Sunday, December 11, 2011

Unambiguous Wealth 2 – The MF Global Chronicles

Jon Corzine the former CEO of MF Global with his preferred candidate for President

Sometimes I write post-length comments that would be more useful as actual posts. Here's one…

Hello Edwardo,

Thank you for the ZH link. I suppose I need to be more specific when I refer to "the ZH/GATA CB thesis." First let me state that Zero Hedge and GATA both provide a great service and they both do fantastic work, ZH comments section notwithstanding. It is their underlying thesis about fiat currencies and central banks in general that I have a problem with. And this is not a problem with only ZH and GATA, it is a problem with the entire hard money camp.

Their foundational thesis is that fiat currencies and the CBs that manage them are the most fundamental flaw in today's system from which all other problems flow. This directly conflicts with my thesis that using the same medium in both the primary and secondary monetary roles is the fundamental flaw from which all other problems flow. My thesis applies to both hard and easy money systems. Their thesis points to the CBs as the bad guys. My thesis holds up a mirror and says, "We have met the enemy, and it is us."

One of the biggest struggles I observe in newish visitors to my blog is that they instinctively try to reconcile everything they learned from the hard money camp—ZH and GATA being two bright stars there—with what they read here. Their effort inevitably leads to contradictions that cannot be resolved. And because ZH, GATA and the rest of the hard money camp is so much more ubiquitous than my little blog, they win by default in minds that are unable to think for themselves.

Here are a couple of the irreconcilable concepts found on this blog that noobs must either reject or ignore in order to hang on to their ZH/GATA CB thesis.

1. Remember when Aristotle wrote this? "In working on this project, I was personally shocked when I discovered that we absolutely NEEDED paper currency in order to set Gold free. In the perfect world you lapse into in your comments, everything you say is well and good. We don't live in that world, however. My biggest challenge in piecing together my proffered solution was to accept what this real world had to offer and avoid foisting my own preferences onto the world like a square peg in a round hole."

Have you ever seen anyone in the hard money camp write anything like this? Or can you imagine them ever doing so? Yet this is one of the core fundamentals necessary to understanding Freegold.

2. And FOA wrote this: "Several years ago, many gold bugs and gold advocates missed the path as the trail turned." "Yes, the war now is between the Euro and the dollar! The Washington Agreement [a Central Bank agreement] placed gold 'on the road to high prices'." "The war between gold and the dollar has been over for a while now… Leaving gold bugs with a lot of questions that ask why this: both systems will strive for a higher currency price for gold; one doing it because they have to; the other doing it because they want to! The casualty on this battlefield will be the world gold market as we know it. A market caught between how Western perception thinks gold's price should be "discovered" and at what price level trading in physical gold craters the entire paper structure… This paper gold market will be cashed out at prices far below real bullion trading so as to inflate further the books of the Bullion Banks,,,,,, not destroy them. At least this is how the US side will proceed."

Again, have you ever seen anyone at GATA or ZH write anything like this? Or can you imagine them ever doing so? This view is so completely antithetical to their most fundamental thesis. And whenever we see the price of the paper gold market fall under the force of short-term manipulation, their instinctive explanation is that the CBs are puking up physical to suppress the price of gold.

This particular ZH article you linked, Edwardo, is superb with regard to this blog, and especially to the topic of this post, Unambiguous Wealth. Tyler notes:

"…there should never be any debate over who owns a given physical asset, as replicated ownership (note - not liens) effectively means someone stole the gold (or there was counterfeiting involved) and was never caught... until MF Global finally expired of course."

This is, of course, the problem with holding your "wealth" in the system. This is an extreme example, where the wealth being held in the system was presumed to be unambiguous—and physical—and yet the system itself imputed ambiguity onto the ownership of that asset, which was only discovered once someone went bankrupt. Possession is the timeless attribute of wealth because true possession is unequivocal. But the system apparently equivocates its own illusory version of possession when it comes to bankruptcy. Therefore nothing held within the ($IMFS) system can be unconditionally qualified as "wealth" under FOA's definition.

This guy, Jason Fane of Ithaca, New York, simply wants to get his gold out of the bank vault and into a non-bank vault at Brinks. Remember, this is one of GBI's big selling points. Your gold bars and coins are stored in non-bank vaults that have no reason or even ability to use them for other purposes like rehypothecation. But even better than that, with gold, you can actually take true possession of your wealth yourself! A million dollars in gold can easily fit into a small box. If that sounds dangerous or risky to you, just take a look at what's happening inside the system today! HSBC's hands are tied until a judge rules on whether Jason can move his own gold that he thought he already "possessed."

This MF Global bankruptcy is like a shockwave spreading out over the whole marketplace. It's like an EMP that could fry the matrix in a flash, once people begin to understand its implications. It's already had far-reaching consequences.

One group that has so far been disproportionately affected is the non-bank physical gold dealer network. Many large and small, retail and wholesale gold dealers used the COMEX paper market to hedge their physical business. Say someone walked in and sold a dealer a thousand ounces of krugerrands. That dealer would immediately go to his MF Global online account and short ten COMEX futures contracts worth 100 ounces each.

So these dealers often have large cash balances sitting at the ready so that they can earn the spread from any customer without taking the price risk. It was not their contracts or COMEX positions that disappeared when MF Global went bankrupt, it was their large cash balances. Active positions were rolled over to other clearing houses, but the cash disappeared.

I have heard about one large gold dealer that had $5M in cash at MF Global. Many smaller dealers had hundreds of thousands sitting there. And they were all with MF Global for one reason and one reason only, Lind-Waldock. "Lind-Waldock was the Charles Schwab of commodity brokers" according to one of my readers who trades commodities. It was the longest-standing discount commodity broker in the world. It had been around for more than 40 years and many big names used Lind-Waldock. It was bought by MF Global's parent company back in 2005, but up until a few months ago, the commodity trading website still said Lind-Waldock at the top.

So for whatever reasons, word of mouth, residual credibility or whatever, the physical bullion dealer network was disproportionately with MF Global when it filed for bankruptcy. And ever since this went down on October 31, it has had an impact on the physical market in the United States. The liquidity these dealers used to hedge their business is not available right now.

So imagine that you walked into a dealer to buy or sell 50 gold eagles today. When he makes that deal with you, he is now taking on position risk. So he's going to have to pay you less for your eagles—or charge you more if you're buying—in order to lower his risk. Previously he would have hedged that risk on his MF Global account. So if you've noticed that the buy-sell spread on physical has gotten wider over the past month, that's why.

(Turd Ferguson reports today that: "Sources tell me this is already happening as bulk physical gold is currently being sold and delivered at $1950/ounce." h/t burningfiat)

And now that you've got that picture in your mind, imagine the dealers' conundrum with intraday $200-$300 price swings, or if the market mechanism for paper gold price discovery breaks down entirely. Some of these dealers have already said they will never go back to paper hedging, period, even if they get their money back! Paper gold is nearly finished.

I'd like to mention now that Jim Sinclair has been absolutely ON FIRE talking about the implications and the shockwave of consequences emanating from the MF Global bankruptcy. In his latest great interview he says that by putting the OTC derivative positions of a bankrupt clearing house ahead of its client's deposits, this case will ultimately break the very market mechanism for price discovery. He says the system ($IMFS) is already broken, but whereas Lehman Bros. was the "Lehman event" for Main Street, MF Global is the "Lehman event" for the insiders. When your clearing house becomes a questionable counterparty, it's over.

He says the only reason it's still working at all (the clearing system necessary for settlement and price discovery) is "rank ignorance" on the part of the participants as to the implications of this MF Global bankruptcy case. And he's not just talking about gold and commodity trading. He says that virtually any money held anywhere within the system right now exists only insofar as the insiders have yet to figure out the dire implications of MF Global. This is a crisis of confidence. Remember where I said demand/velocity can turn on a dime?

Jim says there's no way to know if the clearing house being used by your broker or money manager is using your funds as collateral for gambles on its own behalf. And the way the law is written, the bank that is lending money to your clearing house apparently has the primary claim to your funds, ahead of you, in bankruptcy.

Most people, when they sign up with a money manager, don't read all the small print. And so they don't know about these clauses that are in virtually all of these types of agreements, or if they do read them they either don't understand them or they simply live with them. Here is the clause from the MF Global agreement:

"7. Consent To Loan Or Pledge

You hereby grant us the right, in accordance with Applicable Law, to borrow, pledge, repledge, transfer, hypothecate, rehypothecate, loan, or invest any of the Collateral, including, without limitation, utilizing the Collateral to purchase or sell securities pursuant to repurchase agreements [repos] or reverse repurchase agreements with any party, in each case without notice to you, and we shall have no obligation to retain a like amount of similar Collateral in our possession and control."


The term hypothecate comes from your creditor's "hypothetical control" over your asset until you pay your debt. To "rehypothecate" an asset, your creditor is giving "hypothetical control" of your asset to a third party, another creditor, in exchange for what is essentially a gambling loan to himself. This is technically legal, and if your broker or clearing house is international, it may be rehypothecating your entire account, even if you haven't borrowed a dime.

As I said, most people don't even know about this. But the big hedge funds have teams of lawyers that go through these contracts and strike out such clauses before they ever fund an account. And those that did got their money back right away. This happened with Lehman Brothers as well. And with Lehman, some hedge funds that failed to strike out these clauses are still fighting to get back some of their money.

As sick as this all sounds, it's not only technically legal, it's rampant! Here is what Reuters found as to the proliferation of what they termed "hyper-hypothecation"…

"Engaging in hyper-hypothecation have been Goldman Sachs ($28.17 billion re-hypothecated in 2011), Canadian Imperial Bank of Commerce (re-pledged $72 billion in client assets), Royal Bank of Canada (re-pledged $53.8 billion of $126.7 billion available for re-pledging), Oppenheimer Holdings ($15.3 million), Credit Suisse (CHF 332 billion), Knight Capital Group ($1.17 billion),Interactive Brokers ($14.5 billion), Wells Fargo ($19.6 billion), JP Morgan($546.2 billion) and Morgan Stanley ($410 billion).

Nor is lending confined to between banks. Intra-bank re-hypothecation is also possible as evidenced by filings from Wells Fargo. According to disclosures from Wachovia Preferred Funding Corp, its parent, Wells Fargo, acts as collateral custodian and has the right to re-hypothecate and use around $170 million of assets posted as collateral."


Here's a question. Say you have your money with Conservative Wealth Management in Los Angeles who is churning you a nice, conservative 3% a year on your $200,000 retirement account. Where did "Conservative" put your money to get that return? And whoever Conservative put it with, where did they put it? Where is your money right now? How many different entities are using your assets as collateral to churn themselves a high-risk return? And does anyone else have "hypothetical control" over your money in the event one of the counterparties in the chain goes bankrupt? Jim says you'd have to be a "past master of actuarial accounting" to know.

It is very difficult for shrimps to think like Giants. Usually we just follow in their footsteps. But there's something very important that you really REALLY need to understand—right now—about people with really big money. And that is that they are much quicker to panic than we are. Big money is nervous money. Always. They live much closer to the panic end of the panic-calm spectrum. While we shrimps sleep soundly, big money wakes up in the middle of the night with cold sweats.

We talk about making a return on our money. But the truly wealthy are first and foremost concerned with preserving their capital. Earning a return is a secondary concern. Big money stays invested mainly because they are not losing money. How many fund managers beat the index in the long term? Nary a one. Yet their clients stay "invested" as long as (at least) they aren't losing money.

MF Global and rehypothecation will move these people ever closer to the panic button. It merely requires time for the implications to sink in. Apparently they are not invested in the location they think they are. Their wealth is not parked where they think it is parked. Think of it like a valet. What if you took your claim ticket and tried to fetch the car yourself? What if you found an empty space where your Bentley was supposed to be parked?

I was emailing with a friend yesterday about this whole MF Global thing, and he had a great analogy for this. Compare these big money folks to the average guy who rides the bus. You miss a bus, so what? It's inconvenient but another bus will come. It takes a long time to sink in that another bus isn't coming. It's not until there is such a big crowd waiting at the bus stop for the next bus that people start thinking "even if a bus comes there are too many people to fit on one bus." In that mindset the surest way to cause a riot is to send one bus i.e., not enough buses. You have to fight to get to the front of the queue. This is a bank run mentality.

And this is a key difference between the average guy and the big money. Big money isn't used to being kept waiting. Big money owns the "bus company". They know the buses aren't going to run before the little guy. They panic early. There was an electronic bank run around the time of the Lehman collapse. That was one of the reasons why governments around the world stepped in with fresh deposit guarantees. But there were no lines outside the banks to alert the average guy to what the Giants were up to.

Right now gold is $1,712 per ounce. If you have $200,000 in ambiguous claims floating through system-space, your account is right now worth 116 one-ounce gold coins of unambiguous wealth. But here's the thing. You are never going to beat the big money to that panic button. There are enough gold coins on the market right now that you could get your 116 of them without affecting the price. But if you're waiting for the first signs of panic, you're not going to get anywhere near 116. You'll be lucky to get six or seven.

There's only one way to beat the Giants to the gold, and that is to run in front of them. Jim ended his interview by saying, "Take care of yourselves, because nobody else is gonna do it for you. Have what you own, otherwise you don't own it." What a great interview!

But, unfortunately, Jim also subscribes to the hard money camp CB/fiat thesis. And with this view, he comes across as colorblind to the difference between the ECB and the Fed/BOE, the difference between the euro and the dollar, the difference between a gold standard and Freegold, and the future system that is already unfolding. The problem with his view is that, while it does deliver solid individual advice, it leads to poor macro conclusions and predictions.

For example, Jim and I both agree that the $IMFS is kicking the can down a dead end road. The system is basically dead already, and the MF Global bankruptcy case may very well turn out to be the last nail in the confidence coffin. But he concludes that this obviously means a return to a commodity currency based on historically similar occurrences.

Like others in the hard money camp, he envisions this reversion to a commodity base being crafted by some of the same people running the failed current system through a revision of the unit of account function at the super-sovereign level. Jim says, "When things become extraordinarily difficult, you'll find that any attachment to gold, even if it's via a virtual reserve currency, and a global Western-world M3 for valuation, it will be considered to be a solution and probably will be a road out."

"Virtual reserve currency" means something—like the SDR—that's primarily a unit of account for the purpose of providing monetary stability. But with the primary and secondary media of exchange becoming separate but symbiotic counterparts, stability will be automatically achieved, and a "commodity-based" super-sovereign unit of account comparing fiat M3 with a centrally managed gold price will be completely superfluous and unnecessary (i.e., as unused as the SDR).

Eric King: "So that's where we're headed basically? The destruction of our current system?"

Jim Sinclair: "You can fix a market, but wait 'til you see what you have to do to fix a whole system."

Eric King: "One final question, Jim. We've talked about gold being revalued. When that day comes, and there is a gold-backed currency once again, will the world be able to turn itself around here?"


This is two people discussing a possible solution to a serious problem at the 11th hour. What they don't understand is that this very scenario—$IMFS collapse—was faced 32 years ago and a solution was crafted at the highest levels. That solution took 20 years to launch (at great cost, mind you) and today it stands at the ready. If you read too much ZH and thereby think the European debt crisis changes things in some way, guess again. The European debt crisis is a symptom of the dying $IMFS, not the Eurosystem. In every way this is true.

Jim talks about the sociopathic bond vigilantes (a relic of the $IMFS) who can take entire countries down through the debt markets. He talks about them waging WWIII in the bond markets every day. If you want stability, insulated from these sociopathic traders, you don't want some slipshod unit of account basket solution patched together by the IMF at the 11th hour. You're more likely to fall back on the long-line plan that took two decades to implement and another decade to season.

The Achilles' heel of the $IMFS is that debt is the system's official store of value and foreign exchange reserve. And bearing this flaw, savers, currencies, banks, governments and even entire countries are all vulnerable to the inevitable failure of the debt.

The problem with debt performing these functions is that debt is a derivative of the currency itself. Currency moves opposite the flow of real goods and services. And with a derivative of the currency acting as the only counterbalance to uneven trade, there emerges the exact opposite of a natural adjustment mechanism for correcting trade imbalances.

With debt as the store of value and official reserve asset, the party producing more real goods has no way to record his net production (savings) other than lending that excess currency back to the consuming party, encouraging him to consume more, and recording the new debt. A true adjustment mechanism makes the balance swing back and forth. But the debt system requires an infinite debtor. So the system is designed to fail. The debt backing the system is designed to fail. And as the official store of value and reserve asset, the savers, currencies, banks, governments and even entire countries are destined to fail in the end… under the $IMFS.

Enter the euro. According to the ECB website, the road to the euro began in 1962, shortly after the launch of the London Gold Pool which aimed to keep gold cheap in support of the $IMFS. The French were the first to pull out of the Gold Pool and also the first to mark their gold reserves to market in 1975. By 1997 even the Germans were marking their gold reserves to market in anticipation of the euro launch date.

Today the Eurosystem still operates under the same $IMFS, yet it declares proudly on line 1 of its weekly statements that gold is its primary currency reserve, marked to market every quarter. And anyone can download the data from its website and plug it into a spreadsheet. If you chart it, it looks like this:


(Please see my Euro Gold post for more.)

The point is, there's a turn-key problem-solving system waiting in the wings. So whenever you hear anyone in the hard money camp or the Anglo-American press talking about something that sounds like the SDR with "gold backing" (watch out for that word "backing") don't buy it for a second. They simply don't have the full picture and, therefore, don't know what they're talking about when it comes to macro solutions. But even so, they're still right when they recommend that you get your butt out of that reclining black office chair and take personal responsibility for your wealth. Hear hear Jim:

"Take care of yourselves, because nobody else is gonna do it for you. Have what you own, otherwise you don't own it."
_________________________________________________________

**Christmas Fundraiser**

Old FOFOA needs your help again. It's been 10 months since my last fundraiser, and I know there are a lot of new readers out there. Yeah, I did drop a hint or two back in August, but to tell the truth, that didn't turn out to be much of a fundraiser (perhaps because of that Scary Correction). There are a few of you who have been very regular and generous in your support! You know who you are, so THANK YOU THANK YOU!! But for the rest of you, I could really use your support right now.

In the spirit of full disclosure, I am living the austere dream! I have no debt, low expenses and a modest stack of gold coins. And I'm able to be here writing this blog thanks to your generous support. For the past couple of years, donations alone have been covering my expenses. But lately they have only been covering a portion of my expenses, and now I've run down my cash reserves to the point that I need to do something, either seek an income or dishoard some of my savings prematurely.

With 2012 right around the corner, we've got a year of heavy events in front of us; a Presidential election, the euro debt crisis, helicopter drops, etc… So if you appreciate this blog and having me here to do what I do, and if you are one of the thousands of readers that checks in every day, please consider making a donation, a contribution toward keeping this going into 2012.

Thank you!

UPDATE: Thank you to the 172!! of you who donated so far! Bless you, and Merry Christmas!

Sincerely,
FOFOA

To all savers, the $IMFS asked me to pass along this (love letter?) message…


_________________________________________________________

UPDATE:

New GLD Puke Alert from Lance Lewis


Lance: "As long-time readers know, a one-day decline of over 1 percent in GLD’s holdings is what I call my “GLD Puke Indicator,” and it flashed another “buy signal” again today, indicating that we are within + or – a day or two of an important low in the gold price.

As you can see from the chart, this indicator is nearly foolproof when it comes to marking important lows in the gold price. Now, recall that we can sometimes see “clusters” of these signals around major lows in gold rather than just a single signal, but we haven’t seen such a cluster since back in 2008 during that epic panic.

There has also been one false signal back in early December of 2009, which came just a few days off a peak, but there has never been a false signal that has occurred months after a gold price peak has been put in like this one is and definitely not with MarketVane’s bullish consensus below 75 (and especially not at 58 like it is now).

In fact, the closest analogy we have to the current low in the gold price was the 60% MarketVane reading back on July 20, 2010, which came 8 days before the July 28, 2010 “GLD puke indicator” signal, during which period the HGNSI hung around 9%, vs. the current 0.3%.

You will recall that this low in gold that was marked by the intersection of these indicators in July of 2010 just below $1200 was also THE low for the gold price ahead of the Fed announcing the launch of QE2 in November of 2010.

Will history repeat with this week’s low ahead of QE3’s launch in early 2012? Perhaps it won’t repeat exactly, but I suspect it will most certainly rhyme."

317 comments:

1 – 200 of 317   Newer›   Newest»
Tyrone said...

A while back, someone asked...
Who shot Tyrone?

Answer:
The Man with the FreeGolden Gun!

And Oil Bidding Directly for Gold. Oh, my.

Cheers!

Ramon said...

Tyrone,

Speaking of oil, Lars Schall has an excellent interview with Maarten van Mourik that displays haunting echoes of FOFOA's Flow articles.


FOFOA,

I took Jim Sinclair's gold certificate ratio to be very similar to Freegold. It seems the primary distinction is reliance on gov't management for an additional layer of paper reserves instead of markets as with Freegold/RPG; like using bonds as the intermediary for price discovery mechanism rather than open exchanges with direct trading. What am I missing?

The austere dream is alive and well here also. Sinclair offers a compendium: why not a FOFOA Financial Field Guide? The PDFs are already prepared.

Chico_hawk said...

I suspect this has already been addressed, probably a long time ago, but in relation to the ECB's ConFinStat where under Assets it lists #1 Gold and gold receivables, what do the gold "receivables" represent & do we know what the breakdown is between gold & gold receivables?

thanks for bearing with me.

Michael said...

I just read a 'come-on' from one of the news letters I subscribe to. The letter is Daily Wealth. As often happens they try to sell a related publication. In this case they are pushing a Brian Hunt pub.
Here is a quote:
"In this classic interview, Brian debunks some of the biggest myths and misconceptions about gold, describes how it can be used as insurance, and explains why he's rooting for the yellow metal to fall all the way down to $300 per ounce."
I don't follow Hunt but he must be referring to the "gold going into hiding" expectation we here at FOFOA often discuss.
Does anyone read Hunt to confirm that he wants gold to drop as a sign that the paper market is cooked?

78Rubies said...

Comments…

Michael said...

The MFGlobal collapse has been THE wake up call for me. I no longer feel that ANY investment I have is safe. Even Fidelity has a clause that states ...roughly..."we will cash you out as though you own what you think you own....BUT we do not necessarily have the stocks, gold or whatever that you think you own". All this is fine UNLESS thing go South. If there are rapid bankruptcies and BIG players start to fall then even Fidelity might be unable to make good on its assurances.
I am personally acting on these fears. It is a hassle but if MFGlobal is just the beginning then I will look smart. If I'm wrong I will have lost the opportunity cost of keeping my money in the bank...which is ZIP anyway.
Turns out that 100 dollar bills and gold both fit well in a safe deposit box. If the bank itself fails...well I'm sure some one will warn me....right...
HOW THE F•CK did all this happen to the this country?
We here know but THAT question will be on the lips of many Americans...soon...I fear...

tudsy said...

FOFOA,

I appreciate your brave commitment to the Eurosystem in these turbulent times and in the face of the ZH onslaught. I understand your argument about debt/currency being insufficient for properly adjusting trade imbalances, but can you clarify how the Eurosystem solves the issue of trade imbalance within the Eurozone itself?

I've seen many commentators note that the fundamental problem in the Eurozone as it stands today is exactly the trade imbalance between the core and the periphery and the lack of any mechanism to right it. While the monetary setup of the Eurosystem seems strong, what about the problems caused by its imperfect fiscal union?

One Bad Adder said...

http://stockcharts.com/h-sc/ui?s=$IRX&p=D&b=5&g=0&id=p73458434997

We appear to be reaching an inflection point in all things monetary as the Boyz struggle to keep PoG "credible" today - buying the dips like crazy imho.
Ultimately, as FOFOA has so eloquently pointed out above, ALL will seek to "have and hold" reality.
This trend is typified vividly in the short T's (linked) where bids at par or above spell curtains for the System du-jour.

DP said...

C

victorthecleaner said...

todsy,

the trade imbalance between the core and the periphery and the lack of any mechanism to right it. [...] what about the problems caused by its imperfect fiscal union?

The silly answer is this: It is the German savers who are to blame. They should have saved their surplus in gold (or perhaps other real assets) rather than leaving their money in the bank. Their bankers just bought Greek government bonds with that money. What a pity.

You see how big the implications are: Savings in the bank are bad!

Once the savers behave rationally, all the talk about the fiscal union is redundant. When I read papers such as the Financial Times, I always get the impression they want a fiscal union for Europe because they hope they can eventually force the ECB to monetize these deficits. Once the savers have changed their behaviour, this will be pointless.

Victor

victorthecleaner said...

FOFOA,

when I read your comments about the hard money camp, in particular Aristotle's posting, I had to think of Jim Rickards' proposal of a US dollar gold standard at $7000 per ounce.

Just the existence of the euro renders this attempt futile (unless the Americans indeed manage to steal all the European gold). First, as soon as the US devalue with respect to gold and thereby achieve a better 'gold backing' for their dollar, the euro would immediately enjoy effectively the same backing as long as there is a liquid market for gold in euros.

Second, as soon as the market suspects that the price of gold in dollars is artificially low (which would probably be the case at $7000), gold in euros would be valued higher. This would devalue the euro with respect to the artificially high dollar, cause the US trade deficit to widen and gold to flow from the US to Europe.

The ECB can speed this process up at any time by purchasing gold in euros and thereby increasing the valuation gap. Rickards would probably call this currency warfare, the nasty Europeans devaluing again, but in reality they would have just called his bluff, i.e. his still artificially overvalued dollar.

The mere existence of the euro prevents the US from returning to a gold exchange standard. Anything short of free convertibility in physical gold at a market price would fail after a short period. The requirement is just
1) physical only settlement in euros without any synthetic supply (unallocated)
2) enough liquidity for CBs to trade their quantities

Victor

FOFOA said...

Hello Victor!

!!!!!!!!!!!!!!!!!!!!

I don't know what else to add. ;)

Sincerely,
FOFOA

Casper said...

How right you are Victor!

It's quite an irony that "Germans are to be blamed afterall!" - those nasty savers.

I also find talk of "Eurobonds" to be quite funny since those bonds, if they ever get issued (which I don't believe), can be looked upon as currency with some additional currency (interests) in the future attached to them. Eurozone already has "Eurobonds", they float around by the name of "euros". A bond that will provide either goods&services or gold. If not, then euro is no more.

"Once the savers behave rationally, all the talk about the fiscal union is redundant. When I read papers such as the Financial Times, I always get the impression they want a fiscal union for Europe because they hope they can eventually force the ECB to monetize these deficits. Once the savers have changed their behaviour, this will be pointless."

Indeed! As more and more savings are transfered to gold, the ECB will be able to print more and more as it won't hurt those savers anymore.

How probable do you think that some country within the eurozone exits the zone or at least there's some popular uprising in any particular country. I don't mean the economic reasons (I'm aware of your stance in this regard and agree with it).. I'm thinking of irrational motives and what the consequent reaction of the ECB or other institutions would be?

Casper

Motley Fool said...

Comments...

mortymer said...

5/22/98 ANOTHER: Sir, Yes. I do look for much destruction of the gold market as this progresses. I think, much of this "fight of money" will happen between 1999 and 2000, as the "gold trading center" in the middle east will be completed by then....

Dubai Gold Souk

http://images.google.ca/search?svnum=10&hl=en&lr=&q=Dubai+Gold+Souk&btnG=Search&biw=1113&bih=783&sei=OtzlTt3DE4HMhAeM5cT4DQ&tbm=isch

Dubai's share of value of trade in gold and diamonds to its total non-oil direct trade increased from 18% in 2003, to 24% in 2004. In 2003, the value of trade in gold in Dubai was approximately Dh. 21 billion (US$5.8 billion), while trade in diamonds was approximately Dh. 25 billion (US$7 billion) in 2005. India is Dubai's largest buyer of gold, accounting for approximately 23% of the emirate's total gold trade in 2005. Switzerland was Dubai's largest supplier of gold ingots, wastes and scrap. Similarly, India accounted for approximately 68% of all diamond-related trade in Dubai; Belgium's share in Dubai's diamond trade was about 13% (2005).
~wiki

http://en.wikipedia.org/wiki/Dubai_Gold_Souk

mortymer said...

Here is more:
http://www.alsjazeera.com/dubai_city_of_gold.html

http://www.dubaicityofgold.com/index.asp

and one more news:
http://www.dmcc.ae/jltauthority/gold/news/news-details/240/

"Dubai, UAE; 2 December 2011: Following the unveiling of its first UAE gold bullion coin prototype in August 2011, the Dubai Multi Commodities Centre (“DMCC”), the licensing authority for the Jumeirah Lakes Towers (JLT) Free Zone, is proud to release the first impression of the design of the second UAE bullion coin, in honour of His Highness Sheikh Mohammed Bin Rashid Al Maktoum, Vice President of the UAE, Prime Minister and Ruler of Dubai..."

"...The DGD gold standard, launched by DMCC in 2005, is the adopted quality standard for gold and silver bars production and technical specifications in the region and is benchmarked to international standards..."

mortymer said...

VTC:

"...One day soon, this "paper gold item" may lose it's "integrity from oil" by way of "competition" from a new reserve currency! In that day, "paper gold" will rush to become "physical gold" as "dollar gold contracts" rush to become "Euro gold contracts". You see, the value of the gold lost from the Euro CB sales will return in the form of a "Euro strong in gold". The "gold reserves" held for the EURO will offer strength, but it will be the total destruction of the dollar gold market that does make " this currency go home"!..." A:5/26/98

J said...

Mortymer- I saw the dubai gold coins at the airport. They wanted over $2200 for a 1 ounce!

Jeff said...

Rehypothecation, fractional reserving, whatever you call it, the first requirement is confidence.

I would watch this price correction carefully. Paper gold price cannot be allowed to run away to the downside, any more than it can be allowed to spike too high. IMO 1500 would be a real danger sign for the paper managers.

J, I was in an airport once. They wanted $12 for a rice burrito. I don't buy gold, or burritos, in airports.

mortymer said...

Perhaps a Q for Bron or/and others:

"Switzerland was Dubai's largest supplier of gold ingots, 2005"

-> Could this be related the gold which was leased from CBs, sold and then delivered via the futures gold contracts from mines?

mortymer said...

In one searches at the page 4 Thoughts with the keyword: "Portillo"
Then there is this speech:

"The forum was titled, "America and Europe: Will European Monetary Union Fracture the Alliance?" Foreign policy analysts and experts talked about the possible impact on relations between Europe and the United States. Mr. Portillo gave his perspectives on the Euro currency and the importance of maintaining stable relations with the United States."

http://www.c-spanvideo.org/program/106190-1
May 27, 1998

JR said...

Tudsy,

Here is more color on Victor's point. So saving in the currency enables imbalances and malinvestment through new debt creation; saving outside the system in gold is the solution

The Return to Honest Money
"But debt itself is not the cause of our problems today. Today we have a situation where the vast majority of excess production value (excess capital) is enabling massive amounts of global malinvestment through new debt creation. That has peaked and is now contracting. But the problem is not the debt itself. The problem is the enabling effect of excess capital not having a viable alternative that floats against the currency. The problem is the lack of the adjustment mechanism of Freegold. There is no viable counterbalance against uncontrolled debt growth today. So we are only left with credit collapse and hyperinflation of the monetary base to clear the malinvestment from the system.

It is easy to blame this on debt as a principle, but unless you don't mind being wrong, there are some deeper explanations out there. Debt under Freegold will not reach such destructive levels. "Easy money" thinkers may or may not get their debt-free money, but if they do they will suddenly realize the flaw in their reasoning. Oops! That it can only have expandable value (needed for the welfare state) if producers are willing to hold it while it expands Without that, socialist welfare expansion will simply dilute the value of the currency and be as limp as a eunuch."


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

A Winner Takes the Gold
Remember; savings = production – consumption. And as I wrote in my last post, buying physical gold acts just like consumption with regard to the balance of trade, yet it also works like net-producing/saving to the global economy in that it leaves "on the table" all useful net-production as well as all of John Locke's "things of short duration, things that are consumed in the support of life, and things that invade the rights of others."

Okay, that's enough density. Put simply, there is a very simple, good, moral and ethical solution to the problem of global trade imbalances. And before I tell you what it is, I will say this: If you're not part of the solution, you are part of the problem. And that includes Munger and the Dingbat.

The simple solution to all the world's monetary and trade-imbalance problems is...... dot dot dot....... Buying PHYSICAL gold with your savings. It works (very roughly) like this:

If every Chinese saver were to take his cash savings (yuan) out of the bank and start buying the limited stock of physical gold already inside China, the price of gold in yuan would start to rise. This would create a theoretical arbitrage opportunity to buy gold cheaper outside of China and import it. Gold would flow into China. Of course this arb would happen naturally and automatically which would equalize the price of gold across borders.

And this gold flowing in would balance all other trade. If China exports X amount of goods and imports Y goods plus Z physical gold—with X > Y obviously—then X = Y + Z. The quantity of gold required to settle the accounts would float in price. Arbitrage through the open market between currencies and gold would automatically remove imbalances over time. Imports would always equal exports as long as the price of gold fills the void. And over time the price and flow of gold would automatically stabilize, as would the global monetary system.

Michael H said...

comments ...

Matt said...

JR - "Easy money" thinkers may or may not get their debt-free money, but if they do they will suddenly realize the flaw in their reasoning. Oops! That it can only have expandable value (needed for the welfare state) if producers are willing to hold it while it expands Without that, socialist welfare expansion will simply dilute the value of the currency and be as limp as a eunuch."

JR, having spent a considerable amount of time on 'debt free money' fourms can you explain why money needs to be expandable (isn't money a concept afterall)? While I agree that rapid ecomomic expansion is facilitated by expandable money, i am not convinced that the economy needs uninfringed debt money creation to function. My preference is to have 100% reserve banking with a target (0%) inflation rate that would require steady monetary expansion roughly inline with gdp growth (assumedly) and where lending will come from genuine savings so that capital investment is less frequent but still possible if the investment thesis is strong enough. ie, banking performs exactly as the wider population already believes it does!

Matt said...

JR - Aplogies: (isn't money a reference point afterall)?

Matt said...

JR - Aplogies: Apologies

Edwardo said...

Dear FOFOA,

While I am honored and delighted that you've found something in my comments-even if it's just a link- to act as grist for an incisive new post, I do wonder what I might have written that prompted you to respond as if I did not share your views on the flaws in the ZH/GATA perspective, especially as they relate to gold. Perhaps, I was just a useful foil to review a key issue that separates your views from those occupying the "hard money camp", but, just for the record, in case there is any misunderstanding, I do not share their views on the role of gold. However, I do admit that I am less sanguine than you appear to be about the nature of Central Banks.

Motley Fool said...

Matt

100% Reserve banking is a very bad idea. It would not last one Christmas. The volume of trade is not a constant thing, it is seasonal, with spikes and drops at certain points.

One requires flexibility in a monetary system, to facilitate fluctuating levels of trade.

TF

d2thdr said...

Keep up the good work.

Matt said...

MF/TF doesn't business credit (AP/AR) and the flow of currency combine to take care of that?

Motley Fool said...

Matt

Not if you restrict bank books like that. All business has a clearing cycle for which that liquidity is required. Of course with multiple businesses, it forms aggregates of required credit.

Your other goal of 0% inflation is also unattainable with reactive monetary policy(such as our current system).

TF

Matt said...

MF, while I understand that businesses use their overdrafts to cover cashflow shortfalls. Does the shortfall really require an aggregate increase in the money supply or do they make use of the drawdown facilities because it is available?

Most arrangements in business can be restructured if needed and 'industry norm' (such as extended credit terms) is nothing but indentured practice built within the confines of what is possible. If a project is viable but has an extended cashflow cycle than should be able to access funds from existing savings without the need to create new money.

0% inflation would just be a target.

Motley Fool said...

Matt

I understand what you are trying to say.

In broad terms the most important thing I learned from FOFOA is not to enforce hard money on those who wish for soft money, or enforce soft money on those who wish for hard money.

It always ends badly.

Your conception is a form of hard money. Would it be great if we could all use hard money? Yes. But. Not all men are honest, and not all men wish to repay what they owe. And sometimes, sometimes things go awry despite the best intentions of honest men.

For this reason, for us as a species to live in harmony, we must separate the two. Let those who wish for soft money, use it, and we all of us do to some extent; let those who wish for hard money use it too, and there exists the other part of most men that agree with that.

We have tried over the centuries to enforce one or the other, it always ends in tears.

In some ideal world, all men are honest and nothing ever goes wrong. This is not that world.

TF

Flore said...

It sure looks like Victor has found the path...

dieuwer said...

I understand the implications of the MF Global collapse and the need to own physical gold in your own possession.
But how about Central Banks? Is it ok for them to own gold on the books, but not in their own vault? Does any Western central bank actually HAVE the gold it SAYS it owns in it OWN vault? How about the Asian Central Banks?
What happens if a European or Asian Central bank has gold stored at the NYC FED and the FED refuses to relinquish it? Gold War ??

JR said...

Matt,

Echoing MF's excellent commentary above, particularly the idea "In some ideal world, all men are honest and nothing ever goes wrong. This is not that world", here is FOFOA discussing one of Gary North's proposals for re-instituting a gold currency:

comment to One Tin Soldier

The point of Gary's scenario, minting 1/10th ounce coins and then handing them out, is to get gold back into circulation again. He wants new gold money. But the point of Freegold is to finally free gold of its link to the debtors' folly. Circulating small gold coins as the currency always ends in tears for the savers. The debtors will always borrow and expand the currency, even if it is gold. But in Freegold, the gold floats against the debtors' folly. And it is the LACK OF A FLOATING MONETARY RESERVE in all other systems that gives your elites the power to grow beyond reason.

It is not fiat. It is not the printing press. It is not the Fed. It is the SYSTEMIC LACK of a floating alternative for the producers to store their savings that automatically funnels that power back to your power elite. It is what allows an expanding currency to expand its value in favor of the elites. Without it, the expanding currency would just dilute its own value, keeping the power of the printing press in check.


This was Aristotle's big epiphany back in 2000. (You can read all about it in the link in the above post) This is when it finally clicked for him, what FOA was saying. It is so extraordinary and seemingly counterintuitive that very few will ever understand it until it actually unfolds in front of their eyes. And it is, that we actually NEED fiat currency in order to free us from this burden, this never-ending struggle between the debtors and the savers. We NEED fiat currency to truly set gold free. Gold money just doesn't do it. It has been tried several times and it always ends badly because of the reality of human nature.

Gary's system might be the perfect system in a perfect world. But as Aristotle said, Freegold is the perfect system for our real world, our imperfect, real world. Freegold is what will keep the power elite in check, not gold money.


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

Aristotle's commentary linked above in FOFOA's main post:

"In this commentary I shall attempt to clearly lay out what I feel this "perfect" monetary system to be -- the *perfect* system for a consistently imperfect world, that is. I am not so bold as to think that the world of human ambition and disposition is something that can be altered to suit the perfection of our preferred (Gold coin) currency's characteristics -- especially the limitations (fiscal austerity) it imposes on its users, the population at large. I therefore resolve myself (and hope you do, also) to the humble thought that our currency system as a whole might be artfully developed into a state of harmony with the world in which we do live. The present system, and all failures before it, have been as square pegs in round holes. With the system to be described, I hope to avoid any system that lends itself to the repetition of past abuses and failures.

[...]

In working on this project, I was personally shocked when I discovered that we absolutely NEEDED paper currency in order to set Gold free. In the perfect world you lapse into in your comments, everything you say is well and good. We don't live in that world, however. My biggest challenge in piecing together my proffered solution was to accept what this real world had to offer and avoid foisting my own preferences onto the world like a square peg in a round hole."

JR said...

Matt,

The post you quoted was about the idea that what easy money folks want - expandable money with expandable value - is not possible unless there is also real world value that is saved in that money. Money has no value, its the real world that provides the value. Without the real world value being saved in the money, expandable debt just dilutes the purchasing power of the money. You need new savings for the new debt to have expandable value.

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

FOFOA is onto a whole other track - the separation of money functions into a savings medium (secondary media of exchange) separate from the medium of exchange - in that context, here is some real good discussion of the medium of exchange being available in unrestricted amounts

"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.

Matt said...

Thanks MF, I take your point entirely.

I am very curious to see how debt free money would operate more than hard of soft money but my preference for hard money is to see how the economy would operate with minimal inflation (what is truly productive enterprise and what is inflationary activity?).

I know FOFOA believes our core economic problem is imbalances brought up through an inability to clear residual trade balances but I am still (stubbornly) of the opinion that debt based money systems are also an economic drag on the whole (either through the link between debt and general access to money or through the inescapability of inflationary cycles).

Having said that I can see the benefit of having debt based money with either very strong bankruptcy laws or laws that limit non-productive borrowing (such as Steve Keen's suggestion that non-productive asset lending be limited to a set multiple of yield so that if you want to over bid you have to have the capital in hand).

My ideal situation - a core debt free money supply with the ability to expand access to capital via borrowing for productive purposes, like a two tiered money system,,, Twist it around a bit and you probably come to free-gold anyway!!

victorthecleaner said...

Matt,

100% reserve ratio in the banking systems (just pooling the saved money and lending it, similarly to the old building societies that did not have any banking license) together with business credit sounds a lot like Fekete promoting the real bill doctrine.

Yes, you could even combine this with an old fashioned gold standard, and it would probably work much better than the present fiat system with debt as the long term savings.

Still this system would be prone to gaming such as
1) writing uncovered bills that are not backed by a lot of goods in the inventory
2) trying to roll over bills beyond the 90 day period even though there is no corresponding real economic activity
3) abusing bills to fund speculation or even government deficits (Hjalmar Schacht comes to mind again)
4) accumulating bills rather than taking delivery of physical gold in order to clear international trade if the balances become asymmetric

So yes, it would be 'harder money' than the present system and probably last substantially longer. But it would still have some of the flaws of the gold standard (because it basically is the pre-1922 gold standard).

Victor

Matt said...

Hi JR, your comments came while posting. I will read them again as soon as I have more time. Please note I'm not necessarily in the hard money camp but get there from being in the debt free money camp (and realising that debt free money only retains value from restricted supply).

Why should fiat for day-to-day use be debt based? Why should the money I use for my weekly shopping and to pay my weekly rent be the debt of some other party rather than just a token with no liability behind it? Perhaps I should use gold for saving, bitcoin for transacting and fiat for borrowing!

JR said...

Matt,

FOFOA is not discussing debt free money. FOFOA is instead discussing bifurcated monetary system: 1) a credit fiat system of lending the currency medium of exchange, and 2) a separate store of wealth based on the possession of a real, tangible good - gold.

The Value of Gold:

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

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

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

After a period of slower talking and deeper thinking, I arrived at a position with a realistic eye on the middle ground giving me clearer monetary understanding as it works in the real world, and also how it COULD in fact (and should) be made to work immeasurably better. Simply put, my thoughts had evolved from their starting point, and I became comfortable with my own concepts of a unique kind of monetary idealism that existed at the nadir--the bottom of the pendulum's arc. ...

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"


================================
FOAFA via Reply to Bron
"Gold could / would be a final trade; I'll give you ten cars (or gold) for your house,,, deal done. If I want more time to pay, I and we must engage a fiat loan."

Fiat currency (the medium of exchange) is for lending, not gold (the store of value).

Matt said...

Hi Victor, thanks for the response. Call me a bleeding heart but I'm still a fan of debt free money although realistically I can't see that coming about any time soon!

In light of which I am more than happy to see freegold become the defacto intranational standard. from there, who knows what economic shifts will occur.

JR said...

Matt,

You comment:

"Why should fiat for day-to-day use be debt based?"

Its not an issue of should, that's what money is - credit.

Once Upon a Time:

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

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


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

Gold is Money - Part 3

"The following is a post by Randy (@ The Tower) describing the end of the gold coin standard and the dawn of the Federal Reserve System (in blue).

[...]

"To which Baker proclaimed, "Mr. Untermyer, THE FUNDAMENTAL PRINCIPLE OF BANKING, perhaps more than some others, is CREDIT." [emphasis added]

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

[...]

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

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


The point here is that our modern understanding of money, or any money concept for that matter, combined with our modern taste for borrowing, lending and trading of credit and debt, may not NECESSARILY be a perfect fit with a pure gold standard. Even a gold standard, with gold as the actual currency, is manipulated by the banks through confidence-based lending schemes. Sure, a gold standard somewhat limits the collective in its more nefarious pursuits, but it also has flaws that always seem to lead to the same conclusion... failure.

Perhaps it is time for us to consider another alternative, even a natural one that is happening whether we like it or not. How about a new, de facto, free market-driven stasis instead of the old de jure (rigged) false parity relationship... how about Freegold?


Cheers, J.R.

JR said...

Take note of this Matt:

"Even a gold standard, with gold as the actual currency, is manipulated by the banks through confidence-based lending schemes. Sure, a gold standard somewhat limits the collective in its more nefarious pursuits, but it also has flaws that always seem to lead to the same conclusion... failure."

Matt said...

Cheers for the response JR, struggling to keep up!

Please note that I didn't claim FOFOA or freegold has anything to do with debt-free money, only I saw in the comment you posted ""Easy money" thinkers may or may not get their debt-free money, but if they do they will suddenly realize the flaw in their reasoning. Oops!" and thought I would query this as debt free money (which I am a fan of depending on the context) must of course be hard money or at least harder than anything we have now to hold any value.

(also please note that I have been a reader for a fairly long time, just not a commentator, and I am also not a hardmoney goldbug!) While I know money is credit I am not convinced that money needs to be credit just because that is the system we have in place.

C'est la vie though - I am a realist and so believe freegold will happen long before debt free money (or my preference for 'substantially' debt free money)!

Robert Mix said...

Blogger ate my comment... Too irreverent? So, I try again.

---

Whenever I am out of the country (like now) I always feel a little nervous about being far from my gold...

So, I have a big favor to ask you guys. Please do not start any bank runs until at least Thursday (as I want to be first in line that morning). Similarly, please don´t be buying up all the gold until I get my crack at buying one more time, at least!

This whole MF Global failure looks like it has MANY cracks reaching way into the $IMFS. As some of you above have noted, this could get ugly on a turn of a dime...

---

Finally, congratulations FOFOA on another great column. I pass along similar thanks to you the above commentators, whom I also learn a lot from.

A ZH-style + $55,000 to all of you!

victorthecleaner said...

Matt,

I'm still a fan of debt free money

The thing is that what you are proposing is not debt free money. Yes, your monetary base would be just circulating coins (or perhaps little pieces of cotton-plastic blend fabric with a fancy hologram). But you have proposed commercial bills in order for companies to defer payment as an alternative to taking out bank loans.

This system includes the option that you can endorse the bills you have received and pass them on as payment to your suppliers. The bills start circulating as credit money. As long as these bills are accepted at face value minus discount, you have credit money on top of your base money tokens.

Should there be a problem with the market confidence in these bills in general, you will get problems very similar to a run on the bank. In particular, if the bills are no longer accepted as payment, they need to be bailed out paying them off immediately in base money.

Sure, since your bills have a very short maturity (90 days) and they are written only against some semi finished products as the collateral, the real bill system is way better and more stable than the present system of holding debt as long term savings. But the system nevertheless has the same sort of conceptual problems as any combination of hard monetary base plus freely created credit money, including a 90-day version of FOFOA's dilemma.

Victor

Motley Fool said...

Matt

Fwiw I was an advocate for the Real Bills doctrine as proposed by Fekete, before running into FOFOA.

Debt based systems do not have to be a drag, though the current one is.

Your additional suggested measures are superfluous.

You see, the main reason that bad or non-productive investments are made at present is due to metrics being distorted by paper money (or official decree). Gold will be a un-manipulatable reference point. The implications are vast.

...god bless the idealists anyway. :P

TF

Edwardo said...

Does this fellow really understand his data?

http://www.mcoscillator.com/market_breadth_data/

FOFOA said...

UPDATE:

It appears that Judge Glenn of the MF Global bankruptcy case may not be on the payroll of the evil bankers after all. It seems he has ruled against JP Morgan and other creditors of MF Global's gambling fund and in favor of the little guy, the customers. And the banks aren't happy about it:

"Martin Bienenstock, a lawyer for the official committee of creditors [lenders such as JPMorgan Chase & Co.] in the Chapter 11 case, told Glenn today that Giddens had taken an “extreme position” in saying all customer claims would come ahead of creditor claims…

Glenn told Bienenstock that he could have more time to make arguments about whether creditors have any standing at all in the brokerage’s wind-down.

“The committee’s standing is questionable,” Glenn said."


But there's still $1.2B missing from accounts that should total $5.8B.

"Corzine testified that he didn’t know where the missing $1.2 billion went.

“I was stunned when I was told on Sunday Oct. 30 that MF Global could not account for many hundreds of millions of client money,” Corzine said under oath. “I remain deeply concerned about the impact this has on MF Global customers and others. I simply do not know where the money is.”"


JP Morgan was MF Global's largest creditor with an outstanding $1.2B gambling loan. I don't know if you'd call it a kick back, bribe or what, but JP Morgan had agreed to lend another $26M to the bankruptcy team so that all the lawyers could get paid. But that loan was subject to an agreement that gave JPM first shot at ALL of MF Global's assets to recover its $1.2B.

And now that the judge has ruled against JPM, the lawyers are asking to still be able to use the $26M to get paid:

"[Judge] Glenn, in a separate hearing today, adjourned until next week consideration of the holding company’s request to use cash collateral of its largest lender, New York-based JPMorgan, to pay lawyers and other costs of its bankruptcy."

The Trustee (Giddens) filed a 30 page document today describing the rules for customer claims. Customers will be able to get back 72% of their frozen accounts within the next few weeks. And there is hope for recovery of even more down the road as the Trustee liquidates “traceable” assets.

"‘Public customers’ of MFGI -- essentially all customers with commodity accounts other than proprietary accounts of MFGI, MFGI affiliates and insiders,” will get distributions first, Giddens said in court papers."

So the customers get paid first, the insiders and the creditors like JP Morgan… get in line!

Cont…

FOFOA said...

2/2

Seems the CFTC is backing this anti-insider stance as well:

"Commodities customers “are granted the highest priority against the bankrupt broker’s estate,” and if customer property isn’t sufficient to pay all claims of public customers, “other estate property will be used to satisfy those claims,” lawyers for the CFTC wrote."

Link 1 - Link 2

Sounds like a big win for the little guy!! Which, for me, begs the question of how all the other big bank creditors and insiders will now view the collateral behind their outstanding loans. Will they continue to view it as secure through rehypothecation? Will they call in the loans? And what effect will this have on the liquidity created by the proprietary gambling habit of these large brokers? Remember, there's a lot of this going on:

"Engaging in hyper-hypothecation have been Goldman Sachs ($28.17 billion re-hypothecated in 2011), Canadian Imperial Bank of Commerce (re-pledged $72 billion in client assets), Royal Bank of Canada (re-pledged $53.8 billion of $126.7 billion available for re-pledging), Oppenheimer Holdings ($15.3 million), Credit Suisse (CHF 332 billion), Knight Capital Group ($1.17 billion),Interactive Brokers ($14.5 billion), Wells Fargo ($19.6 billion), JP Morgan($546.2 billion) and Morgan Stanley ($410 billion)."

If you give it to the banks, the little guy loses out. If you give it to the little guy, the big banks and insiders lose out. That's the problem with allowing multiple claims on the same asset. But that's how these guys fund their gambling habit. And that gambling habit supplies a considerable amount of market liquidity. Seems even Jon Corzine, himself, was a bit of a gambler according to the NY Times Dealbook today:

"Soon after taking the reins of MF Global in 2010, Jon S. Corzine visited the Wall Street firm’s Chicago offices for the first time, and spent an hour questioning a broker about his bets, as other top executives from New York hovered impatiently nearby.

Although Mr. Corzine had been a United States senator, governor of New Jersey, co-head of Goldman Sachs and a confidant of leaders in Washington and Wall Street, he was at heart a trader, willing to gamble for a rich payoff.

Dozens of interviews reveal that Mr. Corzine played a much larger, hands-on role in the firm’s high-stakes risk-taking than has previously been known.

An examination of company documents and interviews with regulators, former employees and others close to MF Global portray a chief executive convinced that he could quickly turn the money-losing firm into a miniature Goldman Sachs.

He pushed through a $6.3 billion bet on European debt — a wager big enough to wipe out the firm five times over if it went bad — despite concerns from other executives and board members. And it is now clear that he personally lobbied regulators and auditors about the strategy."


So is this story over now that the customers get back 72% of their money? Don't bet on it!

Sincerely,
FOFOA

Robert LeRoy Parker said...

Hi Edwardo,

Mortymer's quote seems applicable:

"I only know of two men who really understand the true value of gold: an obscure clerk in the basement vault of the Banque de Paris and one of the directors of the Bank of England. Unfortunately, they disagree.
- N.M.Rothschild

From a trader's perspective that dude son of a bitch might understand how the libor lease rate spread might effect the PoG, but does he really understand the meaning of the data?

When he says "we've never seen a condition this big negative in the 22 year history of the lbma data on gold lease rates" and then says "there is an unwillingness of the people who hold gold to lease it out, for whatever reason, we don't have to question what their motivations are, we just have to observe what their behaviors are," I get the sense that no, he does not really understand.

Robert LeRoy Parker said...

Hi Fofoa,

Although JP Morgan may be upset, perhaps this is simply a matter of MOPE by the fed/cftc/sec/etc. Keep the little guy 1st in line at the bankruptcy court and perhaps they won't be so pissed off when the banks line up first for the front lawn dump.

costata said...

VTC,

Excellent points if I may say so.

The bills start circulating as credit money. As long as these bills are accepted at face value minus discount, you have credit money on top of your base money tokens.

Should there be a problem with the market confidence in these bills in general, you will get problems very similar to a run on the bank.


According to my reading this was the heart of the panic of 1907 and one of the major reasons for setting up the Federal Reserve system. To ensure liquidity in the clearing of commercial bills. It was the politicians who hi-jacked the Fed Res as a buyer of government debt.

Barney said...

Hi all,
Just a link for everyone who enjoys all things FOFOA.

http://pogoprinciple.wordpress.com/

Barney

Michael said...

Owning physical is OK for small amounts that can be cleverly hidden at home, but what about large amounts? Who would really feel secure with $1,000,000 worth of gold in their home? And then the flip side of that quandary is if allocated accounts like GoldMoney are good for large holdings then are they necessary bad for someone who is just starting to accumulate? Also, safety deposit boxes have the risk that thieves or thugs take over the bank. What is a gold bug to do?

Motley Fool said...

Michael

Physical in your own possession is best. People can be creative in hiding things. :)

I understand what you are asking though.

If I had a gun to my head and had to mention another option, I would say that FOFOA mentioned something in Treasure Chest 2 – Game Changer , and I have mentioned something other myself on my blog.

Rather be creative though. :P

TF

mortymer said...

I have a q:
2000, 22 Sep - "Joint action of ECB, Federal Reserve, and Bank of Japan to support euro"

http://www.bis.org/about/chronology/2000-2009.htm

Why? Any details?

Nickelsaver said...

Today is a very good day to BUY!!!!

2000 Flushes said...

Michael,

How To Hide Anything

Matt said...

Hi victor I didnt actually propose real bills here but I am aware of it and think that it is still better than what we have! My original comment was intended to state that businesses could adjust their AP/AR cycle to adapt to changing credit systems. 90days terms would simply be done away with or substitutes would be found if access to overdrafts were reduced in the case of money becoming debt free(and by extension harder), either that or velocity could accelerate to accommodate. Its interesting that $1 dollar can pay a lot of debts until it hits its one final debt - the one owed back to the bank. Its important to also realise that not only would the nature of money change - but what 'terminal' liabilities (bank liabilities) would also be hugely reduced (or eliminated).

TF "You see, the main reason that bad or non-productive investments are made at present is due to metrics being distorted by paper money (or official decree). Gold will be a un-manipulatable reference point. The implications are vast." Bless you TF but i just can't see freegold having such an impact on economics that non-productive investment is considerably diminished! I see it bringing vast differences at a national/macro level but most people can't keep track of the ratio of gold to their pocket book balance and thereby make an informed judgement on the diminishing purchasing power of their income when buying a dozen eggs at the local checkout. Nor is it anywhere assured that the gold price will reflect that devaluation of their currency over the short to medium term. I really cant see people not getting caught in the next bubble simply by being able to reference the gold value of the currency they use - most people just want to borrow what they are allowed to in the 'hope' they'll make more later or because their neighbour made $XXXX doing it and they want to too.

On your point above - I see investment bubbles as a form of mass psychology that humanity will never escape under any system, even under hard money, but at least it should not be given a ready positive feedback loop while tying the participants to a form of debt servitude.

JR said above that credit money is a vote in favour (showing my nationality here) of the creditworthiness of the borrower, while i'd contend that it is just as much a vote in favour of the upfront initiation bonus collected by the loan officer. The credit money system has some good points but also countless bad. I believe that alternatives are realistically possible and could be beneficial if structured right, however unlikely!

In essence we need an expandable stock of money, but we only really need it expandable at the margin so why carry a whole stock of expandable credit money? For instance, it'd be possible to have an 80% debt free fiat money stock backed by the government plus give banks a 75% reserve requirement to create some expandable credit money separated in the system without government backing.

While all pie in the sky, I don't see freegold saving the individual from currency devaluation. Can grandma really use freegold to protect her savings after RPG. Nor how the working family scrapping together for a house deposit going to be protected from currency depreciation in a housing bubble because central banks use a gold reference point? Sorry just can't see it working out much different for the unsophisticated individual. There's plenty of reference points in place already (perhaps not as clear as freegold) but that has never stopped the mass psychology of a bubble.

FOFOA said...

Hello Matt,

When you talk about debt-free money, whose proclivity for borrowing are you hoping to inhibit? Everyone? Or just the government? Do you want to outlaw borrowing altogether? Or do you just want to make sure that all borrowed money must first be coaxed from an actual austere saver?

Please explain your definition of debt-free money. Because the way I see it, either you want to outlaw the very nature of money as it has evolved over thousands of years, or else you want to tie the debtors and the savers inseparably at the hip like two cats in a bag. Please explain how your idea of debt-free money is neither of these two unconscionable choices.

You see, I think you are totally missing the point here. But I do look forward to your description of debt-free money. ;)

Sincerely,
FOFOA

Jeff said...

CME Group Chief Operating Officer Bryan Durkin said on Monday the exchange will not guarantee the funds that remain missing from customer accounts at bankrupt brokerage MF Global after they are reimbursed by the bankruptcy trustee.

Such a move would be "unwise" and the CME has a "fiduciary responsibility" to its shareholders, he said at a National Grain and Feed Association conference on Monday.

http://tinyurl.com/cemaoka

Jeff said...

(cor sine) Latin for "heart without"

FOFOA said...

"Donald Ludwig, manager of Elkhart Grain Co. in central Illinois, attended the grain conference and said he was frustrated his money had not been returned. He said his company was missing money from an MF Global account but declined to say how much.

"It's got to be somewhere," he said. "I hope they get it back."


It's not money in your cash account once you give it to your broker. If you sit on a cash balance, your broker buys assets with your money and credits you with imaginary dollars. Perhaps some of those assets were credit default swaps that went poof. The dollar liability remains, a liability from MF Global to Elkhart Grain. But the asset needed to be sold to fulfill that obligation is now gone. So it's not "got to be somewhere." It's gone. That's why they're in bankruptcy.

Where is your money right now? How much of your money is imaginary broker bucks?

I heard one farming client of MF Global had $140M sitting there.

Matt said...

Hi Fofoa, when I say debt-free money I am really combining two ideals as you point out:

1 is that money is a 'barter token' that exists independent of credit and thereby excludes banking liabilities from the general money supply (so we have 2-way, rather than 3-way transactions once the banks are excluded). Credit exists as it is either excess capital handled by the banks, or credit in the terms of extending favourable trade terms (I know that that is money itself if it can be traded further on as per real bills).

2. is to limit a select groups ability to conterfite the existing money supply (banks). The ability of banks to create new money and direct where that money goes, while all the while devaluing the existing money supply causes all kinds of unneccessary social problems (IMHO).

That's the crux of my position, the seperation of general money from a direct liability, plus the removal of asymetrical privatised money creation.

If you can explain how freegold will help make privatised debt money creation more equitable I'd be very glad to hear it!

FOFOA said...

Hi Matt,

Thank you!

Private banks cannot debase our currency. They can only debauch it by becoming balance sheet entities in excess of prudence. They do this by onselling the debt to savers, relieving themselves of the burden of prudence and making a profit from the savers at the same time.

I've always said, they can control the legality of the medium of exchange we use, but they can't control what we choose to spend it on. So whose fault is it that the savers relieved the banks of that burden of prudence and made them rich at the same time?

The prudent creation of "privatized debt money" does not devalue the existing money supply. Only debasement (by the government) or debauchery (by the poor discretion of savers) does.

I can see you don't like banks. And there's plenty not to like. But banks have always dealt in credit, even when we were on a gold coin standard. See JR's comment. Your 'barter tokens' are the base. Always have been. If you want 2-way rather than 3-way transactions, use bitcoins or else go back to the dark ages. 3-ways lubricate the modern world. 3-ways are good! ;)

Sincerely,
FOFOA

Edwardo said...

From FOFOA's post,

"It's got to be somewhere," he said."

Yes, but where it is may be a perfectly legal spot for it. Consider that big dark secret with MF GLobal is not that the loss of those funds involves a criminal act, but that a kind of theft is enshrined in the law via Reg T.

In short, the "missing funds" were pledged as collateral as part of a very bad bet.

http://brucekrasting.blogspot.com/2011/12/fed-mfg-and-reg-t.html#comment-form

In the meantime, I agree with RLP that Mr. McClellan, and a whole host of other gold technicians do not understand their data. But then TA, broadly defined, is of limited value even under the best of circumstances.

Casper said...

FOFOA:

"Private banks cannot debase our currency. They can only debauch it by becoming balance sheet entities in excess of prudence. They do this by onselling the debt to savers, relieving themselves of the burden of prudence and making a profit from the savers at the same time."

Let's say I go to a bank to get a loan to buy a house. The bank credits my account with digital credits. I now exchange these digital credits for the house and the seller ends up with these credits.

What just happened is this: I forward sold my labour to the bank and the bank sold me credits on spot. Then I sold these credits on spot to the seller of the house, who at the same time sold me the house on spot. If these credits now circle in the interbank market as deposits, then someone, somewhere is holding them as assets and the »onselling« part already happened at preciselly the moment the bank approved my loan application.

If we see these credits as claims on the currency - zone, then any increase in bank's lending activity can already be characterised as »onselling« of debt.

Casper

Matt said...

Cheers Fofoa

"Private banks cannot debase our currency. They can only debauch it by becoming balance sheet entities in excess of prudence. They do this by onselling the debt to savers, relieving themselves of the burden of prudence and making a profit from the savers at the same time. "

I am of the opinion that broader money measures form part of the supply and that expanding these debase the money supply (but i do concede it is conceptually only temporary debauchment - empirically however it is continuous - just chart M2, M3 or ATMS!). Further to your example, I'd argue that credit expansion can debase the money supply when lenders are guarenteed or supported by a CB or government (or working together to mitigate market pressure on their excess of prudence).

"I've always said, they can control the legality of the medium of exchange we use, but they can't control what we choose to spend it on. So whose fault is it that the savers relieved the banks of that burden of prudence and made them rich at the same time?"

Its humanity's fault - irrational exuberance is not a choice one makes when they wake up in the morning, it is a creeping dereliction of prudence that effects everyone and is outside the confines of attributable blame. I don't personally blame bankers for overlending in the same way I don't personally blame borrowers for overborrowing. Its just part of being an emotional human but heaven forbid we actually enable and incentivise it!

"The prudent creation of "privatized debt money" does not devalue the existing money supply. Only debasement (by the government) or debauchery (by the poor discretion of savers) does. "

I assume you mean so long as the new credit money is encaptured in the increased size of the economy driven by the borrowing and excess is liquidated through bad loans/default? If so - then what damage can be done in a 20 debt bubble waiting to be liquidated? How much inflationary 'make-busy' work can be carried out while psychology and the system wait to run into the reality of over investment. And what if all parties are incentivised to avoid this reality and 'keep the game alive'? If you mean that banks can't issue base money then i of course agree but classsify the money supply a little broader than that.

"I can see you don't like banks. And there's plenty not to like. But banks have always dealt in credit, even when we were on a gold coin standard. See JR's comment. Your 'barter tokens' are the base. Always have been. If you want 2-way rather than 3-way transactions, use bitcoins or else go back to the dark ages. 3-ways lubricate the modern world. 3-ways are good! ;) "

I am ambivalent to banks per se. I don't like the favoured position of banking when countered by nothing but the rationality of humans (give me free banking, give me full reserve banking, give me robust bankruptcy or debt free money, just don't give me human prudence on one hand and central banks & lobby groups on the other). I understand that banks have always dealt in credit - but they have not always been able to issue new credit, and not always had the ability to surreptitiously co-mingle their credit with the broader money supply.

By barter tokens I didn't mean the current fiat/CB base money but a true barter token not linked to government bonds and both physical and electronic (apologies i can see how 'token' implies physicality) that is issued to trade without a debt attached. Please do not think I meant that we have to physically exchange tokens without bank accounts and electronic transfers and the wonders of modern electronics (i did comment briefly above 'give me gold for saving, bitcoin for transacting and fiat(or credit) for borrowing) - but i also don't believe modern society can't function without an unlimited money supply or that we will go 'back to the dark ages' for not having banks create our reference point.

Robert LeRoy Parker said...

Victor, is that your alter ego at ftalphaville?

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

Lets play a game - what do you think these phrases mean?


1. debase our currency


2. debauch our currency


3. the burden of prudence


4. balance sheet entities in excess of prudence


Cheers, J.R.

JR said...

Matt,

This is wildly incongruent:

"I don't like the favoured position of banking when countered by nothing but the rationality of humans. give me free banking, give me full reserve banking, give me robust bankruptcy or debt free money, just don't give me human prudence on one hand and central banks & lobby groups on the other"

You have two choices -

1) you can force people to do stuff by legislative fiat

or

2) you let Mr. Market, aka the the Superorganism, have its way.

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

But either way, on the grand scale, the the Superorganism finds a way:

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

The sustainability (and, indeed, the very survival) of the global economic ecosystem is predicated not on balance in the monetary realm, but on the delicate balance between real production and real consumption. It is the flow of actual physical gold that, at least prior to 1922, moderates and regulates this complex balance because gold, like real production and consumption, exists in the physical realm and is therefore not subject to the politics of easy money...

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

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

Gold will return to its pre-1922 function, but that does not mean we will return to a pre-1922 gold standard. This post is not about the merits of the gold standard. It is not about praising the hard money camp’s decision in 1445 over the easy money camp’s decision in 1922. It is about the choice of the Superorganism over the management of men.


That's fun:

"It is about the choice of the Superorganism over the management of men."

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

Methinks harkening back to flawed ideas as to how to force people to do stuff by legislative fiat, and polishing them up under the well-worn counter-factual guise of "we can do it better this time" is for the rubes.

Turn around, the future's the other direction.

In front of you.

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

JR - "This is wildly incongruent"

Me thinks you missed my point JR.

If freegold is a balancing mechanism at the macro level (as I personally believe it operates more at the macro than individual level) then the comment you quote is harking for something similar at the micro level. "give me free banking, give me full reserve banking, give me robust bankruptcy or debt free money, just don't give me human prudence on one hand and central banks & lobby groups on the other"

EDIT:
- Don't give me the seething stack of the human antfarm on one hand countered by a banking system with a privileged position (the power to issue credit combined with a CB to backstop their F-ups!) and then tell me its up to only the greater knowledge of human ingenuity in the freemarkets to sort it out - BS! The free markets are fine and I believe in free markets in many ways, just don't jump up and down when the seething antfarm realises that it is in a weak position that is being used against it and subsequently uses legislation to correct that. Legislative fiat can be freemarket choice too JR.

Kid Salami said...

FOFOA - in the Euro Gold article you link to you say

"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...

...The ECB can save its own system, but the member states cannot force it to fund perpetual profligacy."

I just don't get this.

While it is true that "it has severed the link to the nation-state", you say "it cannot be forced to fund the future government profligacy of the PIIGS through volume-only expansion".

I don't know what "forced" means exactly here. Surely we can agree - as per your hyperinflation and deflation series - that the one thing those in charge of the printer can be guaranteed to do is save their own skin and at least "outrun the bear" (or was it lion?).

So the member state maybe can't force, via diplomacy, this to happen, they can certainly act in such a way as to make it preferable to the printer-holder to print and save his own skin rather than not print.

I just don't see the key difference betweeen the dollar and Euro that you say exists here.

Matt said...

JR-
1. debase our currency - diminish purchasing power through dilution

2. debauch our currency - i take it to mean expand with the same purchasing power - sort clarity from FOFOA on that.

3. the burden of prudence - burden to make rational prudent choices

4. balance sheet entities in excess of prudence - I assume FOFOA means to expand credit beyond what can be met by the underlying business in times of shock. Ie a bank with too much leverage.

Do me a favour and tell me what my score was.

Kid Salami said...

For example, the ECB might prefer to print than let the PIIGS default, as they don't want a banking collapse just yet as they haven't accumulated enough gold, they would like to defer things for a year - who cares whether the PIIGS can "force" them to print or not? I just don't see how this is any different to the FED or BoE.

Biju said...

today bought some Gold at $1660.

JR said...

Hi Kid Salami,

"So the member state maybe can't force, via diplomacy, this to happen, they can certainly act in such a way as to make it preferable to the printer-holder to print and save his own skin rather than not print."

Exactly!! Of course the ECB will print to "save its own skin." This is FOFOA's point you quoted, well done:

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...

...The ECB can save its own system, but the member states cannot force it to fund perpetual profligacy."


The ECB is severed from the nation-state.
ECB's Jens Weidmann:


JW: I don’t want to speculate what would happen if somebody decided this way or another way. Regarding the role of the eurosystem [of eurozone central banks], I will just confirm to you that we will act according to our mandate and provide liquidity to solvent banks and ensure price stability – this is our task. It’s the task of governments to ensure that banks in Greece are solvent. We provide liquidity to solvent banks against adequate collateral.

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

A nation state can fail and the euro continue on:

FOA "the ECB can use not only it's excess dollars to buy physical gold sold from other banks, they could use Euros printed outright to buy physical spot delivery. If their currency continues to fall before the dollar begins it's terminal phase, this option is wide open to them. Certainly, "Free Gold" is not going to compete against them as it would against the dollar because it's their policy to mark all it's rise to the market. Because Free Gold will not be an official currency, it's wealth building power will compliment the bank's reserves...Basically, this is the direction the Euro group is taking us. This concept was born with little regard for the economic health of Europe. In the future, any countries money or economy can totally fail and the world currency operation will continue. What is being built is a new currency system, built on a world market price for gold."

JR said...

Great FOFOA comment

"Don't believe all the noise, and there's a tonne of it right now. They don't know what they are talking about. The euro survives and thrives regardless of how the European debt crisis is ultimately resolved, and no countries will leave the euro. In fact, there are countries trying to get in, and none that will leave short of a coup, revolution or state failure, which isn't even a consideration right now. And even if that happens, the euro will still survive and thrive while the country that leaves will suffer greatly, the local hyperinflation that will ensue being the least of their problems.

Spend some quality time with the Eurosystem's balance of payments and marvel at how remarkably balanced Europe is with the rest of the world. Then compare that with the US balance of payments. As just a quick example, in April (one month) the Eurozone imported only €4.1 billion more goods than it exported. The US, on the other hand, imported $58 billion more goods than it exported, and April was the lowest month yet this year for the US. Of course that's just goods. For services, the US exported $14.5 billion more services than it imported. How much of that do you think was "Wall Street financial services"? Europe also exported more services than it imported, but only €2.8 billion.

So for goods and services combined, the Eurosystem ran a trade deficit of €1.3 billion in April, while the US ran only a $43.5 billion deficit (down from its previous normal $50 billion, but back up in May). Looking back at 2010 (just to get a full year's picture) the US ran a $500 billion goods and services deficit for the year. The Eurosystem (even with those lazy PIIGS) actually ran a trade surplus for the year, exporting more goods and services than it took in! So how can that be? As a currency representing a community of more than 300 million people, the euro is quite healthy compared to the dollar!

Of course there is a huge imbalance inside Europe between the states running a large surplus and those running a large deficit. But with a shared currency the adjustment pressure for such an imbalance is foisted elsewhere, not on the currency. It lands squarely on the politicians, who, like Costata said, couldn't be a more deserving bunch of Aholes. For the dollar, the structural deficit and debt of the US places a massive devaluation pressure directly on the dollar. But for Europe the currency is balanced with no (or very little) adjustment pressure.

The economic flow of goods and services within Europe will of course have to contract as the imbalance retreats. If the euro weakens on the global currency stage Europe will start running an overall trade surplus again, like China, which will soften the blow of a contracting internal economy. If the euro strengthens, things like cheaper oil will help soften the contraction. Internally the politicians have their hands full. No doubt! Externally, the euro is just fine. To the euro, just like FOA said, the politics of the PIIGS and Germany are little more than a sideshow.


And notice I didn't even mention gold yet. Anything that would appear to seriously threatens the euro, like an outright sov. debt default, would explode the price of gold which would simultaneously rescue the euro balance sheet and kill the dollar. "

Matt said...

Hi JR and FOFOA -

Quick one on the euro, if the euro becomes a reserve trade currency beyond the borders of the EZ and hence the international demand for the euro increase dramatically, would the ECB print to maintain internal currency stability?

JR said...

The Euro is already the second largest trade currency in the world Matt. What is collapsing is the $IMFs SoV function, all the debt.

But yes, if the there is greater demand for the Euro in international trade, aka the "network effect" discussed in Dilemma, the Euro will look to its mandate, price stability, which would necessitates ensuring adequate Euro liquidity.

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

From Focal Point Gold on needing money in unrestricted amounts:

"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."


Also see Windmills, Paper Tigers, Straw Men and Fallacious Fallacies on needing money in unrestricted amounts.

M said...

@ Kid Salami

you said"For example, the ECB might prefer to print than let the PIIGS default,"

Mario Draghi said that the ECB is not in the business of bailing out governments. It is against the treaty. The ECB is forcing the Fed to print for them.

www.gregor.us said...

The issue which Merkel and Weidmann don't seem to understand is that paper currency gains its value through flows. Protecting the EUR as a savings unit won't matter much if the EUR as a transactional unit is destroyed. Because the value of, say, 10 trillion Euro notes sitting in a banking system that the people are too afraid to use is precisely zero.

The risk of hyperinflation during a debt deflation after the bursting of a credit bubble does not come via "money-printing." QE simply maintains flows and thus confidence. imo, the threshold event on the path to hyperinflation is the start of sovereign bond market crash(es) which are the beginnings of a rejection of the currency.

I frankly have never understood this thread's confidence about the EUR currency, based on the holdings of gold in the Eurosystem. However, I do very much align with FOFOA's position towards the hard-money goldbug view. To me, many of the older, more senior goldbugs maintain a view that conforms with the system still being in Normal. My big picture take is that the system has exited Normal already, the collapse has already occurred, and we are now in a very different regime even in probabilistic terms.

Meanwhile, is it not fascinating the gold is already being marshaled into the financial system more meaningfully, through the demand for new collateral? See FT Alphaville's piece on this, by Izzy Kaminska: "Make your own (collateralised) gold standard"

G

d2thdr said...

[i]'I just don't see how this is any different to the FED or BoE.'[/i]

It takes time to read through A/FOA/FOFOA to really come to some understanding why ECB is different from FED BOE.

Sorry I cannot help you to understand, you need to put some weekends in to read up. Its worth it. I have never slept better after understanding the premise of RPG.

costata said...

International Trade Under A Freegold-RPG Regime

Part 1/4

There was an interesting discussion on the previous thread that LS kicked off with this comment. JR, Jeff and other generous souls provided some excellent responses to his questions about trade settlement, and related issues, in a Freegold-RPG environment.

It occurred to me as I followed this exchange that some readers might appreciate a basic, simplified outline of how gold and currency might flow under this new regime. So I decided to give it a shot. Even though this is oversimplified there are some twists that may still surprise.

Background

To begin let’s assume the transition to the new international monetary and financial system (IMFS) has taken place. This is now a Free-Market-In-Physical-Gold + Reference-Point-Gold regime. At the risk of stating the obvious, the one-time gold revaluation has already occurred so the price of gold has a relatively stable price in well managed currencies.

This is a regime where physical gold is a long term store of value (SoV) and currencies are solely a medium of exchange (MoE) not a combined MoE + long term SoV. Gold is also formally acknowledged as a crucial part of the FX market. Under this regime a currency’s exchange value in gold determines its exchange rate with other currencies. That’s the Reference-Point part of Freegold-RPG.

There's no global hegemonic reserve currency that you are forced to hold in order to buy (for example) oil. There’s no free ride in this system, no exorbitant privilege, no global fiat reserve currency. You can trade using your own currency as long as it is convertible, respected and trusted ie. ultimately exchangeable for gold.

It may surprise you to learn that you won’t need any gold or currency (FX) reserves to participate in this new international trading environment. It may be highly advantageous to have either or both but it won’t be essential because the exchange value in gold of your currency will be dynamically updated. Gold will announce if your currency is over-priced, under-priced or correctly priced, dynamically, through a free market in gold.

Continued/

costata said...

/Continued

Part 2/4

Introduction To The Three Examples

After we review a few more points we will try to construct some basic flows in international trade under this new Freegold-RPG regime. Please note:

1. Balance sheets must always balance. Therefore in the bi-lateral (two way) trade relationships in these examples if you run a deficit in trade (real stuff) you have to run a surplus in the capital account. You have to import capital to balance the books. If you run a trade surplus then you have to export capital. FX reserves cannot be spent domestically. They must be spent externally because they are not legal tender in your country. (With one possible exception that I’m still mulling over).

2. The country running the trade deficit is called Your-land. The country running the surplus is called My-land. (nyah, nyah!)

3. When you attempt to barter you confront an age old problem called the double coincidence of wants. Basically in order to barter (direct trade) each party has to have exactly what the other party wants at the exact same time. You have a problem of both vending and time/timing. Currency helps to address this problem provided it isn’t teamed with debt (as FOFOA explained in the post above). When you marry the currency with debt ‘time/timing’ in trade becomes ‘time bomb’.

There is something very important to be grasped here. The reason Your-land has a trade imbalance in the real stuff, trade account with My-land is because they don’t have a double coincidence of wants. If they did they wouldn’t need currency, at all, to balance their books. Currency would not be required for settlement in their two-way international trading relationship. Nothing to settle – the trade flow nets to zero. Keep this in mind. Something interesting happens when physical gold is used in two-way trade settlement. More on this below.

The Examples

>> Example 1: Neither country has FX reserves but Your-land has gold reserves.
>> Example 2: Both countries have a mixture of FX reserves but No gold.
>> Example 3: Neither country has gold, Your-land has No FX either but My-land has an FX reserve comprised solely of Your-land’s local currency.

Continued/

costata said...

/Continued

Part 3/4

Example 1: Neither country has FX reserves but Your-land has gold reserves.

Your-land has a trade deficit with My-land. So My-land has a trade surplus. Balance sheets must balance so there has to be a flow of capital from My-land to Your-land in order to balance the books. (Or does there?)

As mentioned above neither of these countries has FX reserves but fortunately Your-land has gold reserves. So Your-land exports some physical gold to My-land equal in value to the trade deficit and records that transaction in their trade account. My-land’s surplus is cancelled and both of these country’s balance sheets balance. We’ll revisit this transaction later but here’s a question to consider: Did any money change hands here? (Think vendor finance or collateralized line of credit.)

Example 2: Both countries have a mixture of FX reserves but No gold.

Re-run Example 1 but instead of settling the deficit in gold Your-land settles by transferring currencies from its FX reserves. The currencies of countries who have the real stuff My-land wants to buy. Third party trade provides the “coincidence of wants” required and vendor “finance” from My-land resolves the time issues.

Example 3: Neither country has gold, Your-land has No FX either but My-land has an FX reserve comprised solely of Your-land’s local currency.

Re-run Example 1 but instead of settling the deficit in gold or FX Your-land allows My-land to acquire assets and/or make capital investments in Your-land paying with their FX reserves. Incidentally, this oversimplified example provides a crude picture of how Australia has been able to fund its trade deficits for decades despite having hardly any gold or FX reserves in recent times. You sell off the “farm” (at worst) or develop your economy in a best case foreign investment scenario.

Continued/

costata said...

/Continued

Part 4/4

Now let’s look at the transactions using FOFOA’s monetary and physical planes and his pyramids as described in Just Another HI Post - Part 3 here and Gold is Wealth here.
http://fofoa.blogspot.com/2010/09/just-another-hyperinflation-post-part-3.html

In the first example the gold never “left” the physical plane or entered the monetary plane except on a notional basis. My-land doesn’t need to keep that physical gold as an asset reserve it can use it for barter in precisely the same way that Your-land did. Gold is the physical commodity/hard asset with the highest, the closest to universal, “coincidence of want” globally under this regime.

In the second example the trading partners conducted their settlement of the trade balance entirely in the monetary plane. The currencies that were notionally “exported” (transferred) from Your-land’s external FX reserves derived their exchange value from the physical plane. All of it, not just gold. This is the heart of a currency’s “moneyness” (MoE-ness here) - its exchange value.

The exchange value, the exchange rate, of each of those currencies was “priced” by reference to the free market in gold – hence RPG Reference Point Gold. (Okay, the FX market did some grunt work too.) So you could say that under this regime currency derives its MoE from its acceptability in the exchange of goods in the physical plane (where physical gold always resides), derives its exchange rate by reference to gold and its short term SoV function from the management of the currency.

Now in example 3 something quite different happened. The transactions could have taken place entirely within the monetary plane (eg. government bonds issued) or in both the monetary plane and the physical plane. Over time My-land accepted Your-land’s MoE, it’s currency, for its real stuff. Your-land also had to be open to accepting “foreign direct investment”. It had to allow the purchase of existing assets from either of the planes or the creation of a new asset within its currency zone.

So under a Freegold-RPG regime gold may flow in a kind of “barter” or it may not flow at all, acting solely as a reference point for pricing the MoE value of a currency via the FX market.

d2thdr said...

Quick one on the euro, if the euro becomes a reserve trade currency beyond the borders of the EZ and hence the international demand for the euro increase dramatically, would the ECB print to maintain internal currency stability?


Excuse me but why the hell should Euro become reserve. The reserve will be gold. Anyone wanting Euros will exchange them for gold, perhaps to buy OIL.

Am I missing something?

Matt said...

Excuse me but why the hell should Euro become reserve. The reserve will be gold. Anyone wanting Euros will exchange them for gold, perhaps to buy OIL.

I meant transactional reserves, say if neighbouring Belarus hyperinflates and the people want a sturdy outside medium like the various countries that use USDs now, the average person won't revert to gold (at how much an oz!?!) but will be looking for something stable but accessible.

JR you didn't give me my score! My position was never that money is not debt BTW, that contract and exchange is not in the settlement of debts but that the general money stock does not have to be debt based. C'est la vie. I will keep fighting to bring awareness to the nature of money, and then the human collective can finally make an informed choice (if you asked the average person on the street to describe money - what do you think they would describe?)

JR said...

Its was a rhetorical exercise Matt. I still think you are conflating debt-free money with a credit based system"

"Your 'barter tokens' are the base. Always have been. If you want 2-way rather than 3-way transactions, use bitcoins or else go back to the dark ages. 3-ways lubricate the modern world. 3-ways are good! ;) "

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

Lets call the Euro an "international transactional" currency

"What we learned from ANOTHER thirty years later was:

1. The purpose of the euro was to provide an international transactional alternative to the dollar."


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

FOA on the Euro as a "seocnd money"

We must not confuse a currency's "total demise" or "falling out of use" with a "loss of identity". In our time there have been few major moneys that went away. Today, we have a whole world of national fiats "in use" and "not demised" that still carry their nation's identity. They lose value at an incredible rate, are mismanaged to the highest degree, are laughed at and despised. But, still they are "in use" as they function for their governments and economies. Usually, they function alongside whatever major reserve currency is in vogue. Today the dollar, tomorrow the Euro. Make no mistake, the entire internal US sector can and will function as its currency runs a price inflation just like these third world countries. We will adapt as they have by dropping our living standard accordingly and adopting the Euro as our second money.

[...]


NO, "this country will not turn over and simply give in" as you state. But, we will give up on our currency! Come now, let's take reason in grasp. Our American society's worth is not its currency system. Around the world and over decades other fine people states have adopted dollars as their second money, only to see their society and economy improve. Even though we see only their failing first tier money. What changes is the recognition of what we do produce for ourselves and what we require from others to maintain our current standard of living. In the US this function will be a reverse example from these others. We will come to know just how "above" our capabilities we have been living. Receiving free support by way of an overvalued dollar that we spent without the pain of work.

Biju said...

WHOA ... Gold taking free fall $1627. paper going to decouple from physical ? last time this happened my local dealer was cleaned out by some big shot.

Matt said...

JR - and there i was thinking it was to make sure we were on talking about the same thing!

"I still think you are conflating debt-free money with a credit based system"

Might be but not that I am aware of. Your next paragraph I responded to before and had to clarify that I was not talking token as in physical notes or base money.

JR said...

"but not that I am aware of."

We certainly agree here. I hear less typing and more reading is a great cure for such ails.

"Your next paragraph I responded to before"

You may have attempted to, but you didn't respond to his point.

mortymer said...

@Matt:
"Quick one on the euro, if the euro becomes a reserve trade currency beyond the borders of the EZ and hence the international demand for the euro increase dramatically"

There are words in few re-posted researched files somewhere on my blog which state the position of ECB/Euro founders - something like (sorry writing from head, no time to search): "We do not promote nor discourage the international function of Euro, we let the market to work."
Note also the words of Iran when it was switching from Dollars some years ago.

Clyde Frog said...

I don't understand.

Where does debt-free money come from?
Who creates it?
When?
Do they ever retire it?

Sorry for the elementary questions...

cd8dae52-8e01-11e0-8eb5-000f20980440 said...

It seems like every time FOFOA runs a fundraising drive gold gets housed.
Any chance for 3 more funraisers around my bonus payment in march? :)

Matt said...

Thanks Mortymer. I was trying to work out if they would print to maintain internal functionality and JR and yourself have cleared that up for me.

Hi Clyde F - there's a a hundred different theories and methods that range from gold coins and bitcoin but mainly it refers to full reserve banking and all the possible iterations of that (literally dozens of different iterations). There's those who think the there should be fixed amounts of tokens and others who think the government should just issue them out for public works and tax back any excess. I guess the structure you prefer is a reflection of your political beliefs.

Nice name by the way, i laugh everytime i see one of your comments.

Jeff said...

MF Global Holdings Ltd.’s $25.3 million in cash held at JPMorgan Chase & Co. (JPM) is presumed to be its own, the bankrupt company’s Chapter 11 trustee said in response to customer objections to its bid to use the money.

http://www.bloomberg.com/news/2011-12-12/mf-global-cash-at-jpmorgan-presumed-its-own-freeh-says.html

Jeff said...

counterparty meme:

http://www.quickmeme.com/meme/35h9q2/

Dr. Octagon said...

Costata - thanks for the exercise in International Trade Under A Freegold-RPG Regime. Your description reminded me of a nagging issue with freegold. Namely, why gold, and not SDR's.

In order for freegold to be successful, we need a much higher valuation of gold, as has been explained many times. But a high gold price comes with social problems that are less frequently discussed. Problems such as unauthorized gold mining operations after the transition to freegold, and rewarding those few who hold gold through the transition, while the majority who do not hold gold loose their savings.

I can see the same exercise working with SDR's in place of gold (let's call it FreeSDR). SDR's also do not come with the social problems that gold does, as they can not be mined, and no one gets rewarded in the transition. SDR's also have many of the special features that make gold especially suitable as a store of value, as holding them does not deny others of their other uses. This is the argument for gold over silver, or any other commodity, but SDR's are even better at this than gold is, because no one wears jewelery made out of SDR's.

SDR's exist on the ECB financial statements, not in the same league as gold, but they're there. SDR's can be created, but gold can be mined, so that seems similar too. SDR's, like the euro, have “severed the link to the nation-state". The arguments for Freegold state that the euro will not hyperinflate because it has mark-to-market gold for the value to flow into, while the US Dollar does not. But the USDollar does have SDR's on it's balance sheet, which are marked-to-market. Wouldn't FreeSDR provide the same social benefits that Freegold does, but with even more political and social acceptance than Freegold?

Perhaps I've missed it and could use a refresher, or perhaps I'm missing a fundamental flaw in SDR's. I would very much appreciate any arguments against FreeSDR in place of Freegold.

JR said...

Dr. Octagon,

Here is Randy Strauss on the strange obsession with the notion of replacing the dollar (as a reserve currency unit) with simply another institutional emission of similar ilk (such as currencies of other nations, SDRs, bancors and whatnot). As Randy insightfully notes, what IS desperately needed is not another "institutional emission of similar ilk" but a universally respected reserve asset capable of filling our current void with a reliable presence that serves as a store of value. The SDR is a unit of account, not a reliable store of value. The lack of unit of account is not the problem - we already have many institutional emissions of similar ilk.

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

The news said "...This has led to a rising call for the creation of an alternative to the dollar in the form of a new world currency. It would be an enormous mistake to discount these calls as a sideshow. The odds of a world currency emerging have never been higher.

The calls are coming from many corners. Nobel Prize-winning economist Joseph Stiglitz chaired a United Nations panel that recommended the creation of a global reserve currency. Zhou Xiaochuan, governor of the People’s Bank of China, proposed that the International Monetary Fund take over the global leadership role traditionally ceded to the U.S. And Russian President Dmitry Medvedev handed out minted coin samples of a new world currency at the recent Group of Eight meeting in Italy.

These calls are worth paying attention to for a number of reasons. The arguments for a world currency are much better than you might think. An alternative to the dollar clearly has a promising market that can develop even if it is opposed by the U.S..."


RS Comment: So often in commentaries of this sort that propose a “solution”, the author is strangely obsessed with the notion of replacing the dollar (as a reserve currency unit) with simply another institutional emission of similar ilk (such as currencies of other nations, SDRs, bancors and whatnot). Their avoidance of any meaningful discussion of the most obvious remedy is almost pathological in the extreme. To be sure, we don’t need to invent any manner of universal reserve currency to fill the role of a unit of account because that role is already served in a fully functional capacity for any given country by its own monetary unit.

What IS desperately needed, however, is a universally respected reserve asset capable of filling our current void with a reliable presence that serves as a store of value. And far from needing to be conjured or created by complex international committees, that asset is already in existence and held in goodly store by central bankers and prudent individuals around the world — it’s known as gold. From amid the ruins of a chaotic financial crisis that was brought about by its own complexity, a degree of sanity will prevail, and gold as a freely floating asset will arise in stature as THE important element of global monetary reserves. The floating aspect is the vital evolutionary improvement over all previous structural monetary failures which tried to use a gold standard at a fixed price (i.e., unit of account) perversely joined to the very elastic money supply of any given country’s banking system.


Obvious enough?

Cheers, J.R.

Matt said...

"We certainly agree here. I hear less typing and more reading is a great cure for such ails."

My point has never been that we dont have a credit based system but that we can move on from there by changing the medium of exchange and letting the system adapt to that.

"You may have attempted to, but you didn't respond to his point."

His point -"Your 'barter tokens' are the base. Always have been." Base money makes up less than 5% of the money supply depending on your definitions so hardly inline with my position of having 'substantially debt free money' as mentioned above
His point - "If you want 2-way rather than 3-way transactions, use bitcoins or else go back to the dark ages" implying that electronic bitcoin provides an alternative to the darkages (being 2 way but electronic) and to which I clarified that my reference to 'token' wasn't a reference to physicality but to being 'unfettered by debt'

His point - "3-ways lubricate the modern world. 3-ways are good! ;)" I argue that it is the expandability of money on the margin that lubricates the modern world, but that the money stock in no way needs to be 3 way. 3-ways enslaves the modern world!! 3-ways is deeply inequitable!!!

Clyde Frog said...

Matt,

I'm glad it isn't lost on everyone. :-)

Thank you for explaining the basics of your ideal scheme. I find it interesting that you apparently don't have ANY credit (full reserve banking)? Or is there still more you can tell me about it?

Thank you!

Matt said...

Hey Clyde, its late here and im four beers down so i'll just reference a few basics if that is cool.

Credit exists under debt free money but the money supply itself isn't derived from credit. I can owe someone money or my supplier can issue me goods and i agree to pay them later, but when a bank extends credit, they take it from someone else's savings rather than create brand new money. This can severely curtail the expansionary aspects of the money supply, but eliminates a tonne of other problems.

In any case the money is issued as tickets or tokens as i keep referring to them and they exist purely as a reference point to circulate in the economy. Ultimately there can be fixed supply or issued by the government for public works or just dropped into a bank account or rebates on tax.

The key benefits are:

A. the people aren't beholden to banking for their money supply
B. there is no interest due to a private groups for medium of exchange being in existence
C. someone doesn't have to be in debt for someone else to save some money.
D. Paying off debts doesn't lead to deflation
C. a private group cannot dictate who gets the benefit from counterfeiting the existing money supply (either by lending into a boom or by their legislate fiat reserve mandates)
D. Monetary inflation (and hence theft of value) can be minimised
E. Concentration of wealth to banking centres can be greatly reduced (if interest is owed to banks for our money - where does the benefit of our interest concentrate?)
F. Banks are less able to hold the economy to leveraged ransom
G. Full reserve banking breaks the positive feedback loop to credit bubbles.

Is it perfect? No, but if money is a human invention than I'm pretty sure we can also invent a debt free monetary system if we really put our minds to it. There are many proponents of full-reserve banking in the austrian school and countless others in broader economics but there are so many possible iterations that ones preference depends on ones politics. Its all possible though and would simply provide the monetary system that the average person thinks we already have!

JR said...

Hi gregor,

Continuing with some ideas from my earlier comments. The euro is a transactional currency and people need to transact. Why would the debt crisis change this need for an MoE to transact with?

The Euro has external trade balance, so unlike the dollar, there is no trade flow that puts downward pressure on the euro.

The dollar's SoV function supports the trade imbalance (capital account surplus to balance out the trade deficit). As the external creditors stop holding the dollar debt as a SoV, the dollar has to print out to maintain the external trade flow.

The Euro has no such a dynamic, because it is not using its SoV function to support and external trade deficit.

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

Here is some more fun stuff about the Euro from a FOFOA email:

"So if the ECB is not going to print, how are we going to have euro hyperinflation? The Eurozone does not have a trade deficit with the outside world the way the dollar zone does. The Eurosystem is not going to print for the profligate socialist governments the way the $IMFS is doing for the USG. And furthermore, the massive, monumental derivatives mountain as well as the overstretched paper gold market is mostly all denominated in dollars. The euro does not have that threat. So what makes you think the euro is even at risk of collapse? It’s not. Part of the cause of these problems is that the euro has been so strong for the last decade while the US and China debauched their currencies leaving the euro strong.

[...]

The press is so confused thinking that the debt is the currency. If the debt fails, then the currency must fail, they think. No, the currency is simply a shared standard that everyone is using to express the relative value of things in Europe, including various debts. Debts can fail, and banks can be protected by the ECB because they are the credit transmission infrastructure for the economy, and they only require nominal balance. The politicians will have to work out their bad debt situation, but that is not of dire consequence for the euro as a medium of exchange and a unit of account.

It is not the euro that is a poor store of value, it is the promises of governments like Greece and Italy. Anyone who held those bonds as savings was holding imaginary wealth, an illusion. That is not a flaw in the unit of account, but a flaw in the reasoning of the saver who lent his savings to a profligate government.

Edwardo said...

Great news, sports fans, Dennis Gartman, one of the great contrary indicators of our time, is a bear on gold.

http://www.theglobeandmail.com/report-on-business/top-business-stories/dennis-gartman-out-of-gold-proclaims-death-of-a-bull/article2269368/

www.gregor.us said...

Thanks for the responses, JR. What concerns me is that in the process--or frankly in the mayhem--of any Eurozone country exiting the Eurozone, that a rejection of the currency could develop behaviorally among the people. Not only in the exiting country but in other countries where the people fear an exit. I give great weight to behavior, in addition to operational realities. Debt-saturated EU countries must be allowed to reschedule their debt. If not, the price of staying in the gold-standard Eurozone is simply too high. Germany, imo, expresses a "no one gets out of here alive" approach to the problem. Germany seems only now to have recognized the compact they've gotten themselves into. Someone should tell the Bundesbank there's no DM.

I agree, however, it is not impossible that countries will reschedule their debt, while also opting to stay in the currency zone. Indeed, a credible threat for any of the countries to exit the Eurozone should force any concessions they might like, from the ECB. Let's see how the ECB handles an exit, should it come to that.

G

2000 Flushes said...

www.gregor.us,

Here's how I see it. The population of any country that defaults on euro debt is going to prize euros. A default on euro debt means insufficient euros are available, which makes them more valuable. This is the polar opposite of hyperinflation.

As for the socialists rioting in the streets as a result of cuts to their beloved welfare state -- they will not understand, nor care, how currency issues play into this. They will just demand to see "the 1% pay their fair share" and so on. It would be hard to envision them demanding an exit from the eurozone, as most of them love the idea of a large and powerful eurozone government. Even the dumbest of soft money socialists will understand that changing currencies will not make them any wealthier, nor erase their euro debts. They will just want "the rich" to pay those debts.

A lot of debt will still have to get refinanced and/or written off. This is the safety valve that will keep any French Revolution events from happening IMO. As all of Europe's ex-Goldman politicos are aware, well-fed slaves are more productive than starving ones.

Dr. Octagon said...

JR – thanks for the response and link to comments from Randy Strauss. Unfortunately for me, they don't seem to offer much to help dissuade me from considering FreeSDR as a possible outcome.

Randy, and wikipedia suggest that the SDR fulfills the unit of account function of money, not the store of value function. While this may be true within the IMF, I doubt there are many people out there who think of prices in terms of SDR's. We think in terms of our local currencies – not SDR's. So I don't buy the argument that SDR is a unit of account. For the general population, it's not a means of exchange either. These follow gold – which today is not a unit of account (except maybe for a few goldbugs), or a medium of exchange.

JR posted a link above to Once Upon a Time quoting “When gold first became money, it was as the mental unit of account”. If this is how the SDR is today for central bankers and within the IMF, why could it not take the same path as gold, and transition to a store of value?

Indeed, the SDR already (sorta) floats against several major currencies, and is recalculated daily. I realize this isn't a true float, as the value of an SDR is calculated by the value of a fixed-weighted basket of currencies. But it's not much of a leap to go from the current implementation of the SDR to a true float. According to the IMF: “Once allocated, members can hold their SDRs as part of their international reserves or sell part or all of their SDR allocations. Members can exchange SDRs for freely usable currencies among themselves and with prescribed holders; such exchange can take place under a voluntary arrangement or under designation by the Fund.”

I can understand the argument that the ECB could bid up the price of gold as a way to redirect pressure in the current system over to gold, which can handle that pressure. But could they not just as easily direct this pressure at the SDR instead, by offering to buy SDRs from other IMF members? This would be much more acceptable to the US, and avoids the messy parts of Freegold I mentioned earlier (unauthorized mining, significant wealth transfer to holders of gold). China may like the idea too.

As someone who has some gold, but no SDRs, I'd really prefer Freegold, but I'm not yet comfortable with the inevitability of it.

Virgule said...

FOFOA,
Thank you very much for one of the most interesting articles in a long time.
It is indeed difficult to navigate through and reconcile the viewpoints of Jim Sinclair, Tyler Durden and yourself.
I'm having trouble with the last view that makes a bit of "system sense" : MMT/PragCap.
I sense a compatibility with FreeGold (lots of fiat money ;-), but I am having trouble connecting all the dots.

Robert LeRoy Parker said...

Some Russian Imf stuff.

Reuters

JR said...

Hi Dr. Octagon,

"Randy, and wikipedia suggest that the SDR fulfills the unit of account function of money, not the store of value function. While this may be true within the IMF"

I'm glad to see you agree what the SDR is - a IMF created unit of account to relate together the various fiat currencies under the $IMFs.

RS Comment: So often in commentaries of this sort that propose a “solution”, the author is strangely obsessed with the notion of replacing the dollar (as a reserve currency unit) with simply another institutional emission of similar ilk (such as currencies of other nations, SDRs, bancors and whatnot)

See that - all the SDR is an artificial unit of account created by the IMF - it isn't a medium of exchange or a store of value.

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

You also write:

"“When gold first became money, it was as the mental unit of account”. If this is how the SDR is today for central bankers and within the IMF, why could it not take the same path as gold, and transition to a store of value?"

You are comparing a centrally managed, $IMFS imposed unit of account - another institutional emission of similar ilk as the dollar - to the pure concept of money. The full quote from Once Upon a Time:

"It is how the pure concept of money emerged in the very beginning. When gold first became money, it was as the mental unit of account. I'll give you five ounces of gold worth of cattle and you'll owe me five ounces worth of milk and other goods and services."

Gold is Money - Part 3:

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

cont.

JR said...

cont.

The Return to Honest Money

"Our ancient instincts have not gone away. We have not "advanced" as much as we think. Our use of "the pure concept of money" has not changed since the days when we engaged in direct barter trade. We still want to accumulate wealth item along side and separate from our transactional "pure concept of money" which is really just a number in our mind, or marked down on paper. We know that this "number" is not something to be saved, except perhaps for as long as it takes to arrive at the next transaction. (See: Fekete's A ‘fairy’ tale)

You see our modern money concept has been surreptitiously eroded into only one half of our ancient barter understanding of the money concept, and one half does not equal a whole. Most of today's money, other than the monetary base, is borrowed into existence. It represents a debt, and a debt is an incomplete transaction. It is only one half of what our instincts require as a wealth reserve, which is a fully completed transaction resulting in an accumulation of hard value. And yet we still buy these "wealth assets" denominated in only "half a concept", half of the monetary concept that our mind intuitively understands.

This is a flaw! It is a big one, especially now as "the other half" is waving the white flag of surrender and default. Some very smart analysts see this as deflationary. They truly believe that the waving of the white flag will make this "half a concept" actually rise in value against its parallel real world economic counterpart. But that is not what will happen."

[...]

"FOA: Naturally, for gold to advance as the leading tradable good it had to have a numerical unit for us to associate tradable value with. We needed a unit function to store our mental money value in. In much the same way we use a simple paper dollar today to represent a remembered value only. Dollars have no value at all except for our associating remembered trading value with them. A barrel of oil is worth $22.00, not because the twenty two bills have value equal to that barrel of oil: rather we remember that a barrel of oil will trade for the same amount of natural gas that also relates to those same 22 units. Money is an associated value in our heads. It's not a physical item.

The first numerical money was not paper. Nor was it gold or silver; it was a relation of tradable value to weight. A one ounce unit that we could associate the trading value to. It was in the middle ages that bankers first started thinking that gold itself was a "fixed" money unit. Just because its weight was fixed.

In reality, a one ounce weight of gold was remembered as tradable for thousands of different value items at the market place. The barter value of gold nor the gold itself was our money, it was the tradable value of a weight unit of gold that we could associate with that barter value. We do the very same thing today with our paper money; how many dollar prices can you remember when you think a minute?"


Cheers, J.R.

JR said...

Hi Victory,

We were talking about Triffin's dilemma last thread. Here is FOFOA describing how Freegold resolves Triffin's dilemma:

"For any real economists out there, here's how Freegold resolves Triffin's dilemma.

Triffin's dilemma highlights two flaws in the dollar and its use as the global reserve currency. Flaw #1 is the dollar being a national currency and also a supra-national global reserve currency. Flaw #2 is the dollar trying to be as good as gold in the store of value role via US Treasuries. What I mean in flaw #2 is that the dollar's credibility is hurt by a rising price of gold and, therefore, it must systemically manage that threat by backing the fractionally reserved bullion banking system which eases the natural supply constraint of gold.

The euro has eliminated both of these flaws in its fundamental architecture. It is not a national currency and it does not oppose a rising (in the present case) or a free floating (in the future case) price for non-fractional physical gold reserves. I have written extensively on this topic, and the bottom line is that gold is not yet free floating, even today, because its market is encumbered by many forms of gold IOUs that trade at par with the physical stuff through the support of the dollar system.

You can obviously resolve Triffin's dilemma by removing both flaws. But removing #1 alone is not enough, while #2 alone is enough.

Triffin's dilemma observes that when a national currency also serves as an international reserve currency (as the US dollar does today), there are fundamental conflicts of interest between short-term domestic and long-term international economic objectives. But this is only the case if that currency does not embrace a "secondary media of exchange" that is allowed to float in value in a quantity not managed by the currency manager (i.e. physical only), and can be purchased and stored in lieu of retaining debt denominated in the primary medium.

Imagine, if you will, the euro supplanting the dollar's role as the globe's super-sovereign currency unit. This is (at this point) merely a conceptual exercise for all you anti-conceptual mentalities. Let's compare the two with regard to Triffin's dilemma.

How often do we hear euro critics repeat that the euro, a currency without a country, has no political union to back it and is therefore worthless? The US dollar has a country, but in its role as the world's currency it also functions just like the euro, without a global political union.

The fundamental difference between these two units of account (the dollar and the euro) is their relationship with gold.

If you have followed my blog at all, you know that the euro has Freegold, the wealth consolidator and "real money" with no country, no links and no political union to back it. So which unit of account (€ or $) is closest to gold? Which currency, of these two, is most likely to be preferred as the global reserve currency next to Freegold in the wealth reserve role?

The point is, once "Freegold" (nature's wrath) inflicts itself upon us all, it won't really matter what is chosen/used as the super-sovereign or supra-national currency to lubricate international trade. It could be the euro, the yuan, the SDR, Facebook Credits or even the dollar! Triffin's dilemma will be gone. And you shouldn't worry so much over the transactional currency question, because that will be chosen through the market forces of regression, the network effect and game theory's focal point discovery at the international level."

Victory said...

Thanks JR,

I think I'm getting closer to being on the same let me outline some of my thoughts and see if you agree. First let me say I understand what FOFOA clarified for me about not confusing fx reserves under freegold with reserve assets because fx reserves will be used to buy gold for that purpose.

That being said if, contrary to this understanding, the euro was to replace the dollar as the global reserve currency with its store of value function, wether in currency or bonds, then a rising gold price would also threaten the euro just as it would the dollar. In other words under these conditions the mark to market function of the ECBs gold reserve would do little to resolve this problem. However if euros are not held by other nations as a store of value then then a rising gold price would not threaten the euro.

Actually now that I've written that down it makes me question the significance of marking the ECB gold holding to market. I know it's important from an accounting stadpoint in order to keep the balance sheet solvent but I think it's much more than that for real world practical reasons. Does it have to do with the ECB itself making a market in Gold?

Costa,

I enjoyed your settlement examples. If you continue with that analogy it might be neet to show how those various exchanges affected the pice of gold in yourland and myland

JR, one last thing you mentioned in a post earlier that if a country in Europe defaulted on its sov debt the price of gold would skyrocket. Why is that exactly, could you elaborate on the mechanics behind that?

-v

Nickelsaver said...

Matt,

when a bank extends credit, they take it from someone else's savings rather than create brand new money.


Sounds like the model MFG used.

Nickelsaver said...

Victory,

This is a quote from Blondie's blog
http://flowofvalue.blogspot.com/2011/04/freegold-standard.html

"The monetary system, as the sum of its functions (unit of account; medium of exchange; store of value), is simply the system we collectively agree to use to facilitate the flow of value between individuals and groups in society (without such a flow we would all need to be completely self-sufficient individuals)..... Viewing money as simply currency (medium of exchange), and accounting for transactions only in nominal currency terms is misleading - currency has value in accord with the value of real goods or services for which it may be exchanged only, and this exchangeability is not fixed, but rather always in flux. Value is simply the measure of utility, and if a currency buys less or none of what one wants, then it has little or no utility, and hence little or no value. A system of account requires a unit with at least some sort of objective basis to have relevance.

To perform well, any store of value should not be used also as a medium of exchange, as at least part of the value being exchanged in any given transaction would not be kept as savings, and would need to be further exchanged to meet current expenses. This increases the velocity of the store of value, reducing its value. Gold, like any other store of value, stores value best when it lies very still.

With a Freegold Standard, only the exchange rate of a currency with Freegold need be established to find the currency’s value, as Freegold is the proxy for the stock of value, wealth.

Freegold acts like a sponge, absorbing surplus value in any given zone, and transferring it between zones through arbitrage, out of deficit zones (net value consumers) and into surplus zones (net value producers). All sovereign entities, whether individual, state, or nation, interact with this system in the same way, only on different scales (micro/macrocosm). They may have different motivations for individual transactions when storing value in or retrieving value from Freegold, but the mechanism they use will be the same - the purchase or sale of unencumbered gold in a floating free market.

The Freegold market is established by the bidding for unencumbered physical gold in preference to encumbered gold derivative products, as these derivatives are found to not perform as well as unencumbered physical in monetary crisis, and as a result are discounted by the market. This is a simple and spontaneous reaction in accord with the self-interest of market participants. When monetary confidence falters the preservation of value becomes the focus, and in this gold is the obvious focal point.

In practice, any currency is valued by the market only by that which it can be exchanged for. Under a Freegold Standard, currencies are technically, but not officially, backed by gold - a currency that cannot be exchanged anywhere anytime by anybody for gold will be avoided in favour of one that can. It is privately-held gold reserves that make themselves available for this exchange, at the right (floating) price, not Central Bank gold reserves. CB reserves are for currency credibility purposes, and a national savings reserve for facilitating international trade in times of distrust and/or great monetary stress. A Central Bank buys or sells gold to manipulate the value of its currency, buying to inject currency into circulation thereby weakening its exchange rate, and selling to remove currency from circulation and strengthen it."

Nickelsaver said...

Victory,

You cannot make the mistake of thinking of the Euro as a reserve currency in the same way the Dollar functions as Reserve currency. The dollar is treated as both medium and store. The Euro is in position, by virtue of its preset condition of separating store of value and medium of exchange, to fall into the position of (at the very least) the predominant global fiat currency.

But the key different is. the Euro is not the reference point, like the dollar. The reference point is gold.

Kid Salami said...

JR and others - I read the comments by the way, just let me think a bit...

tudsy said...

Thanks to Victor and JR for the replies to my comment.

It seems to me that you're more or less saying that with regards to the trade imbalances in the Eurozone, it's all because "they're doing it wrong". I.e., the Germans need to sterilize their capital inflows by converting Euros to gold instead of lending them back to the PIIGS.

I guess this just points out that under Freegold, one can still blow up the currency if you don't save excess fiat by sufficiently converting it to gold and instead recycle it in to increased debt and lending. Since the world currently works on the model of saving excess fiat in terms of fiat (as opposed to gold), there will need to be a major behavioral shift before Freegold can take off, even if all currencies were to immediately transition to a Euro-style, Freegold currency. Is it only through hyperinflationary crisis that we get there?

I think that until people start pricing at least some goods in terms of gold, the behavioral shift won't happen. I live in a place where real estate is typically priced in dollars, due to the historical instability of the local currency. Everything else is in the local currency, but real estate is priced in dollars. This alone creates a practical reference point (and utility) for dollars that encourages people to hold them. I suppose something similar could happen for gold (I believe I've read that in Vietnam most real estate transactions still occur in gold) in various Eurozone countries.

I think the current crisis in Euroland is also a good opportunity to address further questions about how a Freegold world would function. In particular, I'd like to ask: what conditions make for an optimal currency union under Freegold? Is fiscal union advantageous?

This question is addressed by many academics in the context of fiat, but how does the analysis change with a Freegold currency?

mortymer said...

@tudsy: In VietNam the real estate is expressed in the ounces of gold. :o)

I stumbled into this now:

http://goldnews.bullionvault.com/gold_bullion_112920115

"Vietnamese May Be Asked to Swap Gold Bullion for Certificates - 29 November 2011

VIETNAM'S central bank should issue gold certificates in order to 'mobilize' the country's large hoard of Gold Bullion, according to one of its former governors.

The proposal would involve individual depositing gold at local State Bank of Vietnam branches in return for gold deposit certificates..."

[Mrt: Hmmm... :o)]

"...The central bank may buy the idea," notes Hanoi-based economics site Vietnamica.

But Vietnamese people will decide whether they love the certificate or not.

There is a tradition in parts of Vietnam of quoting prices in gold and US Dollars as well as in Dong. Physical Gold Bullion is also used as a medium of exchange for some larger transactions – for example house purchases.

The authorities, however, has outlawed making payments in foreign currencies or gold...."

J said...

Washington (CNN) -- As the United States completes its withdrawal of all military forces from Iraq by the end of the month, Iraq's prime minister made a pitch to leaders of American commerce and industry Tuesday: Iraq is open for business.

In an address to American executives at the U.S. Chamber of Commerce in Washington, Iraqi Prime Minister Nouri al-Maliki said his country offers "limitless" opportunities for American companies.

Al-Maliki said his country is trying to diversify from an energy-dominated economy, to one that focuses on financial, medical, agricultural, educational and infrastructure services as well.

The end of U.S. military operations in Iraq heralds the beginning of a "wider relationship" between the two countries where "not generals but businessmen" will focus on economic and political engagement between the two countries, al-Maliki told the audience. He spoke to more than 400 executives representing a wide range of industries including petroleum, engineering and construction, commercial aviation, architecture, maritime cargo and financial services.


As troops leave, Iraq wants surge of American business

I found this interesting. I have nothing to add at the moment.

Matt said...

Nickel Saver: " Sounds like the model MFG used."

Please see edit:

when a bank extends credit, they take it from someone else's savings rather than create brand new money,,, If you put your money in an interest bearing risk account. It'll be pretty clear though because the money will actually be gone and in use somewhere else, like a term deposit now.

Motley Fool said...

Matt

"when a bank extends credit, they take it from someone else's savings rather than create brand new money"

You are still not seeing that this is a problem. People want easy money. You are advocating hard money.

People will rebel against it, they will beg and plead, they will make the easy money so easy in time that at some point it will fall on it's face.

TF

mortymer said...

http://goldchat.blogspot.com/2011/12/negative-gold-lease-rates-again.html

Orig source:
http://www.metalaugmentor.com/analysis/charlatan-exposed-negative-gold-lease-rates.html

Matt said...

I know MF - please note my comments on substantially debt free money as our current system needs easy money at the margin only.

I put it to you that while the euro is soft money in a credit perspective it is also hard money from a fiat perspective. Depending on your position in the system the euro is both soft and hard.

"POLITICIANS & BANKERS will rebel against it, they will beg and plead, they will make the easy money so easy in time that at some point it will fall on it's face."

"You are still not seeing that this is a problem. People want easy money. You are advocating hard money. " I know hardmoney is a major problem but i won't forgive all 'debt-ills' just to have our current system of soft money. Is a debt free (or substantially debt free) soft money system possible? Put your thinking caps on because I bet that it is if you are willing to think outside the box.

Hard money is a pain in the butt but its not the end of the world. What ills are forgiven for access to soft money?

mortymer said...

http://www.metalaugmentor.com/analysis/a-decently-close-look-at-hyperinflation.html

April 25, 2011

"The recent FOFOA analysis of hyperinflation is a noble try but it fails to differentiate between hyperinflationary collapse and hyperinflation per se..."

[Comments?]

matrixsentry said...

@Matt

I know hardmoney is a major problem but I won't forgive all 'debt-ills' just to have our current system of soft money.

Is doesn't matter what you will forgive, you are in a very tiny minority of people who even have the slightest idea of what money is, let alone hard or soft money. The vast majority will beg, plead, demand, and if pushed will kill for soft money. Take a look at history and see what happens when a soft money regime overthrows a hard money regime. The soft money crowd will demand debt forgiveness and they will receive it!

Is a debt free (or substantially debt free) soft money system possible? Put your thinking caps on because I bet that it is if you are willing to think outside the box.

My response would be to ask why we would want a system with little or no debt? It is not a natural system because it ignores a fundamental trait of humanity, the desire for a free lunch. To bring forward future productivity into the present. Any system that ignores the very nature of man will eventually be altered to come into agreement with his needs.

Hard money is a pain in the butt but its not the end of the world. What ills are forgiven for access to soft money?

Yes, I agree. Focus on the pain in the butt part. Mankind has a built in "free lunch" gene that protects him from expending unnecessary energy, which until very recent history has been pretty scarce. We seek the path of least resistance because it is a survival trait that rewarded our species throughout our evolution. This leftover survival instinct makes credit and soft money too irrisistable to our modern minds.

You are asking humanity to take the hard road. It won't happen. A better approach is to acknowledge our propensity to seek instant gratification today at the expense of increased future productivity, and at the same time give those who choose the hard road a haven where they can protect themselves from the inevitable excess of the soft money crowd.

In a word, choice. RPG-Freegold.

www.gregor.us said...

2000 Flushes: thanks for the response but I don't subscribe to the money-supply theory of hyperinflation. This is how I differ from the traditional goldbug view, which I have also deemed as a Normal view. (Normal systems, Normal probabilities). While there are many conditions, some structural, that can trigger hyperinflation, there is one condition alone that *must* be present for hyperinflation to occur. And that is the behaviorial response from the people. The currency must be rejected by the people, and trying to draw a causal line between money supply and the behavior of people---while many think easy--is not so easy, and is not so clear. The United States has been printing money for decades.

I doubt very much that sovereign bond defaults in the EU will cause an increased desire by the world to hold EUR notes. It might. I also suspect that once sovereign bond defaults trigger in various EU countries, this may initially cause EU citizens to hoard the only cash available to them--EUR notes. But the problem is that as institutions in the EU fail, and confidence is lost in the political complex, then confidence in the currency is very likely to follow. Not definitely, just likely.

For me, hyperinflation is a social and psychological event. It could happen in a low debt country that has not engaged in money printing. It could be prevented from happening in a high debt country that is serially printing money. Accordingly, my view is that the gold market's obsession with money printing is correct--but only up to a point.

If we agree that hyperinflation is a social-psychological confidence crash in the currency and the political leadership behind that currency, then I would ask the question: what would restore confidence? Well, again, many factors. But the people of Europe are not going to analyze trade flows, or the amount of gold in the Eurosystem, as they pick their way through this crisis--and certainly they will not mentally conduct such calculations during banking runs. Should the EUR run into trouble, serious trouble, political leadership will have to become much more explicit about their plans to restore confidence, and that could certainly include making gold's role in the system more understood.

Let's see how the situation unfolds socially--because that is the factor that matters most--when hard defaults come to Europe, and there are citizens of certain countries fearful of what happens when their nation exits the Eurozone. Let's see what crowds do, as they face their holdings of EUR notes.

G

Matt said...

Hi Matrix, I just posted a response but lost it and don't have time to re-write now.

I'd quickly say that we are busy arguing over the merits of soft/hard money when i am arguing for debt-free money. One does not have to lead to the other!

Nickelsaver said...

Sometimes it is just easier to think of things when you break them down into the simplest terms.

Freegold is not a plan that will be implemented. It is an inevitable reality, based solely on the collapse of the current USD based system.

Nixon freed gold (in one sense) in 1971. The USD has no gold reference at all. So the price of gold fluctuates now as a commodity against the Dollar.

When we look at this system we see that the accumulation of debt, without the hard reference to gold (or any other real store of value), will run its course in due time. Or in other words, at some point, default on non-asset based paper is going to happen.

When that default happens. No one is going to stand up and say "Hey, lets try a Freegold standard". No one will need to, because gold will no longer be priced by the USD. It will be free in the second sense in that it is not falsly valued against the USD. Gold (and all other REAL items of value) will find there value relative to TRUE supply and demand forces.

The argument for the Euro as surviving FIAT is in the way that the ECB bases its value. There will be a revaluation of the Euro. The gold which was formerly priced in USD, will then give value to the Euro based on the quantity of gold held by the ECB. You will not think in terms of gold = so many Euro, but Euro = so much gold.

That is the theory as I understand it. Freegold is inevitable and the Euro is counting on it.

JR said...

Victory,

You wondered about the Euro's MTM gold:

"Actually now that I've written that down it makes me question the significance of marking the ECB gold holding to market. I know it's important from an accounting stadpoint in order to keep the balance sheet solvent but I think it's much more than that for real world practical reasons. Does it have to do with the ECB itself making a market in Gold?"

In addition to the ideas offered by Nickelsaver, consider this:

Flaw #2 is the dollar trying to be as good as gold in the store of value role

That is what gold standard currencies do - they say our paper is as good as the gold that "backs" the fiat paper. And they say to themselves "lets hope no one calls us on it."

The Euro admits its is not as good as gold, it revalues ever quarter against it. It says, this is how much in gold our currency is worth. And ultimately, that valuation has to be backed by the flow of gold. If you can't get gold for that MTMed price, its not very helpful. And that's the significance of the Washington agreement and the euro area gold sales.

FOA: "Yes, the war now is between the Euro and the dollar! The Washington Agreement placed gold "on the road to high prices" as it signaled a phasing out of Euro support for our American gold values."

It's the Flow, Stupid: "You see, the European gold reserves are far better, far more credible than the US gold reserve, simply because they engage in a two-way gold market, and have for decades. The US gold has been hoarded and locked away for more than 30 years, never deployed in case of emergency. The European CB's took a lot of flak for selling gold over the past two decades, but that action is precisely what makes them so much more credible (and valuable!) than the US gold hoard. Any trading partner knows full well that if all else fails, gold will be paid.


cont.

holdinmyown said...

For Costata:

http://www.stratfor.com/weekly/20111212-russias-plan-disrupt-us-european-relations?utm_source=freelist-f&utm_medium=email&utm_campaign=20111213&utm_term=gweekly&utm_content=readmore&elq=6eeace4743df49b0bffcc3979aff5535

I hope that this helps in your ruminations wrt Russia.

HMO

JR said...

cont.

It's the Flow, Stupid :

From 1980 through 2001 gold did flow, though not in the efficient way it would in a free market. With the expansion of the gold forward sales and futures markets, the Saudis and the third world bought up all excess physical gold flow. As ANOTHER said in his very VERY first post, which is prior to even the USAGold archives:

September 14, 1997 by "ANOTHER"

The CBs are becoming "primary suppliers" to the gold market. Understand that they are not doing this because they want to, they have to. The [CB] words are spoken to show a need to raise capital but we knew that was a [smoke] screen from long ago. You will find the answer to the LBMA problem if you follow a route that connects South Africa, The Middle East, India and then into Asia!

Remember this; the Western world uses paper as a real value, but oil and gold will never flow in the same direction. Big Trader


"South Africa, The middle east, India and then into Asia!" This was where the physical was flowing while we, in the West, were becoming enamored with paper gold trading. No longer did the US Treasury have to supply ITS gold, the market was supplying gold for it. But keeping the physical flow bought up, cornered as it were, was putting a great deal of stress on the paper market of the LBMA by the mid-1990's. It's all about the flow remember, the flow of PHYSICAL that is."


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

Freegold Foundations:

"And for those of you that think all bankers, by nature, are anti-gold, guess again. A better way to view banking versus gold is that "the past" was anti-gold, but "the future" is pro-gold. The first Central Bank Gold Agreement in 1999 (the CBGA, aka the WAG) signaled this change.

The Washington Agreement is most well-known for its cap on central bank gold sales. But much more important than the sales cap was the cap on gold lending!


[...]

Date: Sun Nov 16 1997 10:20
ANOTHER (THOUGHTS!) ID#60253:

In today's time the CBs do not sell physical gold with a purpose to drive the price down. They sell to cover open orders to buy what cannot be filled from existing stocks. Look to the US treasury sales in the late 70s. They sold 1 million a month using open bid proposals with much fanfare. If the CBs wanted physical sales to drive the price they would sell in the same way.

The sales today are done quietly with purpose. The gold must go to the correct location. That is why these sales do not impact price as they occur, there is a waiting buyer on the other side…

… Banks do lend gold with a reason to control price.


And...

Date: Sun Apr 19 1998 15:49
ANOTHER (THOUGHTS!) ID#60253:

If they sell gold, a way is clear to "bring gold back" for the nation! Canada has local mines, Australia has local mines, Belgium has South African mines! If they lease gold, it is for a purpose…


This is the real significance of the Washington Agreement! The end of the CB's backing (through lending reserves to the BBs) of the fractional reserve gold practices of the Bullion Banks."

JR said...

And here is Randy

"Randy (@ The Tower) (04/17/01; 13:37:02MT - #: 52046)
Mr Gresham, nice question (msg#: 52041)

--- "Was the Washington Agreement the most significant event in gold since you were last posting in 1998?"---

If I may be so bold, let me anticipate ANOTHER's answer with an answer of my own.

The most significant event in gold since the dollar's gold default in 1971 has been the successful launch in 1999 of a long-awaited new currency system built upon neutral (meaning, multi-national) management and, more importantly, a floating gold reserve structure that finally abandoned the now obsolete "fixed" gold legacy of the failed Bretton Woods structure.

With this new reserve structure, the prevailing institutional incentive from '71 to the end of the millennium need no longer be one of "price suppression" for the perceived market value of gold.

In this light, the most significant element of the Washington Agreement is seen to be NOT the amount of pre-announced gold sales, but rather, the self-imposed curb on gold lending operations by these European central banks. And if you think about it, this action with the Washington Agreement was nearly just a predictable inevitability from the moment the eurosystem committed to provide for freely floating gold reserves. The "tools" of the prior suppression are on the outs. Believe it. The WA simply announced the foregone conclusion in a package suitable for newspaper headlines.

Just as the value of the post-'71 paper dollar has long been propped by the international yet artificial "mandate" to hold these dollars almost exclusively as reserves (acting in tandem with the dollar settlement for oil and the overhanging debts of the "Third World"), through this new currency structure gold (and its price/value!) has now been "officially" set free to replace these dollar reserves (savings).

The reason this full transition has not already occurred is that institutional interest still exists to foster the smoothest practicable transition until that unknowable moment where the final remaining *SNAP* in the adjustment occurs.

Speaking for The Tower and personally, I continue to buy gold with excess funds because I prefer the real wealth of gold over managed paper (and digital) contract currency. As a bonus, the real wealth value of same gold will provide a pleasant benefit upon full completion of the transition in world currencies' reserve structures. (An understatement, to be sure.)"


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

See that - "the most significant element of the Washington Agreement is seen to be NOT the amount of pre-announced gold sales, but rather, the self-imposed curb on gold lending operations by these European central banks. And if you think about it, this action with the Washington Agreement was nearly just a predictable inevitability from the moment the eurosystem committed to provide for freely floating gold reserves. The "tools" of the prior suppression are on the outs. Believe it. The WA simply announced the foregone conclusion in a package suitable for newspaper headlines."

Cheers, J.R.

DP said...

Matt,

I'm still struggling to understand the fundamentals of your scheme, unfortunately. Perhaps you can provide me with further meds to get me through this pain?

"Credit exists under debt free money but the money supply itself isn't derived from credit".

For a moment I am setting aside the credit part. I am still trying to imagine where your money supply comes from originally - who creates it, how they create it, why they create it, when they create it, whether it is ever retired from circulation. I think these questions, about your tokens (let's call them "base money" for the sake of simplicity?) themselves, are key to my understanding the proposition - it would be useful if you could answer them please?

Going back now to the credit part. I am a depositor with cash to save. I put it in the bank. I think I can take it out and spend it when I want to: it is still, to me, "my money". At the same time, the borrower has taken out the loan for some specific reason that means he needs to spend the money. So, however fleetingly, "my money" was also "the borrower's money". Finally, whoever the borrower bought the goods and services from, is pretty sure "my money" is their money, once they have handed over the goods and services to the borrower, in exchange for "my money". Eventually, the borrower is expected to work off the loan and repay it in full with some "base money".

Do we agree this is "the monetary system that the average person thinks we already have"?

i.e.: a magic system, where banks can take "my money" and give me more money, but also allow other people to spend "my money" too.

What happens if (when) a borrower loses their job. Or just they are so feckless that they take on debts that they have no chance of repaying? They have to default on the loan.

Where's "my money"?

JR said...

matt, I see you continues\ to equivocate,

"there's a a hundred different theories and methods that range from gold coins and bitcoin but mainly it refers to full reserve banking and all the possible iterations of that (literally dozens of different iterations). There's those who think the there should be fixed amounts of tokens and others who think the government should just issue them out for public works and tax back any excess. I guess the structure you prefer is a reflection of your political beliefs.

[...]

I'd quickly say that we are busy arguing over the merits of soft/hard money when i am arguing for debt-free money. One does not have to lead to the other!"


While you dance, for the edification of others, here are two comments on on soft money/easy money camps' "debt-free money" proposals here and
there. And here is FOFOA on the hard money camps "debt-free money" proposals.

Cheers, J.R.

JR said...

Why debt is not the cause of our problems, and thus debt-free money, in whatever iteration its particular proponent favors, is not the solution - from the first link above:

"I dislike debt as much as the next guy. In fact, I think that equity engagements will ultimately be more appealing in a balanced and stable economy with multiple viable alternatives for capital to park in. I am certainly no fan of the Fed and I don't like what banking has grown into over the last 30 years.

But debt itself is not the cause of our problems today. Today we have a situation where the vast majority of excess production value (excess capital) is enabling massive amounts of global malinvestment through new debt creation. That has peaked and is now contracting. But the problem is not the debt itself. The problem is the enabling effect of excess capital not having a viable alternative that floats against the currency. The problem is the lack of the adjustment mechanism of Freegold. There is no viable counterbalance against uncontrolled debt growth today. So we are only left with credit collapse and hyperinflation of the monetary base to clear the malinvestment from the system.

It is easy to blame this on debt as a principle, but unless you don't mind being wrong, there are some deeper explanations out there. Debt under Freegold will not reach such destructive levels. "Easy money" thinkers may or may not get their debt-free money, but if they do they will suddenly realize the flaw in their reasoning. Oops! That it can only have expandable value (needed for the welfare state) if producers are willing to hold it while it expands. Without that, socialist welfare expansion will simply dilute the value of the currency and be as limp as a eunuch.

And this fatal flaw in the "greenbackers'" reasoning is, for all practical purposes, written into their Western genetic code. They won't see the flaw until it finally fails them. It comes back to the concept of money. Ever since the Dark Ages, money has been both a medium of exchange and store of value, for better or worse. They can't even conceptualize the separating of functions, so they don't bother considering the consequences. They think "all we need is free money and it will be a wellspring of value, because money is always valuable." How wrong they are.

If you want a glimpse at how things will actually play out monetarily, it can be most clearly seen in the structure of the euro. As Wim Duisenberg said in his famous speech, "It is the first currency that has not only severed its link to gold, but also its link to the nation-state." Here, the euro solved TWO problems. 1. It severed its link to the wealth reserve function of money. And 2. it severed its link to the Triffin Paradox.

The resolution of these two problems with the dollar (1. trying to be everything to everyone, and 2. suffering the Triffin Paradox) is the inevitable shakeout of this crisis. This is the final point you should internalize."

Dante_Eu said...

Oh man we're going down...2011 doesn't look to be the Year of the RPG. :-)

matrixsentry said...

@Dante_Eu

Granted, we only have a few days remaining in 2011, but 2012 could certainly be a player. The gold price I am seeing this minute is being determined by a market that trades paper commitments to deliver gold. This market must fail and cease to exist for Freegold to emerge. The mode of failure will not be because the price of paper gold gets too high. It will fail when people sell paper in the knowledge that they cannot stand for delivery. The process up to the day that market ceases is one where paper is sold, price of these contracts will fall.

I would say we are headed in the right direction on the paper price for Freegold to emerge.

Jeff said...

Dante,

Going down is what we are waiting for. Watch 1500 for the tell, IMO.

Gregor said 'For me, hyperinflation is a social and psychological event.'

FOFOA sez: Hyperinflation is a currency event only. The price of three eggs may well rise to $100 billion as seen in this photo:

But those same eggs will still only cost one apple. This is an important enough concept that you should spend some time thinking about it. There will be shortages. Supply lines will be disrupted. And the relative value of stuff will change. But it won't change anywhere near the extent to which currency values will change.

Matt said...

Nice link DP, i appreciated the comment 'Shit, I'm in the weird part of youtube again'

- So basically debt-free money is government created (think it pretty much as to be) which can be an issue depending on your politics (who is better to create our money - our representative government aka seigniorage or private banks? question of your politics).

On roll-out there is the option of the government swapping credit money for government issued 'base money' (both physical and electronic) and restructure the debts (ie nationalise the money supply) or layering base money across the economy evenly (excepting that if you are in net debt, you have to pay that off first) either way the money supply would be regulated via an independent institution similar to the say the ECB. If a target inflation rate is sought (ie 0%), this independent body could issue credits direct to an account people have with them, to the government to spend or as a rebate on taxes etc (again, depending on your politics!)

The system would then work like full reserve banking. If you had spare capital in the form of base money you could elect to put it in an interest bearing, at risk account where you cannot access it (assumedly having it pooled with other investors), or keep it safe and accessible in a no interest account. This would lead to a much tighter capital pool, higher rates of interest and hopefully the requirement for loans to be productively self-liquidating.

In the event of default, the money supply wouldn't contract but the money would not be returned to the lender. This is where pooled investment funds would be required to spread risk across borrowers (look into options for crowd funding that already exist).

My personal preference is for a hybrid with expandable money at the margin. The details would be something like this: debt free money would make up say 85%-90% of the money supply and backed by government (although there's no need to 'back' that money save for replacing damaged notes etc) and the banks had a 80% reserve requirement allowing them to lend a meager 20% of their government backed base money they held. this credit money would not be backed by the government but would allow for an slight expansion of the money supply. As the economy grows the central bank ECB body can nationalise this credit money and convert it into the money stock if the comfortable with the gdp growth brought about by the lending (instead of issuing new debt free money direct to the economy as above).

You can get a fair bit of info on debt free money from groups like www.positivemoney.co.uk and i'd suggest just charting the money supply to bank debt to work out what freedom could be created by a debt free money supply.

One thing I just picked up from positive money: just 8% of UK bank lending is to business. Now, is that really utilising the power of expansionary credit money for the purpose we claim we need it for?

Dante_Eu said...

@matrixsentry & Jeff:

Yeah I know that. The paper price may even go down to 300$ but physical will be impossible to get at that price.

Just teases FOFOA a bit about the timing. :-)

Jeff said...

Gold Lease Rate Slides to Lowest on Record as European Banks Seek Dollars


http://www.bloomberg.com/news/2011-12-08/gold-lease-rate-slides-to-lowest-on-record-as-european-banks-seek-dollars.html

Jeff said...

The interest rate for lending gold in exchange for dollars plunged to the lowest on record this week as European banks sought ways to secure the U.S. currency amid the region’s debt crisis.

The one-month lease rate on gold fell to minus 0.57 percent on Dec. 6, the lowest according to Bloomberg data going back to January 1998. The rate, derived by subtracting the gold forward offered rate from the London Interbank Offered Rate, was at minus 0.56 percent today and compares with minus 0.23 percent at the start of this year. A negative reading means banks have to pay to have their gold deposits lent.

(Maybe no one wants to buy or borrow leased gold, Bloomberg. Maybe they don't trust that paper deal. Maybe physical gold is withdrawing from that market...)

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

JR "Today we have a situation where the vast majority of excess production value (excess capital) is enabling massive amounts of global malinvestment through new debt creation." As per the endogenous theory of money, credit money is created independently of the underlying reserves. If you are saying that the excess capital is servicing the debt load then i couldn't agree more but i see freegold as a macro solution that won't insulate the average person from currency manipulation so am not convinced that once free gold is in, the micro situation will automatically stabilise itself as well. ie "1. It (euro) severed its link to the wealth reserve function of money." Really? Maybe on a macro level but not in the day-to-day lives of the average person.

I do concede that freegold will come long before debt free money though so I am quite happy to be proven wrong on that!

"It is easy to blame this on debt as a principle, but unless you don't mind being wrong, there are some deeper explanations out there. Debt under Freegold will not reach such destructive levels. "Easy money" thinkers may or may not get their debt-free money, but if they do they will suddenly realize the flaw in their reasoning. Oops! That it can only have expandable value (needed for the welfare state) if producers are willing to hold it while it expands. Without that, socialist welfare expansion will simply dilute the value of the currency and be as limp as a eunuch." As i said before this is assuming there is an outright softness to debt free money, and while the pressure may be on to expand the currency to fund the welfare state - what is the difference to now? And if the ECB can be independent of this than why can't the governing body of debt free money be independent of it as well? The price of gold under freegold? well then what difference the price of gold under debt free money freegold?

Please note that i have worked hard to not 'personalise' my responses to your good self and I'd appreciate the same. I realise im gumming up FOFOAs comment section on non-freegold topics but am hopefully adding some variety to the usual discussions and am happy to learn what i can in the mean time.

Edwardo said...

I wonder if, long before one ever sees a quoted price for "gold" at $300 dollars (or thereabouts) an oz, if some other source will be offering information suggesting that there is a vast gulf in pricing between physical and paper gold. Also the condition of such entities as GLD will be very telling. I also wonder if there will be clues that a new day has dawned found amongst small and not so small retail PM outfits.

JR said...

Great FOFOA comment from a great blog on the idea that timing and paper gold price discovery:

"So he emails me this today…

>"I hate to say this, but it looks like we have some serious
> liquidation that is going to continue in the gold market. My guess, is
> that we have another hundred and 50, maybe even $250 to the downside,
> i.e. around
> $1400 or so.


I reply with…

That actually excites me! The more liquidations,
> the higher the probability that "this is it" (to use Jim Sinclair's words).

He comes back with…


"The thing is though FOFOA, I don't think this is IT yet."

So I say…

"No one does! And that's when it's most likely to be "it".

Point is, so what if everyone panics out of every kind of "gold" other than physical? As long as that liquidation is happening at a faster pace than the liquidation of physical, and remember there are some giants that are buying physical on the dips, that puts extreme pressure on the BBs. If the price drops that much, they've got to source the physical they sell at those lower prices for the price of paper gold to remain representative of the value of physical. If your assumption is that the CBs are still willing to support that connection with physical, as GATA's assumption is, then sure, they can handle it with CB backing. But I don't think the CBs are doing that. So I guess we'll see. If it drops to $1,400 I'd expect to see the biggest GLD puke ever, since that may be the only place for the BBs to get that kind of physical *IN SIZE* anymore. That's my thesis. The GLD puke has nothing to do with the AP's managing the NAV of GLD nor does it have anything to do with the sentiment of GLD investors. It has everything to do with the BB's (who are also APs) needing massive amounts of physical during the correction."

dieuwer said...

"The paper price may even go down to 300$ but physical will be impossible to get at that price"

Premiums at APMEX are still what they are and have not increased over the past few days.
Paper gold and physical have NOT decoupled, and will not in a long time.

DP said...

Matt,

Well, at least now you can say "Phew, now I'm back in the only not-weird part of the whole Internet, in fact the whole of present human experience". :-)

What you're describing sounds to me quite a lot like: keep the present system, but with the government having the CB steadily buy up all the credit and replace it with base money that was created for about 0%. Oh, and once we have reset the problematic debt, we tell those naughty banks they can only lend out that part of their reserves placed in time-deposits/bonds - a change from "make up your own rules, there is effectively no reserve ratio since we will turn a blind eye to sweeps".

Am I getting close?

If so, it seems like it's more about improving and enforcing regulation than creating debt-free money?

I note that the UK, regrettably, just turned its back on that whole idea. Because Cameron mistakenly believes the world is going to continue to love bullshit finance. Bummer!

What we haven't mentioned here in this discussion so far, which is odd given this is FOFOA's blog of all places, is how people can store their existing value across the presently unfolding transformation of the monetary system. To successfully navigate from A to C, we must first pass B and collect $60,000.

Gary said...

Quote from ZH comments....

'How's this for clarification?

I've already walked into 3 local coin shops today...

Nobody... NOT ONE was willing to sell me anything today, (rounds, bars, junk, NOTHING)...

1. they had plenty of inventory

2. they'd be willing BUYERS today

3. Out of chance, I casually mentioned that if I paid YESTERDAYS margin over YESTERDAYS spot, would they deal? They said 'maybe', but only for a small purchase (less than 10 oz.)...

That's 'boots on the ground" TODAY... Where she stops nobody knows...'

I bought some via Goldmoney today, they have supply from their mining shareholders.

mr pinnion said...

So...If the price goes down to $300 and we and all the people we know can buy gold coins at that price,do we admit were wrong?
Or do we adjust the theory?

Regards
Ozzy

victorthecleaner said...

On physical versus paper, I don't think the coin stores are a good indicator in the short run. This is first because they have constraints in their supply chain that depend on the capacity of the mints rather than on the interbank market for larger quantities. Secondly, it might be that some coin dealers are not hedging their inventory in the futures market as a consequence of the MF global default. Therefore, they may just be reluctant to sell inventory at a loss and rather wait.

If you are looking for indicators on physical demand, I would go for the LBMA GOFO rate, for the GLD Puke Indicator, and for abnormally large deliveries at the COMEX. If 2008 is any guide, all three happened around the price bottom, and keep in mind, 2008 was still mild enough for the market to survive.

Victor

victorthecleaner said...

As far as I can see, there is still enough physical gold in the market. As of today, we are nowhere near a 2008 situation.

Victor

Dante_Eu said...

@mr pinnion:

We adjust the theory AND buy physical. ;-)

One Bad Adder said...

I'd be loath to label this current rout as a "buying opportunity" if your bent is "the profit motive". With the short "T"s at bedrock and threatening to go underground, I fear we're in for the anticipated Purgatory for $PoG.
The validity of the pricing mechanism (and consequently, the ability to keep physical Gold in the shop-front window) all depends on how well they manage (slow) this $PoG decline ...IMHO.

2000 Flushes said...

Looks like paper gold is this week's contestant on Ow My Balls.

I will be interested to see whether there are any reports in weeks to come of buyers who took advantage of this dip and are still waiting for their orders to be fulfilled.

mortymer said...

JR & DP:

2009 September - 2010 December 2010: IMF sold 403t "on market".

2009 end: CBs became net buyers of gold for the first time since 1989!

Gary said...

@Costata:

'It occurred to me as I followed this exchange that some readers might appreciate a basic, simplified outline of how gold and currency might flow under this new regime.'

Yep, you were right, very useful, many thanks.

@Virgule:

'I'm having trouble with the last view that makes a bit of "system sense" : MMT/PragCap.'

PragCap/MMT is fiat on steroids. Have a read of FOFA's recent post 'Moneyness', where he explains all of its many flaws.

Edwardo said...

Sorry if this has already been posted.

http://www.metalaugmentor.com/analysis/charlatan-exposed-negative-gold-lease-rates.html

Jeff said...

Edwardo,

The MSM paints those negative lease rates as huge oversupply. What if it's really just zero (or negative) demand for leased paper gold?

Edwardo said...

Hi Jeff,

The very well thought out conclusions made by the author of the article at the link definitely don't square with the MSM views.

DP said...

Mrt,

2009 end: CBs became net buyers of gold for the first time since 1989

In the immortal words of Another:

If you are one of "small worth", can you not follow in the footsteps of giants? I tell you, it is an easy path to follow!

mortymer said...

For all those who need courage :o)
From the old vintage

Gold - Quo vadis
1975

http://anotherfreegoldblog.blogspot.com/2011/12/frbsf-gold-quo-vadis-1975.html

Mike said...

@ Ozzy

I'd say we were wrong.

mortymer said...

“There is still a link on a day-to-day and weekly basis between gold and the dollar,
so if the euro weakens gold will come under pressure,” said Standard Bank analyst
Walter de Wet. “We might test down towards 1.10$ if the euro goes to 1.30$.”
CNBC Commentary, March 4 2010

gideon said...

I have said for many months, based on
EW counts thats gold will go to somewhere between 1380 and 1445. I still think so.

JR said...

"This trend is typified vividly in the short T's (linked) where bids at par or above spell curtains for the System du-jour.

[...]

With the short "T"s at bedrock and threatening to go underground, I fear we're in for the anticipated Purgatory for $PoG."

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

Oh yeah!!:

As the "players" quietly exit the "game" , the role of assuager will be taken up by 'ol Buck I feel ...which is in keeping with US T-bill market action of late ie: less "yield" the market demands over the short-term implies an ever-growing desire to hold ONLY $Cash.

...the race to the bottom ...and the Here 'n Now ..which itself is a manifestation of complete loss of Faith ...not so much in the System ...but in those who have completely and utterly mis-managed it.

Edwardo said...

The system and those who manage it may well be inextricable from the standpoint that a system calls on certain types to operate said system.

Let me put it another way, when system's fail the operators of said system are invariably accused of having failed the system as opposed to admitting that one *the system* begets the other*the operators of the system*.

One Bad Adder said...

Attn: JR.
Rather than a loss of faith in the System, it appears a loss of faith in "vast sections" of the System ..Banks, Brokerage houses and whatnot, is currently underway. The only "quality investment" left is the US Gov't ...and ONLY at the short end of the curve.
On top of the "usual" parking of loot in short T's at Xmas, there appears to be a mountain of reasons adding to the "problem" and necessitating this avalanche into $Cash proxies.
$PoG, because it is a "future", will cop it in the neck with the rest of the market ...until a Here 'n Now point is reached.
The biggest (only) threat to the status-quo is if the US were to convulse internally. IMHO.
...FYI - 100% "invested" (not my choice of words) in Bullion.

One Bad Adder said...

http://stockcharts.com/h-sc/ui?s=$TYX:$IRX&p=W&b=5&g=0&id=p38601690182
This is the "Long - Short T's" Ratio which clearly shows the Xmas blips referred to above.
Log Charts being what they are, it doesn't give a true picture ...but the trend is clearly evident.
A wholesale abandonment of the long end is now required (expected) to get the thing to track above the apparent "current ceiling" ...being hit on a regular basis nowadays.

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

"Rather than a loss of faith in the System, it appears a loss of faith in "vast sections" of the System."

I think there's a loss of faith in the entire system, but due to some impressive cognitive dissonance-the result of generations of, how do I put it, indoctrination- there is still a powerful vestigial impulse to move one's cash into nothing more than a different strain of terminally compromised, in this case, (U.S.) sovereign debt.

We are a lot closer to the end of this business then not since there are now almost no assets left that can be said to act as decent collateral. It won't be too long before it becomes apparent to those now running into treasuries that U.S. debt won't, no pun intended, fill the bill.

Edwardo said...

Kyle Bass by way of ZH.

http://www.zerohedge.com/news/kyle-bass-rehypothecation-and-other-keynesian-endgame-scenarios

victorthecleaner said...

Another Kyle Bass:

http://watch.bnn.ca/#clip584881

And here is Christian Noyer via Reuters:

http://www.reuters.com/article/2011/12/15/us-noyer-ratings-idUSTRE7BE05I20111215

"The downgrade does not appear to me to be justified when considering economic fundamentals," Noyer said. "Otherwise, they should start by downgrading Britain which has more deficits, as much debt, more inflation, less growth than us and where credit is slumping," he said.

Seems to be increasingly difficult to keep cool.

Victor

costata said...

HMO,

Thank you for the link to the Stratfor piece on Russia and US tensions.

Cheers

costata said...

Dr. Octagon,

Hello and thanks for the response to my comment about international trade under Freegold-RPG. You sparked an interesting discussion about IMF special drawing rights (SDR) with that comment.

It has been a while since we discussed SDR in detail here so I cannot readily recall the thread with the most relevant comments. Back then I did not prepare most of my comments offline. That said, let me make a couple of comments about SDRs.

Firstly, consider the proposed issuer of this SDR “reserve currency”. The IMF is controlled by the USA (just like the World Bank). The USA has a veto over every IMF “decision”. That’s control with a capital C. So the SDR solution seeks to resolve problems with the $IMFS largely caused by the management of the US dollar. New boss same as the old boss?

Secondly, IMHO, the SDR has exactly the same problem that the Euro bond concept has. In the case of the Eurobond you take 17 EMU government credit cards, superglue them together and what have you accomplished? It has zero impact on the creditworthiness of the individual countries (governments) or their capacity to service their debts. The same reservation applies to the SDR basket from a currency issuer/manager perspective.

I think in order to advance this Free(?)SDR concept you need to take personal control of the thought process. Construct a Doc Oc SDR to begin with. Now which currencies are in the Doc Oc basket? What are the proportions? How strong is the covenant of each issuer (to manage their currency well) in order to give the SDR currency stability? Japan? UK? USA? Or how about Argentina?

Theoretically the SDR could slot into the currency role in those 3 examples but Doc don’t underestimate Triffin’s Dilemma – compounding the dilemma doesn’t resolve it. It’s the road to gridlock. (This post from FOFOA explores the way in which the new IMFS, that many here anticipate, resolves this paradox.)

Ultimately the only way for the SDR to work is if the IMF and the SDR sever their ties to the nation state like the Euro. If the basket was proportionally representative (say, percentage of world GDP) then the IMF could become the independent custodian of a one-world-currency. Take a long, hard look at the IMF’s track record (as I have) and be glad you hold gold instead of SDRs.

Cheers

costata said...

Gary,

I'm glad to hear you found the 'trade' comment useful.

Cheers

victorthecleaner said...

Can somebody explain to me which role of the IMF was proposed at last week's EU meeting? Somehow the euro countries wanted to lend money to the IMF so that the IMF has more capital in order to help bail out Spain or Italy.

Would this involve creation of money, i.e. SDRs? How does the IMF balance sheet work - can they create credit or are they 100% equity funded?

Victor

mortymer said...

VTC: 2 weeks ago Christian Noyer made an interesting comment (read in FT) part was about China that they should decide which way they want to go/what they want. (?)

Matt said...

Hi DP - is that Rosine Murphy in your photo?

"What you're describing sounds to me quite a lot like: keep the present system, but with the government having the CB steadily buy up all the credit and replace it with base money that was created for about 0%. Oh, and once we have reset the problematic debt, we tell those naughty banks they can only lend out that part of their reserves placed in time-deposits/bonds - a change from "make up your own rules, there is effectively no reserve ratio since we will turn a blind eye to sweeps".

Am I getting close?"

Well the way to bring it in is up to debate - if you were to buy up the credit money with base money at 0% you'd have to ensure that reserve ratios increased at the same time so the banks don't just releverage what you pass along to them and we're left with a confetti bonanza! Another problem is that the debts in place now were constructed under a loose money system and so placing harder money onto that will just mean that all the money goes back to the banks to pay off the old debts (debts that wouldn't have gotten to that point under a harder system). This is the traditional problem of moving onto a gold standard without restructuring the existing liabilities.

"If so, it seems like it's more about improving and enforcing regulation than creating debt-free money?" Ultimately its about breaking the inherent link between the money supply and debt per se so that borrowings are fed by excess savings(capital) rather than a dilution of purchasing power* (currently a positive feedback loop exists between irrational exuberance and asset prices creating an a trap of indebtedness while all the while expanding the money supply and thieving existing purchasing power through inflation and then finally redirecting the economic labour of the broader indebted group back to a minority centralised lending group). I'd even be fairly satisfied with the current system if bankruptcy laws were more robust and central banks weren't so willing to backstop their member banks so excess credit liquidity can be drained from the system (capitalism without bankruptcy is like Christianity without hell as the saying goes) but why not go the whole hog if we are going to make a few changes and *consider* breaking the money/debt link altogether?

*FOFOA stated it is debauchment rather than debasement and I take that to mean credit expansion matched by an equal economic expansion (as the new money is utilised) and I agree in the theory but in practice one only has to consider that 8% of UK bank lending is to business and the rest is non-productive lending while the 'system' is backed by a CB which will support the banks from clearing the excesses of their actions, and even convert their credit money to base money ex-post, it becomes pretty clear that the theory is not the reality of the system we have in place at present (or just ask yourself what $1 buys now compared to 40 years ago).

Im a massive fan of freegold (not just because i want to be rich!) and i can see it making substantial cahnges to trade, but i really can't see it clearing the ills of our current bank/finance system on a micro level (having a reference point is not going to stop the effects of currency manipulation for the average individual [what's my ROI on freegold post RPG again?]... and people will always want to blow bubbles, its an emotional response that humanity can't stop, lets not be naive enough to think that detracting borrowers for their lack of prudence is ever going to effect that).

Yannick said...

Gold imports in China literally exploding, see graph:

http://static.seekingalpha.com/uploads/2011/12/14/saupload_goldcore_bloomberg_chart2_13-12-11.png

Matt said...

Article to list of economists who have called for full reserve banking from both political persuasions and throughout an extended period of time (pre current debt 'super-cycle').

http://www.positivemoney.org.uk/2011/07/our-proposals-left-wing-or-right-wing/

list starts about half way down, just please don't read the comments - MMT horrendous!!

mortymer said...

@ Matt:
maybe this will be interesting to you:

BIS - IFC Bulletin 1997, November

http://www.bis.org/ifc/publ/ifcb1.pdf

http://anotherfreegoldblog.blogspot.com/2011/12/bis-ifc-bulletin-1997-november.html

Starting pg9.

He introduced this equation in 1911, in his book The Purchasing Power of Money. To eliminate the social draw backs of price in stability, he propagated a kind of indexation by adapting the gold content of the dollar to the movements in the general price level. It is interesting to note that in Fisher’s view the money supply consisted not only of currency and bank notes, but also of bank deposits. The management of the money supply was primarily to be directed at the process with underlies the creation of bank deposits. This kind of reasoning is nowadays so self- evident that it is difficult to imagine that it was not generally understood when Fisher first came up with it..."

[Mrt: & his part in: "stable money league" - there is a lot material about this movement online]

DP said...

1/2

is that Rosine Murphy in your photo?

I'm going to tell Róisín you said that...

Oh dear! I don't think she was too impressed! Oh well.

you'd have to ensure that reserve ratios increased at the same time so the banks don't just releverage what you pass along to them and we're left with a confetti bonanza!

I think we are heading towards a split between retail and investment banking. Retail, utility banking will have little fractional reserving, perhaps even full reserving, plus a high degree of regulation and safety — government guaranteed deposits, but little, if any, reward interest. Investment banking will be a pretty much unregulated free for all, but the risks to investors will have to be made abundantly clear to them because there will be no government backstop. I suspect support to banks, which is going to be desperately sought, will be conditional upon accepting this.

Another problem is that the debts in place now were constructed under a loose money system and so placing harder money onto that will just mean that all the money goes back to the banks to pay off the old debts (debts that wouldn't have gotten to that point under a harder system)

I think that enough failing debt will be replaced by the CB's to ensure the bank's depositors are made whole. I think the printing will be about preserving the system and ensuring the consumers, which the system relies upon, come out whole. Not the bankers personally. Again, I believe the sought bank support will be conditional on accepting this reality.

Ultimately its about breaking the inherent link between the money supply and debt per se so that borrowings are fed by excess savings(capital) rather than a dilution of purchasing power

I think the link that needs breaking is between savings and the securitisation of debt. I think the world will cease to save so much of its excess capital in debt instruments such as bonds, instead parking a large part of it in real assets (particularly gold, as will come as no surprise to you). This inability of the banks to securitise and offload the debts will bring back the incentive, increasingly absent for some time, for prudence in loan issuance.

... cont'd...

DP said...

2/2

I'd even be fairly satisfied with the current system if bankruptcy laws were more robust and central banks weren't so willing to backstop their member banks so excess credit liquidity can be drained from the system (capitalism without bankruptcy is like Christianity without hell as the saying goes)

+1. Sounds a eerily like the feelings of a currency management team somewhere in a foreign (to you and I) land.

why not go the whole hog if we are going to make a few changes and *consider* breaking the money/debt link altogether?

The evolution of the monetary system is an incremental thing. Right now we have a situation where our present, unsustainable system is breaking down and the Europeans are attempting to transition us to a much more sustainable, equitable system. If we can successfully transition, perhaps in another evolutionary step we might find ourselves more radically changing the mechanisms by which money comes into being, who knows (not me). But that is a rather large "if", and IMO it is better for now to concentrate on just surviving this transition. It's already a complex and dangerous enough task as it is, without throwing in the odd "nice to have" curveball. I struggle to foresee how the right incentives to perform will be present if money is free to come by, but let's see in the fullness of time. Credit isn't the fundamental problem.

in practice one only has to consider that 8% of UK bank lending is to business and the rest is non-productive lending while the 'system' is backed by a CB which will support the banks from clearing the excesses of their actions, and even convert their credit money to base money ex-post

To my way of thinking, the recent 26-1 disagreement between the UK and Europe is almost exactly a difference of opinion about this. The UK demands "business as usual", to continue sustaining the unsustainable, while the Eurozone demands that we transition from this unsustainable system, while we still have the chance. Before it explodes chaotically. I reiterate my feelings about "incentives" above. I don't think banks will see the right incentives in loaning for reckless consumption, when the risk is on their own shoulders again.

For now at least, it seems to me like it's more about improving and enforcing regulation than creating a debt-free money system. And of course, mopping up the overhanging debt problems of the old system. Survival, rather than Utopia. IMVHO debt-free money is at this point just a dangerous distraction that is wasting precious time and brain-cycles. So if you don't mind, I'm going to now step away from the topic. Others are of course free to continue discussing it with you though.

Cheers! :-)

Matt said...

Hey Mortymer - I've thrown that pdf on my desktop as a 'to-do' thanks for that.

DP - I love her more when she is angry with me! (sorry for the spelling Róisín!

Agree with your comments - particularly like the comments on a forthcoming split between retail and investment banking, steady progression required in monetary evolution and the UK Gov. backing 'the city' without realising the game changed for good in 2008. We share similar views but you are far more pragmatic than I.

Take your point on monetary reform being a distraction while freegold will occur in the interim regardless so will galdly step away from the topic myself. I have a limited time to earn myself some more shiny while i still can!

http://www.youtube.com/watch?v=HO1OV5B_JDw

DP said...

Thank you for my parting gift, Matt - I enjoyed it very much. ;)

JR said...

matt,

Thanks for sharing the positive money website. I had a fun time exploring. For the benefit of others who haven't explored, here is their quick 5 minute overview:

"The following is a quick (5 minute) overview of how the reform works. The finer details on each section are outlined in the links at the right hand side of this page.

Firstly, the rules governing banking are changed so that banks can no longer create bank deposits (the numbers in your bank account). Currently these deposits are considered a liability of the bank to the customer - after the reform, they would be classified as real money and only the Bank of England would be able to increase the total quantity of them.

The Bank of England would then take over the role of creating the new money that the economy requires each year to run smoothly, in line with inflation targets set by the government. In order to meet these targets, the decision on how much or little money needs to be created would be taken by the Monetary Policy Committee. To maintain international credibility and avoid ‘economic electioneering’, the MPC would be completely separate and insulated from any kind of political control or influence - in other words, the elected government would not be able to specify the quantity of money that should be created.

The Monetary Policy Committee would decide how much money needs to be created in order to meet the inflation targets by analysing the economy as a whole - not the spending needs of the government, nor the needs of the banking sector. They would use ‘big picture’ statistics to judge whether meeting the inflation targets requires more or less money injecting each month. They would also have access to all the research resources that they require to make an informed decision.


Upon making a decision to increase the money supply, the MPC would authorise the Bank of England’s Issue Department to create the new money by increasing the balance of the government’s ‘Central Government Account’. This newly-created money would be non-repayable and therefore debt-free.

The newly-created money would then be added to tax revenue and distributed according to the elected government’s manifesto and priorities. This could mean that the newly-created money is used to increase spending, decrease the national debt, or replace taxation revenue in order to reduce taxes, although the exact mix of these options would depend entirely on the elected government of the day."


The last paragraph is the best tho:

"Consequently, the decision over how newly-created money is initially spent would be made by the government, but the government would have no control or influence over how much money is created."

Matt said...

Thanks for the endorsement JR although i don't subscribe unreservedely to their system its a great start and provides some simple primers for those who are interested.

Although i'm not sure of the specific point you are trying to make with the bolded text, if you are having trouble conceptualising the following:

"the MPC would be completely separate and insulated from any kind of political control or influence - in other words, the elected government would not be able to specify the quantity of money that should be created"

than may i suggest a simple word game where you swap "MPC" for "ECB" and see if that helps

;)

JR said...

FOFOA - Life in the Ant Farm

"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."


FOFOA - Once Upon a Time

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

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

JR said...

well put matt,

Thank you for elucidating my point. If you are confused, take Matt's advice:

"than may i suggest a simple word game where you swap "MPC" for "ECB" and see if that helps"

Cheers, J.R.

JR said...

More from the positive money website on "savings" - What About My Savings Account?

"Investment Accounts' Replace Savings Accounts

Your savings account would be replaced by an 'Investment Account'. We call them Investment Accounts, for the sake of clarity and because it more accurately describes the purpose of these accounts - as a risk-bearing investment rather than as a 'safe' place to 'save' your money.

[...]

What Is Still The Same:

1. Savings accounts will still be used by customers who wish to 'put money aside' or earn interest on their spare money (‘savings’).

2. These accounts would still pay varying rates of interest.

3. They would still be provided by normal 'high-street’ banks.
"

mortymer said...

I do not know if this add something to the discussion but still:

"...A further disadvantage of the sale of gold reserves is given by the fact that it increases the difficulty of an eventual return to the gold standard, or more generally to a commodity standard including gold as one of its components. This problem is certainly not important at the moment, especially since there seems no political chance for such a change in the foreseeable future. But in the long-term perspective taken here, it still merits our attention.
For it has to be expected that the problem will become more important when monetary systems approach more and more a pure credit money standard, in which the use of government money, that is of central bank notes and coins becomes superfluous. A development into this direction can already be observed and is obviously furthered by technical progress in computer and information technology. In this case central banks will lose control of the money supply, which would lead, as already seen by KNUT WICKSELL (1898/1965), to an unstable and thus inflation-prone price level. Given these conditions, a control of the money supply by central banks can only be maintained by either government regulations (for instance minimum reserves in government money to be held with the central bank) or convertibility of the internet or computer money into gold or another commodity standard at a fixed parity. It is interesting in this respect that the former President of the German Bundesbank, Hans Tietmeyer, has told me at a conference in November 2000, that this was the main reason that he insisted on the right of the European Central Bank, to oblige the banks to hold obligatory reserves at the Central Bank..."

http://anotherfreegoldblog.blogspot.com/2011/12/ideas-advantages-and-disadvantages-of.html

mortymer said...

The above is from:

Advantages and Disadvantages of the Holding of Gold Reserves by Central Banks - With Special Reference to the Swiss National Bank

by PETER BERNHOLZ

http://www.sjes.ch/papers/2002-II-1.pdf

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