov 01 1997 23:55). What does currency "Nuclear War" look like? What is currency "Nuclear War"?

mr pinnion said...

David Morgan ,on the edge with MK.
http://www.youtube.com/watch?feature=player_embedded&v=G7Kra0Mjqj8#!

At 17 45 mins into it David could be talking Freegold if you change the words 'silver ounce' for 'unit of fiat currency'.
A wry smile apears on his face at the same time.I wonder if he knows.

Regards
Ozzy

JR said...

Hi zabba,

Its a play on Milton Freidman's famous parable (since re-popularized by Bernanke) that posits a when the economy is in a liquidity trap - when real and short term rates are at the nominal bound (aka ZIRP), zero - a helicopter drop of money could be used to stimulate aggregate demand and fight deflationary forces.

Its a euphemism for printing money - Friedman chose a "helicopter drop" of cash, FOA called it a "front lawn dump" of cash.

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

Re: nuclear was, in Greece is the Word FOFOA talks about the EURO area's nuclear option of revaluing its own gold (as opposed to waiting for the market to do the heavy lifting for them).

I believe it is a reference to the transition from the $IMFS to Freegold, when the currenct system fails and we see countries begin using gold as a true reserve, when the paper gold markets collapse and physical gold explodes in price - physical gold may not trade, it may gold into hiding as the new physical only market emerges.

"I think, the currency of a country does no longer hold "backing". This term, it is used often, but is not correct. Today, all modern money does have "reserves", and such is used only for "the dirty float" in currency warfare. As in war, the larger and better equipped army in "reserve" does rule over the lesser force. Perhaps we should think in this way: in a "cold war" of modern exchange rates, "digital currencies from reserves are used", however, when a "hot war" of major default does begin, "nuclear weapons of GOLD" are deployed!

As in real war defense, of today, some countries hold a much lesser army, and depend on "the alliance" with other stronger nations to defend them. Such it is with the currencies! Many states hold but a few "digital currencies" as reserves for currency wars and see no need for "gold nuclear weapons". They sell off these weapons and do join "the currency alliance" of stronger nations. We see this in Europe, yes?

5/21/98 ANOTHER (THOUGHTS!)"


excerpted from Of Currency Wars

Joel said...

JR,

Very revealing quotes from Bernanke. To me, they show that he truly believes he has complete control of interest rates under any scenario, and that he can be nimble even to control inflation if they overshoot. It really brings home what I see as maybe the biggest difference in philosophy between the Keynesians and the Austrians, and also of Fofoa's posts on when fear takes over, claiming control for itself. With the ECB, the bank of England, and now even the Chinese getting into the currency wars, it seems to me that it's a good chance that freegold will eventually be triggered by this global "printfest". My bet is that we will at first (next 12 months) see that overshoot scenario, which ramps quickly into Volker era high double digit inflation, at which point the goose is cooked, as gold gets bid for like a cookie at a Weight Watcher's convention. We then see unprecedented US printing due to a bond market implosion and bank runs. Just my WAG, but I'm putting the over under at 24 months, and taking the under.

zabba said...

Thanks JR!

Franco said...

Another question: who are the "giants"? I think that central banks collectively sit on about 1/4 of all the gold ever mined, so the other 3/4 is in the hands of who?

Motley Fool said...

Hi again Franco

Super-producers who have accumulated gold as they understand it's real value. Those who produce more than they consume.

The House of Saud, the Rothchilds, China lately, I would speculate are some giant giant examples. :P

I give some examples simply to illustrate the type of thing a giant is. The list is by no means complete.

@jc

Much better answer than my thumbsuck. :P

TF

JR said...

Small Giants:

"Do you realize that somewhere out there, there is perhaps four billion (with a b) ounces of gold in private hands (in many forms, including coins, bars and jewelry)? A lot of this gold was accumulated by families over many generations. It is only in modern times (and in the West) that we think of our "nest egg" as something that should be deployed into the marketplace in search of a yield. That we must trust it to a "manager" who we pay to churn us an ROI. This is a very modern and Western view. The rest of the world (the rest of time for that matter) views wealth a little differently.

ANOTHER: This brings us back full circle, to the problem of "digital currencies" and the "mind set" of much of the simple ( and rich ) third world persons. To many of these people, wealth is the surplus of life's work that you pass on after death. Currency is something you, spend, trade or hold for a few years. It isn't wealth.

When Another spoke of "rich third world persons" and "old world giants," what quantities of gold do you think he was talking about? Mr. Gresham asked him once:

Mr. Gresham: "We who read here generally buy the coins, one ounce and less. The "Giants" you speak of are usually buying the large bars (100 ounce?), yes?"

ANOTHER: "I ask you, how many of your bars in tonne? This is the small purchase size."


Good question. How many 100 ounce bars are in a tonne? The answer is 321 and a half. Or 32,150 ounces. And this is a "small" giant! 4 billion ounces in private hands. Let's take just half of that and wonder how many of these "small giants" there might be in the world. 2 billion divided by 32,150 = 62,208. So I'm going to go out on a limb and say, conservatively, that there are probably "tens of thousands" of these so-called "giants" in the world. That 4 billion ounces is out there somewhere, in private hands, and that kind of family wealth doesn't necessarily show up on things like the Forbes list."


Freegold Foundations

Jeff said...

rickards audio interview:

http://kingworldnews.com/kingworldnews/Broadcast/Entries/2011/10/9_Jim_Rickards.html

Michael said...

For the consideration of the Fofoa crowd:
I just got back from watching Contagion (Matt Damon, Laurence Fishburne, Paltrow). As a physician I can recommend it for its epidemiology but the social disruption and the clash of information in a time of crisis also deserves attention.

Robert LeRoy Parker said...

Look out for the bat swine flu!

I think forsithia might be white powder gold.

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