In the present monetary system, wealth is commonly held as ambiguous claims against the economy. We call it stocks, bonds, money market funds, mutual funds, etc… People hold their wealth in this way for the promise it makes of more wealth forthcoming! Sound familiar?
Now, when I say that there will actually be much more wealth forthcoming for those with **unambiguous** ownership of physical gold today, some people feel compelled to argue that their ambiguous claims have a better history of "more wealth forthcoming." And this argument is not without merit.
It is true that stocks and bonds did very well in the '80s and '90s. In fact, my own father is still waiting for the Dow to get back to 14,000 to regain the wealth he thinks he lost. The Dow beat CPI inflation hands down throughout the '80s and '90s, and that's how you know you made a good investment, by beating inflation.
The Dow entered the 1980s at $824. So if your $824 investment in 1980 had perfectly tracked official inflation, you'd have had $1,722 in 2000 and $2,264 in 2011 (according to the BLS inflation calculator). But in the Dow, your investment became $11,722 by January, 2000, and $12,045 today. So even though it hasn't done much in the last decade, the Dow still beat inflation by a large margin over the last 30 years.
Bonds also had a huge 30-year run as the Fed lowered rates from 20% down to 0%. Remember, as interest rates are lowered, the price of bonds issued at the previous higher rates rises. So bond investors do very well in a falling interest rate environment.
When we compare investment gains to inflation, what we're really doing is discounting the devaluation of the numéraire over the period of the gain. In other words, we are gauging our gain against the physical plane of goods and services which is what really matters. Another way to look at it is that the dollar was devalued against goods and services while your investment was revalued. This is what I meant when I recently wrote the following:
"I cannot see a dollar collapse without a simultaneous revaluation of something else. It's a seesaw. The dollar isn't collapsing against gold. It is collapsing against the physical plane of goods and services. That's the fulcrum, not gold. Dollar collapse is the force, goods and services the fulcrum, and gold the load. So gold is revaluing against goods and services. The gold revaluation is against the physical plane so as to fill the reserve void left by the dollar's collapse."
As it turns out, FOA wrote a post about this in November of 2001:
FOA (11/3/01; 14:39:16MT - usagold.com msg#129)
An "inflationary depression" is in the cards -- a "price deflation" doesn't have a chance!
----------------------
Back in the mid to late 70s Sir John Templeton always drove his point home for investors watching Luis Rukiser's show. (how does one spell his name,,,,, we always called him Lou Baby (smile))
Sir John, living here on Layford Cay, kept saying that the Dow of the 70s was very underpriced and would soar. He was the most absolutely correct person stating that then! But more into the mechanics of his perception: he knew that anyone buying the Dow and waiting a decade or more, would gain way beyond mere price inflation. Monetary inflation would eventually drive the perceived virtual wealth of US stocks ever higher. So high, in fact, that their percentage gains over price inflationary gains would be incredible. They were!
Truly, what John was referring to was the effects that simple "passive inflation" has on paper assets; especially in a "reserve currency's" domestic market. In this; real price inflation is mostly exported by importing "real goods" competition. This happens as we export excess credit dollars to buy things. It also has another effect; some of that same exported printed money flows in a circle and joins native investors' buying of local paper assets. When this process first starts, "passive inflation", in the form of massive money creation that's far beyond real price inflation, allows one to gain "virtual paper wealth" even before the markets price out the gains. That is; the Dow stays cheap at first then eventually rises to absorb the money inflation! As long as prices don't rise too much.
People that followed his advice, accumulated the Dow over a decade or more; buying "virtual wealth" before the fact! Stock investors made a killing by positioning their assets where this created "passive monetary inflation" would eventually end up. Even though hard money players laughed at them all thru out the 70s, 80s and early 90s! Look who is laughing now? Stocks tromped hard money plays hands down for over 20+ years! Even considering the latest fall on Wall Street.
----------------------
I want to jump in here and add a little more explanation of what he was talking about. FOA's "passive inflation" was money inflation that didn't spill over into consumer price inflation (CPI). The reason it didn't spill over is in my recent post, Moneyness. (See also: Credibility Inflation) FOA says we imported "real goods competition." That is, we ran a trade deficit and ended up with foreign goods that competed with our own domestic goods keeping all the prices down.
And because we were running a trade deficit, those dollars that paid for it came back to the US buying up the stock and bond markets rather than the price of consumer goods. So the more easy credit we created, the more our paper investments would eventually rise, with a time lag that gave "early adopters" a gain far above consumer price inflation. Now, back to FOA:
My friends:
Today, this same "virtual wealth" effect has been created again and is located in physical gold bullion. I believe Sir John has already made part of my point but I will repeat.
When a currency system comes to the end of its reserve use, I'm speaking politically, its domestic market will come to a point where it can no longer export "real price inflation" in the format of; "shipping its excess currency outside its borders". This happens because internal money inflation, that is super currency printing, is increased so much that it overwhelms even its export flow. Worse, even that export flow later tumbles as the fiat falls on exchange markets.
The effect is that local "passive inflation", built up over decades and fully reflected in "Sir John's" paper assets, spreads out as "aggressive inflation" and hyper price rises begin. In this action, the very same wealth effect that was eventually priced into "John's" Dow stocks and other assets, begins a long march of being priced into real gold.
Anyone that has accumulated physical gold over this past long period was doing the exact same thing Dow buyers of the late 60s and early 70s were doing: ------ saving "wealth" as unpriced "virtual wealth" stored up over that "passive inflation" period. ---
----------------------
As "political will" begins to impact the economies of the US,
our old "virtual wealth" that is no longer in the form of "passive inflation" nor limited to the currency, and is openly displayed in our vast sea of paper assets values including stocks, bonds--------
must now be defended in the open with official printed money flow.
---------------
Me again. Notice he says, "When a currency system comes to the end of its reserve use, I'm speaking politically…" and then, "As 'political will' begins to impact the economies of the US…" What he's talking about is the political will of U.S. trading partners to support our trade deficit by stuffing their reserves with U.S. Treasuries, and again it's in Moneyness that this is ending today. At the time FOA wrote that, the "political will" of Europe had already shifted away from the dollar, today it's China.
More from FOA:
The "virtual wealth" in gold, saved over years by patient investors, will also be priced to market in this process.
Never mind that during the Dow years paper gold markets could not work in parallel with all the other asset gains; it couldn't. Hard money players, trying to somehow play the Dow's game, never caught on to what was happening. Instead of buying "virtual wealth" by saving real gold; they bought leveraged bets that gold would be priced correctly during the "paper asset" years.
Obviously, this "trade" failed hard money players as the waves of value from other paper gains and derivatives leverage were employed against their every long bet on gold. Not only that; the "virtual wealth" in gold was never opened for them with the super price inflation they all thought was coming during that era!
Now that the paper game is about to stop for the Dow, it will also cut off the leverage of gold bets. Just as the real game begins.
The reason for this is that our massive, decades-long gains in our stock markets did not bankrupt the leverage in the money system. Whereas any massive rise in physical gold values cannot be priced into "derivative gold" without crashing the system.
Remember; in political inflations, money is printed to save the assets as they are currently priced; not create new loses by liquefying the leverage that's countering your play!
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.
------
In this perception USAGOLD has been guiding its clients, and now the world, in much the same way Sir John did decades ago.
"Buy what has value at the greatest discount and wait for the politics of money to price your new savings correctly"!
The politics of wealth today is centered around gold bullion and only gold bullion: that is where the wealth and power will be manifest: this is where the gains will be! To bet on the rest of the hard market; is to bet against the coming inflation making your asset whole!
Place as much of your wealth in physical gold as your understanding allows and save this "virtual wealth" of the ages today: waiting for it to become real wealth, priced correctly in the marketplace, tomorrow.
Make no mistake, the wealth is there "but only there in bullion"! Because a free bullion market cannot be denied or controlled
----- when it stands between the opposite goals of political powers! ---
In this: it will separate from the politically crushing reality the current dollar-based paper gold markets represent. The premium on bullion will soar!
The "Political will" of old world Europe is about to help make our investment real. For myself, a large percentage of my wealth is being saved by going with the evolution of paper moneys: not against!
This trend is visible now and based on the forward flow of human affairs, not the backward rules of money theory!
Our future is today; if not just around the trail!
Sir Douglas; aka FOA
your: Gold - Trail – Guide
Were you able to follow all of that? This little bit gets right to the heart of the matter; the difference between paper gold and real physical bullion. Remember from Moneyness that the people's money throughout history has been credit denominated in something. The majority of exchanges up until the invention of paper money were largely on the basis of credit and trust, with accounts later cleared and imbalances settled in metal. In this way, a relatively small and stable monetary base serves a much larger economy.
But today we use that credit, that debt or liability asset as our savings, not just for trade. Now I want you to think about the fundamental difference between claims denominated in paper money versus claims denominated in gold metal. The claims denominated in paper money can be liquefied in actual base money terms by the central bank. But the claims denominated in actual gold metal cannot.
FOA: "Remember; in political inflations, money is printed to save the assets as they are currently priced… 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."
So claims denominated in dollars must be saved, "made whole" for the sake of the system, but claims denominated in physical metal CANNOT be saved without destroying the banks. The entire international monetary and financial system is in dire need of something to save it right now, wouldn't you agree? The whole system appears insolvable as presently priced, a Catch-22 of incomprehensible dimensions.
But the solution is not so incomprehensible, and it was never up for debate. It was baked into the cake long ago, as FOA pointed out. You may personally prefer that they simply let the system fail. But "they" are central bankers, so we can safely predict they will try something. And that something is the only thing that can happen.
The U.S. dollar and gold will both be massively expanded to recapitalize the system, and life will go on. The difference being that the dollar will be expanded in volume while physical gold bullion will be expanded through value. And through this process, all ambiguous claims, both dollar-based and metal-based will become virtually worthless, while unambiguous gold ownership will literally explode in value.
This is an historical first. Today is the first time in history where a massive transfer of wealth will transpire through the conversion of all gold on the planet into unambiguous ownership. Think about this long and hard. More than 90% of all the gold stock has been mined in the last 200 years. During that time, unambiguous, discrete (and discreet) ownership has entailed an unnecessary expense. During the gold standard years gold was the money, so it was all unallocated and ambiguously owned. Even today, most of the gold in the BB system is still on pallets, a remnant of the gold standard years. But that is changing.
It is more important than ever, right now, to make sure that you unambiguously own discrete pieces of gold. You don't want to just own "a bar of gold" at the bank, you want to own bar number JM4835 or whatever. And you certainly don't want to own a fractional interest in a bar when you can own coins down to one gram. Better yet, have your gold unambiguously in your possession, or at least under your control outside of the banking system that is still struggling to cope with this change.
Have you ever wondered why bullion banks have been opening new or decommissioned vaults and clearing space for more gold? It's not because there's more gold coming into play. It's because it takes much more space to store unambiguous, allocated gold than it does to store ambiguously owned pallets of "gold". From my post The View: A Classic Bank Run:
Here's an interesting item that I struggled to interpret until I really thought it through. Do you remember the stories about HSBC clearing out space in their vaults, or JP Morgan building new vaults? What could be the explanation for this if the aggregate gold stock is so stable? Then it occurred to me that unallocated storage is much more space-efficient because the gold sits stacked on pallets. Allocated gold often gets put into cubby holes to assist in recordkeeping. That takes up much more space. So the process of allocation after many decades of non-allocation requires an expansion of vault space. This is how I now interpret these stories.
_________________________________________________________Taking personal responsibility for your life's savings when you've always counted on "the system" to safeguard it for you is not an easy step to take. Converting your savings from ambiguous claims in the system (either dollar or gold-denominated) into unambiguous wealth is not without considerable hassle, risk and expense. But it has never been more important than right now. Conversion is early adoption, like buying the Dow sub-1,000. Conversion to unambiguous pieces you can possess is front running the reset, the global revaluation that could come at any moment. As a long-time reader wrote me just today: the window will be closed soon.
He also wrote this:
"A recent 'convert' to protecting his life savings, a friend said, 'wow, it hit me last night......'
I said, 'what?'
"Well, now I understand, all the policymakers are doing currently is making my gold worth higher in purchasing power as they annihilate my currency.....thus, why the heck would I hold something that they are destroying willingly!"
Yup, that about says it all!
_________________________________________________________
**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. 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!
Sincerely,
FOFOA
_________________________________________________________
Watching the Dow rocket almost 500 points yesterday, you're probably thinking Ben Bernanke is pretty fly (for a white guy)…
But don't be fooled. Be like the squirrel, girl, be like the squirrel…
450 comments:
«Oldest ‹Older 401 – 450 of 450From the telegraph:
"If anyone thinks things are getting better then they simply don't understand how severe the problems are. I think a major bank could fail within weeks," said one London-based executive at a major global bank.
Many banks, including some French, Italian and Spanish lenders, have already run out of many of the acceptable forms of collateral such as US Treasuries and other liquid securities used to finance short-term loans and have been forced to resort to lending out their gold reserves to maintain access to dollar funding.
Hi Victory,
On Triffin's dilemma from Dilemma:
"the dollar is the national currency of a single nation-state, yet it is also held globally as a reserve currency to serve all of its global uses, which in turn give it value even today through the global network effect. So how is this a flaw? Well, it leads to a conflict of interests between the issuing nation-state's internal and external obligations as manager of the currency. This is called the Triffin Dilemma.
…
From Wikipedia: The Triffin dilemma (less commonly the Triffin paradox) is the observation 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. This dilemma was first identified by Belgian-American economist Robert Triffin in the 1960s, who pointed out that the country issuing the global reserve currency must be willing to run large trade deficits in order to supply the world with ,enough of its currency to fulfill world demand for foreign exchange reserves.
The use of a national currency as global reserve currency leads to a tension between national monetary policy and global monetary policy. This is reflected in fundamental imbalances in the balance of payments, specifically the current account: some goals require an overall flow of dollars out of the United States, while others require an overall flow of dollars in to the United States. Currency inflows and outflows of equal magnitudes cannot both happen at once.
The Triffin dilemma is usually used to articulate the problems with the US dollar's role as the reserve currency under the Bretton Woods system, or more generally of using a national currency as an international reserve currency.
[...]
My hope is that I have now armed you with what you need to understand the meaning of this powerful statement. The euro solved dollar flaw #1, the Triffin dilemma, by severing its link to the nation-state, and dollar flaw #2, trying to be as good as gold, by severing its link to gold.
The euro severed the link to the nation-state. You write:
"wouldn't Trifs Dilema still exist. i.e. an insufficient amount of Euros to create global liquidity. "
The euro isn't tied to a nation-state, it is a currency managed by an independent CB whose goal is price stability. No nation has to run a balance of payments surplus for the Euro to ensure there is adequate liquidity to insure its inflation target is met.
The Euro is not beholden to a national monetary policy goals, it is instead only a trade currency so its sole focus is on its international trade use. The Euro has no inherent conflict or tension, as opposed to the dollar situation where the currency of a particular nation is also serving a an international trade currency.
cont.
cont.
Also keep in mind this FOFOA comment from Dilemma:
This is something I was going to get into later, but the fact is that the Triffin dilemma is neither a universal truth nor a truly fundamental flaw. It is true for our system. But it is not necessarily true for all systems. Flaw #2 is really the only truly fundamental flaw, and it is the underlying fundamental element that causes the Triffin dilemma.
Dollar flaw #2 is trying to be as good as gold. Which is why FOFOA focuses on the Euro severing its link to gold and FOFOA's Dilemma:
FOFOA's Dilemma
There will be much more on this later, but very quickly I'd like to share with you a new "dilemma" coined by one of my readers. It is in the spirit of Triffin's dilemma which I wrote about in my post coincidentally titled Dilemma. The fullness of this post will hopefully explain the following in detail, but here it is in short, from my South African friend calling himself The Motley Fool:
FOFOA's dilemma: When a single medium is used as both store of value and medium of exchange it leads to a conflict between debtors and savers. FOFOA's dilemma holds true for both gold and fiat, the solution being Freegold, which incidentally also resolves Triffin's dilemma.
Cheers, J.R.
Great comment Cylde,
The reward is more bad clock.
Thank you JR for your brilliant posts. I read the flow articles and it made me think of PEAK OIL.
Hi JR,
You say: "Currency inflows and outflows of equal magnitudes cannot both happen at once."
Aren't these cancelling out in a classical gold standard, and minor imbalances settled in gold flowing in or out?, they can happen at once, in fact it is the desired mode in that classical gold standard, where am I wrong?
Thanks.
Worth a read in my view.
http://www.acting-man.com/?p=12317
Ampmfix,
a classical (fixed price) gold standard always fail because gold doesn't flow in and out freely.
FOFOA: But the short answer is that the very act of defending a fixed price of gold in your currency ensures the failure of your currency. And it won't take 30 or 40 years this time. It'll happen fast. It wouldn't matter if Ben decided to defend a price of $5,000 per ounce, $50,000 per ounce or $5 million per ounce. It is the act of defending your currency against gold that kills your currency.
You can defend your currency against other currencies… using gold! Yes! This is the very essence of Freegold. But you cannot defend it against gold. You will fail. Your currency will fail. Slowly in the past, quickly today. If you set the price too high you will first hyperinflate your currency buying gold, but you won't get much real gold in exchange for collapsing the global confidence in your currency, and then you will have to empty your gold vaults selling gold (to defend your price) as your currency heads to zero. And do you think the world trusts the US to ever empty its vaults? Nope. Fool me once…
If you set the price too low, like, say, $5,000/ounce, you will first expose your own currency folly with such an act and have little opportunity to buy any of the real stuff as the world quickly understands what has gone wrong and empties your gold vaults with all those easy dollars floating around. You will sell, sell, sell trying to defend your price, but in the end, the price will be higher and you'll be out of gold. Either that, or you'll close the gold window (once again), sigh, and finally admit that Freegold it is.
To "set the price" of anything, you must either buy or sell that thing. Governments cannot just "set" prices. Whenever they try, the items just disappear or go into hiding. If the price you set is lower than the value, then you will have to sell. If the price is too high, you will have to buy.
So... if your standard is going to overvalue something, you must buy it. If you undervalue something, you must sell it.
Remember what Another wrote? "Any nation/state can put its economy/currency on a gold standard. They only have two requirements. Own a stockpile of gold and raise the price very high!"
Thanks Jeff
Hi JR,
I hear you, however it still seems to me like the Euro does not solve Triffins dilemma in the sense that – as you pointed out: 1. The Triffin dilemma ….when a national currency also serves as an international reserve currency 2. the country issuing the global reserve currency must be willing to run large trade deficits in order to supply the world with enough of its currency to fulfill world demand for foreign exchange reserves.
I understand that the EU is not a single nation-state, the Eurozone is however a single currency zone and one can compare the nation-states within the Eurozone collectively to the 50 states within the US which is also one currency zone. Yes the ECB is an independent central bank but he Fed is also on paper independent, the Fed is not the Treasury and vice-versa.
So if the Euro were to replace the Dollar as the worlds reserve currency, as opposed to say gold, then other nations outside of the Eurozone (US, BRICS, Japan, ect) would still need Euro’s as reserves and thus Triffins dilemma.
Now Gold on the other hand I do see solving Triffins diemma because no single currency would receive unfair added value (demand) just because it was the world’s reserve currency. Instead global commodities (most notably oil) would just float against gold no matter what currency any particular exchange priced them in for trading purposes. And because they would all float against gold they would all float against each other relative to gold.
I may be getting too technical here but I’m speaking specifically about the Euro as the worlds reserve currency which I don’t believe is the solution posed in FREEGOLD right, isn’t it Gold as the world’s wealth reserve (FX reserve proxy)?
Jeff,
That’s a great FOFOA quote I don’t remember reading it which post is it from? The last line got me a little confused though because FOFOA earlier states “You can defend your currency against other currencies… using gold! Yes! This is the very essence of Freegold. But you cannot defend it against gold. You will fail.” But then Another states “Any nation/state can put its economy/currency on a gold standard. They only have two requirements. Own a stockpile of gold and raise the price very high!"
Isn’t putting your currency on a gold standard the same as trying to defend your currency against gold?”
Hello Victory,
Severing the link to the nation-state solved Triffin's dilemma with regard to the many European nations using the euro right now. The ECB can operate a middle-of-the-road monetary policy without any conflict of interest. Severing the link to gold solves Triffin's dilemma when the $IMFS dies and the euro becomes the primary international trade currency inside and outside of the Eurozone.
Don't let the term "reserve currency" confuse you. Just because the euro becomes the global reserve currency doesn't mean surplus nations will require euro debt as their reserves. They'll simply buy gold with that excess currency.
It's the fact that the dollar wanted to control the price of gold that the US had to run a trade deficit to supply reserves (Treasuries). The euro floats its gold on line 1. That's a big difference which solves Triffin's dilemma. If, say, China runs a trade surplus (excluding gold) it'll simply buy gold instead of Treasuries with that excess currency. See? Solved.
Sincerely,
FOFOA
Or in other words, gold is the arbiter, not the Euro.
Tnx, FOFOA yes that makes sense, I see the big picture but sometime when I try and put the puzzle together I’m missing bits and pieces out of the box. It helps to take a step back and ask obvious questions like what is China waiting for. Why not buy gold now with their excess reserves. I say obvious because I know the gold market is small and if a Giant wants to buy over 10 tones it’s a problem and China’s FX reserves at today’s gold market price can buy all of the US gold hoard which ain’t gonna happen. So if China tried to buy in mass they would move the price on themselves but then again when FG happens it will happen in a punctuated equilibrium like you said so its not like they will get any more gold in oz.’s then, so again why wait?
That’s the obvious part I’m speaking off, what are these nations waiting for? I see clearly how gold’s revaluation will bring the needed equity/liquidity that our debt-based global monetary system is so desperately in need of (US included). The current system only really benefits the US as far as I can see and even those days are limited because the US debt is the most OC of all and we need equity bad. I can also see why the US PTB would want to keep the $hegemony free ride going as long as possible - after all the gold atomic reset button would benefit the US as well (but then of course it’s a meritocracy from that point out) - but what is everyone else waiting for? Is it just a matter of getting their pawns in formation first and that I’m to impatient wanting nations to move at checkers pace and they are thinking chess? Are they scared to move against the US because of the US military dominance? What’s the hold up?
Victory,
What's the hold up?
FOA: Because Saudi Arabia is a member of the BIS and marks its currency to the SDR, we are going to be hard pressed, for oil reasons, not to ship [gold] against demands. Perhaps, oil's continued settlement in dollars is directly tied to gold,,,, Do ya think?...
"5/3/98 ANOTHER (THOUGHTS!)
The road to making this new Euro did never include gold in large amounts, until the last few years! Even one year ago, the news would say, 5% or less. Today, we speak of a much greater amount! This is interesting, yes? The BIS did "hatch" this deal in a very late fashion! The future of the Euro was found to be "weak", as the Middle East oil imports onto the continent would continue in dollars! This was so from the dollar being made strong in gold. Gold priced in dollars at near production cost, offered a "no switch currency" position, for oil. This position has been unstable for the last year, and the alternative of a switch to gold was in progress!
FOFOA: the dollar is the national currency of a single nation-state, yet it is also held globally as a reserve currency to serve all of its global uses, which in turn give it value even today through the global network effect. So how is this a flaw? Well, it leads to a conflict of interests between the issuing nation-state's internal and external obligations as manager of the currency. This is called the Triffin Dilemma.
Basically the USD is still strong (overvalued) in gold due to the network effect and history. Oil is still getting overpaid and they can still get some gold for dollars, so they are happy to let the game go on until it can't. As the above quotes show, though, they have a plan B.
FOFOA: We've OVER-paid for Saudi oil for 30 years now, with low priced Western gold. And China has been eating up our Treasury paper for a decade now, like they just can't get enough of it. Yes, there is a transgression we'll pay for, but it is not our national debt. It is the entanglement of the paper gold market in the dollar/IMF architecture.
And if you think you can stiff the oil producer, and make them take irredeemable dollars (Victor), refuse to give them gold, think again.
ANOTHER (THOUGHTS!) ID#60253:
There is only one oil state that counts! Only one! They have made it very clear how important gold is to them. If they had started buying outright, gold would have gone to $5,000+ in days. And only a very few million ozs. would have been purchased! The message has been for some years, "we will accumulate thru the back door, using paper deals if you keep the price at or below the cost of production". Do this and oil will remain THE driving force of the world economy!
FAIL THIS AND WE WILL PRICE GOLD IN DOLLARS AT THE TRUE VALUE OF OIL TO THE WORLD!
You see, gold is not a commodity. The CBs have used every weapon to keep it's price low . Understand me, Gold is now, today, a devalued currency being used in world trade!
Jeff,
And if you think you can stiff the oil producer, and make them take irredeemable dollars (Victor), refuse to give them gold, think again.
Victor? Me? I don't produce oil...
The oil volume/$ price relationship that fueled the past 40 years of growth remains lost on mainstream economists and as such they dismiss the thesis of Freegold.
It all comes down to goods and services – returning to the world of real stuff.
--Aaron
What services do mainstream economists expect to provide in a Freegold economy?
That would be like asking the Pope to convert to Islam.
@fofoa
you said 'They'll simply buy gold with that excess currency. '
where/who will they buy the gold from? and with what currency, their domestic currency or euro?
assuming australia is running a surplus trade balance with japan, how would the trade surplus be settled and stored in a freegold environment?
FT Weekend; December 10, 2101:
Pg.1:
Britain´s cold shoulder for Europe
"Those who did not... join the Euro are not in the best place to advise its members of its functioning" ~Nicolas Sarkozy
Pg.2:
Premier hailed at home by Tory party sceptics
John Campbell, 51, director of a construction company in Wigan, struck a contrary note. "He is doing it for his friends in the City. My concern is we will be isolated"
[Mrt: So $IMFS & BIS gold fraction is getting more shape. Next step taken out before LBMA begins to experience some "problems" with flow?]
Hi LS
"where/who will they buy the gold from? and with what currency, their domestic currency or euro?"
Remmember that under FreeGold all the gold in a currency zone, say australia, forms part of the reserves of that currency zone.
When trade is unbalanced, gold becomes relatively overvalued in the surplus zone, which creates a flow to that zone of gold, arbtraging out the difference in value.
From the point of view of a australian buyer, payment is made in Au$, which is then exchanged for Yen, which teh japanese seller gets paid in. Each exchange puts pressure on the incorrect valuation and revalues gold in both currencies.
Beyond that governments also have the option to buy or sell gold to manage their currency price. In your example australia would simply offer a overvalued price for gold, thereby weakening their currency and aquiring gold while revalueing.
It is not simply linear however. Japan may be running a surplus with another country, who runs a surplus with australia. Simply buying gold on the open market affects all those exchange rates.
TF
@tf
you said 'When trade is unbalanced, gold becomes relatively overvalued in the surplus zone, which creates a flow to that zone of gold, arbtraging out the difference in value'
thats precisely where i am not getting it. why would change of the notional gold price in a particular currency creates an inflow? as gold is the ultimate store of value in freegold, then why would someone want to exchange it for au$ or yen?
and regard the australia example, if i were the producer, wouldn't it better for me to just have the payment in gold oz instead of currencies? why would i want to receive yen and then need to convert them to gold later on (and perhaps at a lower rate)? wouldn't that thought lead to hyperinflation of these currencies eventually?
"From his 1999 Nobel lecture, Robert Mundell provides a fascinating monetary history of the 20th century."
http://www.nobelprize.org/mediaplayer/index.php?id=1347
via: http://thesupplyside.blogspot.com
LS,
If you have confidence that you CAN get gold for your currency, why would you be afraid to hold the currency?
FOFOA: 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.
And on arbitrage, DP:
DP: If someone with euros wishes to exchange them for physical gold at the bank, the ECB will step in, if necessary, to ensure the exchange is possible. Not to do so will put the credibility of their currency in question, and that is an unacceptable risk.
Most of the time, while the €price is deemed to be right by market participants, gold will be forthcoming from those participants rather than from the ECB. If, however, the market participants are unwilling to part with gold for euros at the prevailing €price, the ECB will step in and bid up the €price until gold starts to flow through the market again. Liquidity is restored. Or, alternatively, it might choose to satisfy orders at lower prices than the market demands (strengthening the currency), if they feel their currency is losing value too quickly. They can exert some degree of control over the value of their currency in both directions.
Arbitrage will ensure that the price globally will follow the highest price anywhere. So if the ECB is bidding high to bring out the flow in the Eurozone, gold from outside will flow into the Eurozone if the price is not also bid up elsewhere to encourage flow there. Of course ultimately the price in the other zone will have been brought into line by the arbitrageurs anyway. Similarly, if the ECB tried to flood the market with gold to satisfy demand at lower and lower prices, the market will arbitrage this flow of gold out to other zones where it will sell for a higher price. So the self-interest of the ECB, and all other CBs, will be to allow the market to set the price naturally, globally — with perhaps from time to time a little assistance if liquidity is becoming problematic and flow needs to be encouraged out of hiding, before a problem becomes evident.
LS,
I find this example of freegold from zenscreamer can help in developing many other deductions of how the process will work.
Zenscreamer's comment
@jeff,tf,fofoa
thanks for answering.
but i am still confused.
first is the confidence part. it's not just a confidence issue. by freegold, what i understand is gold will be saved as the ultimate store of value and currency will function as the transaction medium. now if thats the case, then it implies people will not expect currency to store value and thus they will be spent or converted to gold as soon as you get it, right? now if i were an aussie iron ore producer, then how am i going to construct my long term supply contract say to japan? if there's a long lag time between production and payment, why would i want to get currency in return risking the devaluation in terms of gold? why don't i just ask payment in gold? i don't have to worry anymore on FX risk anymore, isn't it?
another question is what DP said that ECB will step in to ensure there is flow of gold. let's say if japan is having surplus balance with europe, is it that japan will come to ecb and buy gold with those surplus euro? if so, where does ecb get their gold from? if it's from its member cb, which country's gold will be taken? by proportion or what? or ecb will go to the open market to buy gold with euro? what kind of euro is that, newly created or existing?
third and related question is then if like today, there exists long term imbalances between 2 currency zones, then wouldn't it mean the surplus zone would always come to the deficit zone asking to buy gold with the deficit zone's currency? now that will make gold to flow from deficit zone to surplus zone but at the same time will bid up the gold price in the deficit zone's currency, though this might make the amount of gold outflow smaller temporarily because the deficit zone's currency from surplus zone can buy less gold, but wouldn't it also:
1. shows everyone that this zone's currency is devaluating quickly and erodes the confidence in that currency and create vicious cycle and even hyperinflation?
2. and with a devalued currency against gold, the deficit zone would have to pay even more to get the surplus zone's goods which would make the temporary dampened outflow of gold increase again (i think this is similar to prof fekete's argument against a floating exchange currency)?
Here are some slightly edited comments from TF which I won't link to in regards to currency risk:
"Talking about trade exchange rate risk, also present in the current system.
For example, let us say I trade with you. Our currency currently exchanges 1 for 1. We sign a contract whereby I deliver goods to you for a nominal price in say your currency.
A couple of risks exist here. For example, the exchange rate could go to 2-1, which means your currency is now worth less or my currency is now stronger. This means you will now need more of your currency units to buy mine, in order to keep your contract. In real terms you will need to pay more.
The rate could also go to 0.5-1. With that whole bugger up it implies.
At present companies hedge for this risk by taking out 'insurance policies', if you will, in the forex markets.
What is needed to facilitate trade is exchange rate certainty, otherwise a profitable agreement may turn into a loss, for either party.
Under Freegold one can eliminate exchange rate risk by using gold as point of reference in your contract.
In reality the one of the benefits of having a currency link to gold is that this stabilizes interest rates ( a whole other topic ;) ). Currencies will also be managed for stability ( the ECB's only mandate) so there should be no wild fluctuation in exchange rates. One would be able to simply sign a contract in whatever currency you want and factor in the rates of inflation.
If you or your business partner are uncertain about existent risk you may simply use the former option. Bear in mind though that gold would just be used as reference point, the contract would not be able to be forced by law to be settled in gold.
...
Example:
I write up a contract with you to deliver 1ton worth of copper per month which we both currently value at $1830.
We agree that the price paid will be relative to the price of gold per ounce.
So today you pay me $1830. Let us say the price goes to $2000 next month, then next month you pay me $2000 for my ton of copper."
(cont...)
Cont...
"Let us refine it some more.
Imagine FG is already here and this year gold is $60,000 per ounce. Next year it could be reasonably $63,000 per ounce, discounting factors like inflation.
Now let's say I modify the agreement to giving you a 90% discount on all gains over the year.
So this year you pay me $60k and next year you will pay me $60,300.
We can agree that there is some percentage that both parties will be happy with.
You see having gold as our SoV in a FG environment brings stability to the economy. That means long range prediction of say inflation and growth becomes possible and long term deals can be concluded by businessmen."
To your third point, the spur and brake mechanism of gold from Once Upon a Time:
"The outflow of real capital from any zone signals the need to produce more and consume less. The inflow of real capital signals the need to consume more and produce less. The price mechanism transmits this signal to individual actors in the economy. The inflow of real capital will raise prices vis-Ã -vis real capital, which makes exports more expensive abroad, lowering exports and raising imports. The country with an inflow of real capital will have to start consuming more of its own production or else it will just pile up and rot.
Likewise, the country with an outflow of real capital will have to start producing more than it consumes. Again, this signal is transmitted to individual actors via the price mechanism. With less real capital upon which credit flourishes, credit will contract, general price levels vis-Ã -vis real capital will drop, the purchasing power of real capital will rise, and real capital will become more expensive in terms of goods and services. Exports will rise because exportable goods will fetch a higher price abroad, imports will slow because local prices have fallen versus the vanishing real capital, and people will have to begin producing more than they consume in order to survive.
"
@rlp
on that tf contract example, why wouldn't i as the producer just say i want an oz of gold (instead of all these references, discounting, expecting...), wouldn't that be much simplier, direct and easier? what's wrong with that?
Because fiat is a far superior medium of exchange when you consider the size of international trade.
LS,
Gold is superior for wealth storage, but currencies are for transacting. If the currency is stable in gold you don't need to keep converting back and forth.
From the above quote:
Currencies will also be managed for stability ( the ECB's only mandate) so there should be no wild fluctuation in exchange rates. One would be able to simply sign a contract in whatever currency you want and factor in the rates of inflation.
LS
Firstly, and very very importantly, under FreeGold no contract can be forced to be settled in gold. This is a key requiremnt. So contracts would only be able to be made in reference to gold.
As to your earlier question of why some would want to exchange currency for gold. As I have stated, the currency would be overvalued.
At any point in time there is a fair price for gold. If I were to offer you half that price, you would not sell it to me, if I were to offer double you would, as long as you knew you could get more gold with that currency. A overvalued currency is sold, a undervalued one is bought.
TF
Europe: a financial crisis, not a monetary one
Speech by Christian Noyer, Governor of Banque de France
Tokyo – Singapour - November 28-30th 2011
http://anotherfreegoldblog.blogspot.com/2011/12/bdf-europe-financial-crisis-not.html
Source: http://www.banque-france.fr/gb/instit/telechar/discours/2011/Europe-a-financial-crisis-not-a-monetary-one-28-11-2011.pdf
HI LS,
You comment "first is the confidence part. it's not just a confidence issue. by freegold, what I understand is gold will be saved as the ultimate store of value and currency will function as the transaction medium. now if thats the case, then it implies people will not expect currency to store value and thus they will be spent or converted to gold as soon as you get it, right?"
Its a matter of degree. Hopefully you got RLP's point about practical ways contracting parties can allocate exchange rate risk. Here's a bigger, theoretical conception of the *TIME* issue. And a related issue to the *TIME* over which a currency holds value is how well a CB manages their currency, how much confidence the CB management instills in the currency.
The Return to Honest Money
"Breaking the Triangle
In part 1 of this series I used a diagram I created called The Modern Money Triangle. The three corners of the triangle represented the three primary functions of our modern understanding of money.
But as we pass through the coming phase transition in which the parity between paper gold and physical gold will be broken, cracks will start to form in certain parts of the triangle.
The fractures you see in this diagram are time related. On a short timeline [length of time is the key variable: "t"] fiat currencies will perform our necessary monetary functions, medium of exchange and unit of account. But at some point on the time line, 'length of time', we will switch to a different medium, gold.
On a long timeline, gold will perform our necessary monetary functions perfectly, store of value and long term unit of account. By the way, there is no upper limit on the 'time line axis' when it comes to gold. If plotted out it runs to infinity!
The outcome will be my new Freegold Quadrangle!
The "time line axis" represents the amount of time you are willing to hang onto the fiat currency you either earn or receive in payment. If the monetary authority is printing money, "t" will be shorter and shorter. In a hyperinflationary situation "t" will slide all the way to the left with a value close to zero.
As the new Freegold system of natural, pristine balance emerges, the fiat monetary authority will find its wisest move is to keep the money supply under control. And with a "wise" CB, gradually the "t" value will shift back to the right, little by little."
cont.
cont.
"The Money Concept
FOFOA: The measure of any money's store of value is a continuum of time. It is directly linked to demand and velocity. Even the worst money (say, Zimbabwe dollars during the hyperinflation) works as a very temporary store of value. Perhaps you read stories about workers in Zimbabwe getting paid twice a day and then running out to spend it before coming back to finish the shift. This is an example of the briefest time period in which currency stores value.
FOA: Was gold a medium of exchange? Yes, but to their own degree, so were the bowls. Was gold a store of value? Yes, but to a degree, so were dinner plates. Was gold divisible into equal lesser parts to define lesser barter units? Yes, but to a degree one could make and trade smaller drinking cups and lesser vessels of oil.
Here's the thing, 'store of value' and 'medium of exchange' are relative terms. Anything real stores value (a painting, a computer, a jewel), and lots of things are media of exchange in various settings (dollars, other currency, cigarettes in jail, etc). And for stores of value, there is a continuum as to how long things store value. What we are talking about is degree. And this gets to the heart of a semantic issue about money being media of exchange and a store of value.
Menger: [I]t appears to me to be just as certain that the functions of being a "measure of value" and a "store of value" must not be attributed to money as such, since these functions are of a merely accidental nature and are not an essential part of the concept of money.
Mises: Money is a medium of exchange. It is the most marketable good which people acquire because they want to offer it in later acts of interpersonal exchange. Money is the thing which serves as the generally accepted and commonly used medium of exchange. This is its only function. All the other functions which people ascribe to money are merely particular aspects of its primary and sole function, that of a medium of exchange.
Both of the above quotes get at the idea that, because money is a medium of exchange, it is also, to some degree, a store of value. Even Zimbabwe dollars were a brief store of value, but being a store of value isn't what money is all about. Being a store of value is not its central function—it is derivative of its being a medium of exchange. Being a medium of exchange is money’s essence—what makes money money. This means that, by definition, money’s ability to serve as a measure of value and store of value is secondary."
Cheers, J.R.
LS,
You ask "if so, where does ecb get their gold from?"
The nations who joined the ECB made a capital subscription, payable in gold. The ECB has its gold on its balance sheet. So the ECB has its own gold it can use to defend its currencies. From RPG Update #4
"…The Governing Council decided on the size and form of the initial transfer of foreign reserve assets to the European Central Bank from the national central banks participating in the euro area. This transfer is to take place on the first day of 1999. It has been decided that the initial transfer will be to the maximum allowed amount of EUR 50 billion, adjusted downwards by deducting the shares in the ECB's capital subscription key of the EU central banks which will not participate in the euro area at the outset. The transfer will thus be equal to 78.9153% of EUR 50 billion, i.e. approximately EUR 39.46 billion.
The Governing Council furthermore agreed that this initial transfer should be in gold in an amount equivalent to 15% of the sum I have just mentioned, with the remaining 85% being transferred in foreign currency assets. I should stress that the decision on the percentage of gold to be transferred to the ECB will have no implications for the consolidated gold holdings of the ESCB."
==================================I
That said, I would encourage you to read this super FOFOA 4-part comment from Reference Point: Gold - Update #2 that gets at the preeminent importance of private reserves, not CB reserves.
"The reality is, and always has been, that the real reserves behind any currency are primarily the physical gold held in private ownership within that currency zone's physical boundaries, and secondarily the collective reserves held on public display. Those collectively-owned (official) reserves are only for the management (or mismanagement) of the currency until and unless they are finally used in defense of a full-blown collapse of the currency, the ultimate end of a mismanagement timeline, or in times of all-out war when gold becomes the ultimate (and only) transactional currency among distrusting neighbors. "
LS,
You comment: "on that tf contract example, why wouldn't i as the producer just say i want an oz of gold (instead of all these references, discounting, expecting...), wouldn't that be much simplier, direct and easier?"
So you are asking what the downfalls are to using a paper gold system? This is a very important but often confusing point, so tread slowly - bottom line, we don't want gold lent.
FOA via Reply to Bron
"One of the major problems faced by past hard money planners was that any time real wealth, gold, is denominated as credit money, it always placed the relationship between the rule of law and the rule of gold at odds. If our laws defined gold as official money, and lent it, then by association the law had to define a portion of gold that did not exist in circulation. That portion was the contract asset held as bank savings. Yet, a person's claims against it identified said gold as real. This was and is an inherent contradiction because no law can define the value of real wealth held in contract.
This particular fiat form of hard money owed its existence upon a continuous function of the economy. What the above means is that you cannot take something real and lend it over and over, as banks do when lending fiat, and still demand that the law recognize said contract moneys as hard legal tender.
I would state that no form of lent gold be recognizable or enforceable in the court of law as a legal tender contract. One may borrow gold, relend it, or even borrow against it, but that gold would not be valid in the payment of all debts both public or private. It could not, by law be legal tender. This is not to say the trading of gold would not somewhat supplant currency in function. It could and most likely would to a degree, but it would no longer carry a credit quality that fiat would in the form of a time function. Indeed, in our modern economic structure, a credit time function is very valuable and gives digital contract currencies their demand.
To deal in the future,,,,, to borrow,,,,, to capitalize would require the use of a fiat function. 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."
cont.
Econoclast suggests:
-------weaving OUR gold supply, literally, into gold dollars--------Contracts could be denominated in gold dollars, however these "gold notes" are strictly non-transferable. If someone wants to sell their gold note, they can't. It is only enforceable between the parties that entered into it originally. All forms of paper gold are illegal-fraudulent. Any debt larger than the legal tender law amount has to be denominated in fiat, smaller can be negotiated.------------
FOA replies:
Well sir,
Once again, it looks good at first but later evolves. By mingling your gold currency into the contract / credit realm, it once again creates gold loans that are at odds with human nature. Yes, the gold notes may not be transferable, but the lent gold currency is. It is at once someone's asset while also another's liability. The gold currency in circulation expands thru the nature of loans. When these loans fail on a national scale (major downturn) the legal tender laws defining our new gold currency will be changed. We thin our gold again in an ages old cycle aimed at covering debts that are the common citizen's savings.
Still, we are not far from the position you see. We must remember that neither currencies or gold define society's economy. Business can function using fiat alone. We have been doing just that for a number of decades. Installing a trading medium outside lawful money that acts as a wealth savings and a final trade will not destroy the bankers, governments or paper credit inflation. But, it will allow society a way to judge political efficiency. A nation's productivity will then have two scales to measure with, one it must live with (final payment) and another it cannot live without (future payment).
We shall see (smile)
cont.
FOA (5/9/01; 07:20:23MT - usagold.com msg#72)
A Tree in the Making #04
Our modern gold market and the price illusion it creates, is little more than a fiat dollar system that denominates gold credits in contract form. Is it a free market? Why yes, very free. But only free in the sense that supply is unlimited. Investors and the industry in total, bought into paper based gold and yet they fully well knew 90% of it had only cash equity as the collateral on the other side. Then, somehow expected that those contracts were limited in creation by the fixed amount of gold in the world. Their mistake, not the markets.
…Indeed, a currency without a country! In order to implement such a currency, gold would require laws that would keep it within its wealth concept. Gold in possession would be wealth in possession as long as governments could not use it as credit money. In my discussion with Econoclast, I took his legal meanings and applied them to this "wealth without a country" position.
Keeping gold out of the fiat arena would be more simple than many hard school advocates envision. The key to that is found in the implementation of international law. The leading economic countries (EuroZone in the future) would have but to establish a protocol that forbid the enforcement of collateral attachment anytime physical gold is traded, lent or involved in a trade. In this context, no banker would lend you gold to buy a house if, in a default, he could not claim your house in a court of law. Even private parties would never lend gold if the asset behind the loan could not be claimed for nonpayment. It's that simple. With a stroke of written law, the trading of gold as wealth would become a final payment with no possible credit implications. Our official fiats and wealth without a country would never again function as one.
So this is the key:
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."
In RLP's presentation of TF's contract example, gold is a point of reference for the contract.
It is not a paper promise that someone deliver physical gold in the future - that's a no no. Pay in gold now, but..."If I want more time to pay, I and we must engage a fiat loan"
Cheers, J.R.
Maybe I'm over-simplifying, but settling contracts in gold would be saying that I make 100% profit on this deal with no expenses, right? To me, it seems much more likely that you want currency so you can pay overhead, salaries, COGs, etc. After all that has been taken care of, then the question would be what to reinvest/expand and what to store for future investing (store gold).
Re: why not use the nuclear option now?
I would assume that as long as oil flows, there is no reason to change the current system. It seems to me that the Euro was created to keep oil flowing (and gold in the opposite direction). With the past 100 years as precedent, I'm sure that Europe has no interest in another WW on its soil. If the nuclear button was pushed and the $US was destroyed overnight, I would expect the $US to retaliate and have enough propaganda/severely affected households to rally the citizens. Instead, the Euro is giving the $IMF just enough rope to hang itself. Prudent.
Not sure what you mean abe,
"Maybe I'm over-simplifying, but settling contracts in gold would be saying that I make 100% profit on this deal with no expenses, right?"
No, it means I give you x and you can pay me in currency or in gold. Gold and currency have exchange rates, so in a stable currency there is an amount of gold that is equal to an about of fiat, no?
That a business has to do other stuff to be in the position to transact goods is a separate question from the payment they would accept for their goods. But as you I think allude, with a stable currency there's lots of reasons to prefer transactions be settled in currency as opposed to gold. Fiat's a better medium of exchange for some of these reasons.
Has The Turd just described the final disconnect, FOFOA's inverted waterfall in a very eerie and detailed way?
http://www.tfmetalsreport.com/blog/3120/thought-experiment
When you read this kind stuff on a TA-oriented blog, we can't be far away now, can we?
/Burning
Thanks JR
"That a business has to do other stuff to be in the position to transact goods is a separate question from the payment they would accept for their goods. But as you I think allude, with a stable currency there's lots of reasons to prefer transactions be settled in currency as opposed to gold. Fiat's a better medium of exchange for some of these reasons."
Sorry, that was my entire gist. It doesn't make very practical sense to settle in gold unless everything was for savings or currency devalued within days or weeks.
burningfiat,
Thanks for the link to that TF post. Eerie indeed.
Indeed abe,
Mises said this too. Gold is a secondary media and must be exchanged with the primary to be deployed into other activities.
"Mises: One must not confuse secondary media of exchange with money-substitutes. Money-substitutes are in the settlement of payments given away and received like money. But the secondary media of exchange must first be exchanged against money or money-substitutes if one wants to use them--in a roundabout way--for paying or for increasing cash holdings."
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