Sunday, March 11, 2012

Savings & Capital Theory Open Forum


The monetary plane is only relevant insofar as it directs and facilitates the flow of the physical plane. Part of what pisses people off so much about the $IMFS is that it seems to direct and facilitate the flow of massive amounts of cool physical plane stuff into the hands of those who contribute little more than tweaking the monetary plane in their favor. But we must remember that they are not producing the stuff that they are enjoying. They are simply receiving it.

It is the physical plane that drives the flow. It is the producers that produce the stuff. And it is the net-producers that produce enough extra stuff that it can accumulate in the possession of the monetary plane managers. It is the savers that drive the economy. Savers are net-producers. Net-producers are savers.

I have another big idea post that I'm working on, but I'm finding it difficult to make progress because the stunning revelation I am trying to share with you rests on so many complicated foundations. Without giving too much away, I guess I could say it will be a continuation of some of the themes introduced in Moneyness. So I had this idea that I could dispense with some of my difficulty by just putting a little bit here in an open forum.

Recall the story of "I, Pencil" from the Superorganism Open Forum. The Austrian's taught us that "capital" is not merely a lump of some homogeneous substance. It is a complex structure of various goods used in specific combinations to produce other goods. Capital, in essence, is a product of the Superorganism. All else is simply unsustainable malinvestment. How long managed malinvestment can continue before the whole superstructure collapses seems to be the only real question.

Rather than getting into who should be making the decisions that lead to capital formation and economic growth in the physical plane, I'm more interested in how relevant the $IMFS is to that process at this point. Does the $IMFS transmit any price information that is relevant to the Superorganism anymore? The Superorganism is a robust creature. It can work around a badly mismanaged superstructure and still produce marvelous creations. But there comes a point when the signals transmitted by the system become so detrimental to the Superorganism's natural drive toward sustainability that it must be abandoned for good.

One of the flaws of the $IMFS is that it does view "capital" as a homogeneous lump. And because it is a monetary system managed by net-consumers, it attempts to redirect all capital to the consumption end of the spectrum, where it (the $IMFS) feeds. When you first start this process of capital consumption, everything is really nice. Imagine that you decided to quit work tomorrow and start liquidating your gold to your heart's content. You could live high on the hog for a while! This is the $IMFS. But if you think it through for a minute, you'll realize that the better life is each day, the sooner you'll run out of gold.

Savers drive the economy, and the $IMFS consumes it. And what of investment? The $IMFS heaps the greatest rewards on those who invest in consumables, like APPL, rather than infrastructure or higher order capital goods. The concepts I hope you'll think about and discuss in the comments are the physical plane versus the monetary plane, savings and capital. The physical plane is all that matters. The monetary plane only exists to assist the Superorganism by transmitting information through prices and lubricating the flow. Savers drive everything. If they are saving, the economy will expand (sustainably or unsustainably). If they are not saving, the economy will contract. The Superorganism's natural drive is toward economic sustainability while the $IMFS is a pedal-to-the-metal consumption binge thrill ride toward economic collapse.

Below is an excerpt from Freegold Foundations discussing capital and savings. Sorry about the length of the excerpt, but if you don't like long posts, you're probably at the wrong blog. After that I'll end this post with a neat little island analogy on the topic of capital consumption, or how to kill an economy in style. Everybody loves island analogies, right?

Freegold Foundations

Capital

I'm not going to go into great detail on the concept of capital, other than to give you a mental exercise. Because the term "capital" can be quite confusing in our modern paper/electronic world, I want you to imagine a much simpler human civilization. Imagine an ancient Greek city. All the buildings made of stone and mud, the horse carts and agricultural tools, the linens and skins worn as clothing, the knowledge base passed down through generations; all these creations of man's intellect were the capital of the time.

Now imagine the destruction of capital. Imagine an earthquake or volcano that destroys the fruits of many generations. Or a plague or war, perhaps, that destroys the knowledge base. That's the loss of real wealth you are imagining. And it is this cycle of capital creation and destruction that tells the story of mankind throughout many civilizations.

In modern economics, the word "capital" accounts for many specific things. But I think it is helpful to consider this word in a more basic, fundamental way. Think of it in terms of capital creation, capital employment and capital consumption or destruction. Modern economics would not call consumables capital, which is why I am suggesting a different approach to the word. When we are productive, imagine we are creating this thing called capital. We may figure out a way to turn someone else's capital, combined with our own prowess, into more capital. This would be the employment of capital. And sometimes we simply consume it, or use it up.

If I build a house I have created capital. By owning and living in a home, I am consuming that capital slowly. If I were to buy a specialized tool and use it to make something new, then I have employed capital to create more capital. Is this view of "capital" clear, or woolly?

Savings

Savings are the result of one's production being greater than his consumption. Saving is the convention for deferring the fruits of capital creation—earned consumption—until later. Savings is also the way we hand off capital to the next person who will use it to create more capital. And when it is done right, saving results in the accumulation of capital throughout society at large. When it is done poorly, saving results in the aggregate destruction of capital through frivolous consumption and mal(bad)investment (the misguided employment of capital) resulting in unsustainable infrastructures built on unstable levered foundations.

Here's where it may get a bit counterintuitive. You might, if you were Charlie Munger, think that the best way to pass your earned capital on to another producer is through paper. If you save in paper notes then you are loaning your earned capital to the next producer in line, right? And if you buy gold Charlie says you're a jerk, even if it works, because he thinks you are pulling capital out of the system. But are you really? I bring this up (and please watch a minute or so of that video starting at 1:04:05) because it is the key to this discussion about savings.

We should think about the global economy in terms of production and consumption in the physical realm as opposed to the financial or monetary realm, what I like to call the physical plane versus the monetary plane. A "net producer" produces more capital than he consumes. Likewise, a "net consumer" consumes more than he produces. The global aggregate is generally net-neutral on this production-consumption continuum. I say "generally" because there are times of expansion and times of contraction, so taking time into account, we are "generally" net-neutral (or close to it) as a planet. At least that's the way it is under the global dollar reserve standard.

On the national scale, however, we are all both blessed and cursed by the presence of government. Governments are always net consumers, as it is their very job to redistribute part of our private savings into the infrastructure and secure environment that enables us to produce capital in the way that we do. Government's job is not to produce capital, but to enable and support the private production (and accumulation) of capital!

Being such that human society has evolved in this way, we private citizens must, in aggregate, be net producers so that government can net consume. And we become net producers by saving. Therefore we enable and support our own future net productivity by saving some of our past production of capital today, in the form of savings.

The financial system is really just the monetary plane's record-keeper of this vital process that actually takes place on the physical plane. In its modern incarnation, the global financial system has allowed for a strange international balancing act whereby (literally) one whole side of the planet's net production has allowed the other side to net-consume for decades on end. But this is an unsustainable anomaly, and it is beside the point of this discussion. So please push this giant, global imbalance-elephant in the room over to the corner while we continue this discussion about savings.

The question we must answer here is: Is Charlie Munger right? Are you a good person only if you put your savings into paper where it can be easily redistributed, and a jerk if you buy gold, depriving the paper whores of your savings? Is this the way it works in reality? Or is this simply the sales pitch of one with great bets riding on the continued popularity of paper savings?

The government confiscates a portion of the physical capital created in the private sector through several means. Taxation is one way, forcing you to keep a portion of your earnings in paper so that it can be easily transferred to the government and then used to buy up capital from the marketplace. This forces you to leave some of your production in the marketplace to be taken by the government, preventing you from consuming an amount equal to your productive output.

Printing money, or its modern equivalent, quantitative easing, is another way the government can confiscate real capital from the marketplace without first producing a commensurate amount. This method inflicts what we call "the inflation tax." The "victims" of this confiscation are anyone and everyone holding (and saving) the currency or any paper asset fixed to it, and the damages are relative to the amount of currency each "victim" is holding. Because this form of confiscation is spread so wide and thin, it is mostly not even noticed by the private sector.

The last way the government confiscates capital is by borrowing it directly from the net producers in the private sector. When you buy US bonds, it is you that are loaning your earned claims on capital to the government. So we can see that the government has plenty of ways to create its own claims on capital in the marketplace without first producing a commensurate market contribution (because governments are always net consumers).

In fact, the modern financial system has bestowed these same powers, creating market claims without contribution, upon the private sector as well. I'm not talking about private banks loaning money into existence, for this process has no market contribution from which to feed. It is directly price inflationary until the debtor makes a market contribution to work it off.

What I'm talking about is the private sector's ability to sell unlimited amounts of this debt to the savers, funding the marketplace claims to consumers/debtors with real marketplace capital (contributed by the savers). Private banks that would normally be constrained by their balance sheets for their own survival can now offload that constraint onto the net producers, making themselves—the banks—totally unconstrained.

The banking system sells all kinds of packaged debt to net producers, the savers. It creates this stuff at will to meet demand. And if necessary, it drums up new debtors one way or another to keep this stuff financially funded. Even corporations can dilute their paper shares to take in new claims from the savers without giving up a commensurate marketplace contribution.

This is the process of paper savings hyperinflation. It is a self-feeding, self-fulfilling, self-sustaining, self-propelling system that will ultimately lead to real price hyperinflation. When you produce capital and decide to leave it in the marketplace, postponing your earned consumption until later, and you do so in any paper investment, you are feeding this process of capital destruction through paper savings hyperinflation.

If you buy government debt you are feeding, enabling the growth of government beyond its most basic mandate, providing the infrastructure and secure environment that enables us to produce capital. And if you think an expanding government is good, just beware that all governments are stupid!

"The institution of government was invented to escape the burden of being smart. Its fundamental purpose is to take money by force to evade the market's guidance to have the privilege of being stupid." Richard Maybury goes on (in the linked video) to say that private organizations that petition government for special protections, subsidies and incentives are asking for the same privilege. They want to be relieved of the burden of being smart.

(Not since the Agriculture Adjustment Act of 1933 that paid farmers to destroy crops during the Great Depression in an attempt to raise the price of crops, has there been a more obvious example of government's propensity for destroying real world capital than the 2009 "Cash for Clunkers" program, whereby government literally paid private car dealerships to pour sugar into running car engines ensuring their permanent destruction.)

This is why, when you save in government paper, you are enabling malinvestment and the destruction of capital that goes along with it. And it's the destruction of the capital that you just contributed to the marketplace that you are feeding. The same goes for the private sector. When you save in private paper you are enabling the expansion of frivolous consumption (beyond natural market constraint) and the destruction of your capital contribution to the marketplace that goes along with it.

So what's the alternative? If both public and private paper savings contribute to the expansion of malinvestment, net-consumption and systemic capital destruction, what is a net producer to do? If one wants to produce more capital than he consumes—for the good of the economy—yet he doesn't want to work for free, what is he to do? Or if one wants to produce more than she consumes—for the good of her retirement years and her family's future—what is she to do?

The monetary plane, the modern dollar-based global financial system, has failed these individuals. So what is left? The physical plane? If these individuals trade their earned marketplace credits in for physical capital without employing that capital in productive enterprise, then they are either consuming that capital (capital destruction) or denying other producers the use of it (hoarding, also destructive to the capital creation process). This is not only detrimental to society at large, but also to the future value of your savings that depends on new capital being plentiful in the marketplace when you deploy your savings in the future.

But of course there is one item, one physical asset, that stands out above all the rest. And this isn't some new discovery by FOFOA. Man discovered that this was gold's highest and best use thousands of years ago. Once you've produced capital for the marketplace, whatever asset class you choose to deploy your earned credits into will feel the economic pressure to rise in price. If the monetary plane was volume-fixed (or even constrained), it too would rise in price as real capital is added to the economy. But it has become a system that expands in volume rather than rising in price.

This is hyperinflation: quantitative expansion of savings! If the pool of savings rose only in value and not quantity, then each new net producer would have to bid "savings" away from an old net producer, and "savings" would retain their proper relationship to the pool of real marketplace capital available for purchase.

If you choose to deploy your credits into the everyday physical plane, the tangible goods plane, prices will rise. If all the savers chose oil for example, we'd all pay very high prices at the gas pump. Or choose agriculture for your savings and we'll all have to work an extra hour to feed ourselves. No, you want to choose something that both rises in price (rather than expanding in volume) and also something that does not infringe on others or economically impede the capital creation process that feeds value to your savings. And as an added bonus, if everyone chooses the same thing, it works extra well. This is called the focal point.

But for gold to fulfill this vital function in the capital creation process, it needs to trade in a fixed (or at least constrained) quantity that will allow its price to rise every time a new capital net-increase is contributed to the marketplace. And, unfortunately, paper gold and fractional reserve bullion banking doesn't allow this process to work properly. In fact, it makes paper appear generally competitive, even to gold.

So what about Charlie Munger? Is he right? Are you a jerk if you buy gold? Well, yes and no. If he's talking about paper gold, then yes! But likewise, it seems you are a jerk if you buy Charlie's paper as well! And you're an even bigger jerk if you buy physical commodities and tangible goods without the intention of employing them in real economic activity. It seems—and correct me if I'm wrong here—that physical gold (along with a few other discreet collectible items like real estate, fine art, antique furniture, ancient artifacts, fine gemstones, fine jewelry and rare classic cars) may be the only true wealth holdings in which you are not a jerk. What do you think?

________________________________________________________

And finally, here is a fun little excerpt from Robert P. Murphy's 2008 article, The Importance of Capital Theory:

A Sushi Model of Capital Consumption


Above I've pointed out some of the basic flaws in Krugman's and Cowen's arguments. (Other Austrians have responded to Krugman in the past. See the replies of Garrison and Cochran.) More generally, they are ignoring the all-important notion of capital consumption. This is why one needs to understand capital theory, as pioneered by Carl Menger and Eugen von Böhm-Bawerk, in order to make sense of what the heck just happened in the US economy. Any talking head on CNBC who doesn't understand capital consumption is going to give horrible policy recommendations.

When thinking about this article, I went back and forth. I have decided that I should spell out a "model" of intermediate complexity, because if I simplify it too much, it might not really click with the reader, but if I go overboard with it, no one in his right mind would finish the article. Without further ado, let's examine a hypothetical island economy composed of 100 people, where the only consumption good is rolls of sushi.

The island starts in an initial equilibrium that is indefinitely sustainable. Every day, 25 people row boats out into the water and use nets to catch fish. Another 25 of the islanders go into the paddies to gather rice. Yet another 25 people take rice and fish (collected during the previous day, of course) and make tantalizing sushi rolls. Finally, the remaining 25 of the islanders devote their days to upkeep of the boats and nets. In this way, every day there are a total of (let us say) 500 sushi rolls produced, allowing each islander to eat 5 sushi rolls per day, day in and day out. Not a bad life, really, especially when you consider the ocean view and the absence of Jim Cramer.



But alas, one day Paul Krugman washes onto the beach. After being revived, he surveys the humble economy and starts advising the islanders on how to raise their standard of living to American levels. He shows them the outboard motor (still full of gas) from his shipwreck, and they are intrigued. Being untrained in economics, they find his arguments irresistible and agree to follow his recommendations.

Therefore, the original, sustainable deployment of island workers is altered. Under Krugman's plan for prosperity, 30 islanders take the boats (one with a motor) and nets out to catch fish. Another 30 gather rice from the paddies. A third 30 use the fish and rice to make sushi rolls. In a new twist, 5 of the islanders scour the island for materials necessary to maintain the motor; after all, every day it burns gasoline, and its oil gets dirtier. But of course, all of this only leaves 5 islanders remaining to maintain the boats and nets, which they continue to do every day. (If the reader is curious, Krugman doesn't work in sushi production. He spends his days in a hammock, penning essays that blame the islanders' poverty on the stinginess of the coconut trees.)

For a few months, the islanders are convinced that the pale-faced Nobel laureate is a genius. Every day, 606 sushi rolls are produced, meaning that everyone (including Krugman) gets to eat 6 rolls per day, instead of the 5 rolls per day to which they had been accustomed. The islanders believe this increase is due to use of the motor, but really it's mostly due to the rearrangement of tasks. Before, only 25 people were devoted to fishing, rice collection, and sushi preparation. But now, 30 people are devoted to each of these areas. So even without the motor, total daily output of sushi would have increased by 20%, assuming the islanders were equally good at the various jobs, and that there were plenty of fish and rice provided by nature. (In fact, the contribution of the motor was really only the extra 6 rolls necessary to feed Krugman.)

But alas, eventually the reduction in boat and net maintenance begins to affect output. With only 5 islanders devoted to this task, instead of the original 25, something has to give. The nets become more and more frayed over time, and the boats develop small leaks. This means that the 30 fishermen don't return each day with as many fish, because their equipment isn't as good as it used to be. The 30 islanders making sushi are then in a fix, because they now have an imbalance between rice and fish. They start cheating, by putting in smaller pieces of fish into each roll. The islanders continue to get 6 rolls per day, but now each roll has less fish in it. The islanders are furious — except for those who are repulsed by the idea of ingesting raw fish.

Being a trained economist, Krugman knows what to do. He suggests that 2 of the rice workers and 2 of the sushi rollers switch over to help the fishermen. Now with 34 workers, the islanders are able to catch almost as many fish per day as they were in the previous months, even though they are now using tattered nets and dilapidated boats. Krugman — being very sharp with numbers — moved just enough workers so that the fish caught by the 34 islanders matches up perfectly with the rice picked by the remaining 28 islanders who go to the paddies every day. With this amount of fish and rice, the 28 workers in the rolling occupation are able to produce 556 sushi rolls per day. This allows everyone to consume about 5 and a half rolls per day, with a bonus roll left over for Krugman.

The islanders are a bit concerned. When they first followed Krugman's advice, their consumption jumped from 5 rolls to 6 per day. Then when things seemed to be all screwed up, Krugman managed to fix the worst of the discoordination, but still, consumption fell to 5.5 rolls per day. Krugman reminded them that 5.5 was better than 5. He finally got the crowd to disperse by talking about "Cobb-Douglas production functions" and drawing IS-LM curves in the sand.

Because this is a family-friendly website, we will stop our story here. Needless to say, at some point the 5 islanders devoted to net and boat production will decide that they have to cut their losses. Rather than trying to maintain the original fleet of boats and original collection of nets with only 5 workers instead of 25, they will instead focus their efforts on the best 20% of the boats and nets, and keep them in great shape. At that point, it will be physically impossible for the islanders to prop up their daily sushi output. In order just to return to their original, sustainable level of 5 sushi rolls per person per day, the islanders will need to suffer a period of privation where many of them are devoted to net and boat production. (We can only hope that Professor Krugman has been rescued by the Swedes by this time.)

The 5 people looking for ways to synthesize gasoline and motor oil will have to abandon that task, because it was never appropriate for the islanders' primitive capital structure. The islanders will of course discard the motor brought to the island by Krugman once it runs out of gas.

Finally, we predict that during the period of transition, some islanders will have nothing to do. After all, there will already be the maximum needed for catching fish with the usable boats and nets, and there will already be the corresponding number of islanders devoted to rice collection and sushi rolling, given the small daily catch of fish. There would be no point in adding extra islanders to boat and net production, because then they would end up building more than could be sustained in the long run. Hence, the elders rotate 10 people every day, who are allowed to goof off. They could of course go try to catch fish with their bare hands, or go gather rice that would just be eaten in piles by itself, but everyone decides that this is a waste of time. Given the realities, it is decided that during the transition, 10 people get the day off, even though everyone is hungry. That is just how bad Krugman's advice was.

Conclusion

As our simple story illustrates, in modern economies workers use capital goods to augment their labor as they transform nature's gifts into consumption goods. Because of the time structure of production, it is possible to temporarily boost everyone's consumption, but only at the expense of maintaining the capital goods (the boats and nets), which are thus "consumed." At some point, engineering reality sets in, and no "stimulus" policies can prevent a sharp drop in consumption.

Although the story of the sushi economy was simplistic, I hope that it illustrated essential features of a boom-bust cycle. When the islanders first implement Krugman's advice, they all feel richer. After all, they really are eating 6 rolls per day instead of 5; there is no arguing with results. And they would have no reason to suspect an unsustainable restructuring, either: after all, they are using a new outboard motor. This is analogous to the arguments about the "New Economy" during the dot-com boom, or the confidence placed in the new financial instruments used during the housing boom. During every boom, people can always come up with reasons that "this time it's different."

In the sushi economy, this initial prosperity was illusory. Although there were indeed benefits from the new technology, the bulk of the extra consumption was being financed through capital consumption, i.e., by allowing the boats and nets to deteriorate. This is analogous to Americans' consuming a massive amount of imported consumption goods during the housing boom, because they erroneously thought their rising house values would more than compensate. In other words, had Americans realized that their real-estate holdings would plummet in a few years, they would not have consumed nearly as much. They were consuming capital without realizing it, just as the islanders didn't realize that their extra sushi consumption was largely financed through neglect of their boats and nets.

Note too that this aspect of the story answers Cowen's objection: people consume more during the boom — i.e., the villagers eat more sushi per day — even while new, unsustainable investment projects are started. (In our sushi economy, the unsustainable project was looking for gasoline for the newfangled outboard motor.) Cowen is right that a sustainable lengthening of the capital structure initially requires a reduction in consumption; what happens is investors abstain and plow their savings into the new projects. But during a central-bank-induced boom, there hasn't been real savings to fund the new investments. That's why the boom is unsustainable, but it also explains why consumption increases at the same time. It's true that this is impossible in the long run, but in the short run it is possible to increase investment in new projects, and to increase consumption at the same time. What you do is neglect maintenance on critical intermediate goods, just as our islanders were able to pull off the feat for a few months. A modern economy is very complex, and it can take a few years for an unsustainable structure to become recognized as such.

Finally, our sushi economy showed why unemployment increases during the retrenchment. People don't like to work; they would rather lounge around. In order for it be worthwhile to give up leisure, the payoffs from labor have to be high enough. During the "recession" period, when the islanders had to cut way back on output from the fish, rice, and sushi-roll "sectors," there weren't 100 different tasks worth doing. In our story, we stipulated that only 90 people could be usefully integrated into the production structure, at least until the fleet of boats and supply of nets start getting restored, allowing more of the "unemployed" islanders to once again have something useful to do.

In the real world, this also happens: during the recession following the artificial boom period, resources need to get rearranged; certain projects need to be abandoned (like hunting for gasoline in the sushi economy); and critical intermediate goods (like boats and nets) need to be replenished since they were ignored during the boom. It takes time for all of the million-and-one different types of materials, tools, and equipment to be furnished in order to resume normal growth. During that transition, the contribution of the labor of some people is so low that it's not worth it to hire them (especially with minimum-wage laws and other regulations).

The elementary flaw in Krugman's objection is that he is ignoring the time structure of production. When workers get laid off in the industries that produce investment goods, they can't simply switch over to cranking out TVs and steak dinners. This is because the production of TVs and steak dinners relies on capital goods that must have already been produced. In our sushi economy, the unemployed islanders couldn't jump into sushi rolling, because there weren't yet enough fish being produced. And they couldn't jump into fish production, because there weren't enough boats and nets to make their efforts worthwhile. And finally, they couldn't jump into boat and net production, because there were already enough islanders working in that area to restore the fleet and collection of nets back to their long-run sustainable level.

People in grad school would sometimes ask me why I bothered with an "obsolete" school of thought. I didn't bother citing subjectivism, monetary theory, or even entrepreneurship, though those are all areas where the Austrian school is superior to the neoclassical mainstream. Nope, I would always say, "Their capital theory and business-cycle theory are the best I have found." Our current economic crisis — and the fact that Nobel laureates don't even understand what is happening — shows that I chose wisely.

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Just a reminder, the concepts up for discussion are the physical plane versus the monetary plane, savings and capital. The physical plane is all that matters. The monetary plane exists only to assist the Superorganism in its drive toward sustainability by transmitting information through prices and lubricating the flow of the physical. Savers drive everything. If they are saving, the economy will expand (sustainably or unsustainably). If they are not saving, the economy will contract. The Superorganism's natural drive is toward economic sustainability while the $IMFS is a pedal-to-the-metal consumption binge thrill ride toward economic collapse. Savers drive the economy, the Superorganism organizes it, and the $IMFS kills it softly.

Sincerely,
FOFOA

227 comments:

1 – 200 of 227   Newer›   Newest»
Tyrone said...

FreeGold is my Savings!
Cheers!

FOFOA said...

For anyone who's interested in some more fun, Robert P. Murphy's 2008 article featured in my post finally caught Krugman's attention in Jan. 2011 and prompted this response, followed by this one from Murphy.

Meanwhile, a bunch of Murphy fans pledged more than $70,000 to charity in an effort to encourage Krugman to debate Murphy. The money would only be released if Krugman agreed to the debate.

Krugman declined, but another Keynesian agreed last August to fill in for Krugman and the debate was scheduled as an online pay-per-view:

"This is the econ web cage match of DEATH…

Well, the Austrians at Mises.org challenged Paul Krugman to a debate. Krugman demurred. Seeing no champion to oppose them the Austrians declared victory and a pall was cast over the land.

Wickedness rose up and all that was just and right was driven into the shadows. Flowers wilted. Virgins cried. Cats couldn’t find a comfortable sleeping position. It was a time of unimaginable peril.

But just as things seemed their darkest, a new hope emerged. A hero came forth who could save what was good and decent about the world. A man who could give the people a reason to believe. I speak, of course, of myself.

Now on Friday that hero – me – will vanquish the great evil and send the demon Austrians back into the hellfire from whence they came."


The debate was held on Sept. 2, but you can see it now on YouTube.

Sincerely,
FOFOA

Michael said...

yes instead of slaving for the almighty dollar I slave for zee gold and its long term ability to yield consumption (after a brief first pass through the dollar of course)

Wendy said...

Tyrone you rule!!!

Wendy said...

These days the physical plane is absorbing my excess production:

tuition and books and other stuff for two kids. Or does that not count on the physical plane?

I've put aside my gold goal for now in favour of my kids' education.

ephemeral_reality said...

attempting to subscribe.

Is there an issue with the new Blogger design? We can't subscribe to the comments through email :(?

What a bummer.

Nickelsaver said...

PP (physical plane)

File under unsustainable projects:

Green energy
War on drugs, terrorism, etc
Entitlements

anyone got any more?

costata said...

ephemeral_reality,

Is there a Blogger design that does not have issues?

Cheers

Wandee said...

@nickelsaver
GM The food supply
Obamacare

But why green energy? Once built it provides important Capitol that other real investments need. No?

victorthecleaner said...

FOFOA,

good luck with that endeavour ;D

I don't know anyone who has a coherent and convincing picture on capital and savings that is able to answer your questions.

I have tons of remarks though and it may take a while until I can spell them out.

First, here is my 2-line way of saying what the "monetary plane" does, i.e. the ratios of all the prices of all goods, services, assets, contracts and all sorts of labour: It is a social contract that determines which contribution to society (labour, running a business, etc.) entitles to which sort of living standard and, according to which rules these entitlements can be shifted in time.

So the "monetary plane" describes all the incentives (the economic ones) to do one thing but not the other. If you want to judge whether it performs satisfactorily, you need to have a view on what a desired outcome is, i.e. whether you want a country full of Starbucks' and nail studios or whether you prefer a country full of factories.

Who decides this? Well, a good criterion is probably sustainability. If the incentives provided by the "monetary plane" direct all the investments into nail studios, but not in agriculture, one day your wheat supplies run out and people begin to starve. That's undesirable.

But this was an extreme example, and if you ask more detailed ones, you will have to come up with a view on which outcomes are desirable and which ones are not.

So what went wrong in the case of the nail studio. Apparently, the present value of future agricultural production was underestimated. So people opened nail studios rather than building combine harvester and think about fertilizer and cattle breeding.

Well, I don't have the complete answer either, and so I take a break at this point.

Victor

victorthecleaner said...

Next idea: What else might be going wrong today. Something that obviously goes wrong is the global imbalances.

Production is more and more concentrated in China, Japan, perhaps Germany, while consumption happens in the U.S., in the UK and in southern Europe (until last year).

Is this sustainable? Only if the social contract is acceptable that the producers continuously make gifts of entitlements to the consumers. Inside a small community, even inside a coherent country or state, this is often acceptable to both parties and thus sustainable. Is it inside Europe? Not sure.

But between vastly different countries and different cultures. An additional issue is, of course, making a promise in a contract (implicitly that debt will be services and paid back in real terms) and then breaking it.

By the way, the PhD advisor of Tommaso Padoa-Schippa was Duncan Foley. The Foley-Sidrauski model is an elementary macro-economic model that can show how different monetary and fiscal policies in two countries ('US' versus 'Europe' - the model is from the 1960s) can create imbalances very similar to those I am complaining about.

Victor

victorthecleaner said...

Finally, concerning Charlie Munger. I think you are beating a straw man to death. I have to admit though that Munger does extremely poorly in that interview.

I think the major misunderstanding is that you think Munger advertises paper. I think what he really wants to advertise is business ownership. But slowly.

If you earn a surplus, you have different options. Initially you receive medium of exchange for your efforts. Now you have at least three options what to do with that surplus.
1) you can consume it, i.e. go on holiday, eat out, buy cloths
2) invest it. By this, I mean purchase a whole business outright, i.e. buy a factory and then be the boss and run it.
3) you can save it, for example exchanging your surplus for valuables (gold, fine art, collectibles, ...). This basically defers the decision about what to do it into the future.

Munger is in favour of (2). And now. Nothing is wrong with this. Of course, if you buy shares in a company rather than an entire business, you may introduce an intermediary, but the point is that owning a business is a real asset. It is part of the physical plane as much as ownership of a painting or a gold coin.

So saying Munger advertises paper leads to misrepresenting the entire story. I agree that Munger does a poor job in defending his position, but this does not render his idea wrong.

Comments:
a) If you buy debt, in which of these cases are you? I'd say if you lend money to a company, you are an investor, i.e. you are in case (2). If you lend money to a consumer (includes the government), you are foolish? At least you are a gambler.

One of the key mistakes of the old system is that it advertises precisely the lending to consumers as "savings" (fallacy of the risk-free return on government bonds).

b) Munger is an idiot when he says if you buy gold, you are a jerk. For the following reason. For your surplus work, you initially receive medium of exchange. When you now buy gold with it (or valuable stamps, paintings, etc), the medium of exchange passes on to someone who wants to sell gold. That other person now has the medium of exchange and thereby the option to consumer it, to invest it, or to be foolish with it.

So when you buy gold, you just defer your surplus into the future. But the seller of that gold now recalls his stored purchasing power and then has the option to employ it.

Perhaps Munger never thought this through and so gives a garbage response. But he understands it and gets it right as far as his own actions are concerned.

Victor

Nickelsaver said...

Wandee,

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

victorthecleaner said...

Sorry, no time to fix plenty of typos, hopefully not so much thinkos.

Here is finally the summary of my expedition to TF's site. What struck me is that they all wanted to introduce hard money and then be able to borrow it. I'll never get this logic.

Victor

Nickelsaver said...

Physical gold has an added bonus as savings...your wife cant spend it at the department store.

Nickelsaver said...

Wandee,

With regard to green energy.

"In the real world, this also happens: during the recession following the artificial boom period, resources need to get rearranged; certain projects need to be abandoned (like hunting for gasoline in the sushi economy); and critical intermediate goods (like boats and nets) need to be replenished since they were ignored during the boom.

If we are talking about already developed and implemented green energy practices, that's fine. The compact fluorescent light bulb for instance. It's here to stay.

But when we are talking about alternative fuels that cannot compete with tradition fuels - this is the direct illustration within the Sushi Economy.

ethanol from corn
chevy volt
solar and wind energy

The fact that many of these are politically driven more than market driven will give you a clue as to there cost effectiveness. If the USG has to subsidize it - it is not.

costata said...

Part 1/2

VTC et al,

Have you read any material from the economic thinkers who base their work on the theories of Henry George and some of the classical economists?

I think that this paper titled “Cuckoo Economics” by Gavin R. Putland outlines their thinking quite well. Here’s an extract from this paper:

2. Counterfeit “capital”

“The assets known as the “means of production” fall into two categories:

>> Assets that taxpayers can neither create nor destroy nor move out of the taxing jurisdiction may be called land-like assets or site-like assets (where a site means a piece of ground or airspace, including any attached rights to erect buildings on that ground or into that airspace, but excluding any actual buildings).

>> The rest — that is, assets that taxpayers can move and/or destroy and/or refrain from creating — may be called house-like assets.

By this terminology, house-like assets used as means of production include not only buildings and other fixed structures, but also industrial and commercial equipment of all kinds (fixed or movable) and stock in trade. The great classical economists from Adam Smith (1723–1790) to Max Hirsch (1853–1909) called such assets capital.

Because the production of house-like assets adds to the total wealth of humanity, and because the profits from such assets are an incentive to produce the assets, capitalists advocate the private ownership of house-like assets and the private appropriation of profits derived therefrom.

Land-likeassets include not only sites, but other natural resources (which cannot be created by human effort), statutory monopolies and limited licenses (which can be created only by governments), and the so-called natural monopolies enjoyed by providers of networked services such as electricity, gas, water, railways, and (at the time of writing) telecommunications.

Returns on land-like assets, net of the demands of labor and capital, are known as economic rent; owners of such assets constitute the rentier class. The term “rentier” should be understood as functional rather than personal, because the same person may perform more than one economic role. (For example, one man may be a worker and a capital owner and a rentier — and, under present arrangements, may lose more in the first two roles than he gains in the third.)”

Continued/

costata said...

/Continued

Part 2/2

(Extract from “Cuckoo Economics” continued below.)

“From the viewpoint of taxpayers, land-like assets cannot be produced, but can only be acquired. Such acquisitions do not add to the total assets of humanity. Furthermore, while the returns on labor and capital applied to a land-like asset are incentives to apply that labor and capital, the return on the asset itself (net of the demands of labor and capital) is not an incentive to do anything except acquire the asset; indeed, the party acquiring the asset need not be the one applying the labor or capital.

Therefore the argument by which capitalists rightly defend the private ownership of house-like assets and the private appropriation of the returns on house-like assets is not applicable to land-like assets. But they apply it anyway!”

(End of extract from “Cuckoo Economics”.)

(Me again) Since I view a house as a consumption item I prefer the classical view of capital described in this paragraph above:

… assets used as means of production include not only buildings and other fixed structures, but also industrial and commercial equipment of all kinds (fixed or movable) and stock in trade. The great classical economists from Adam Smith (1723–1790) to Max Hirsch (1853–1909) called such assets capital.

At the same time I see a great deal of merit in the Austrian perspective on savings as capital. Many of the Austrian economists I have read reference savings as the indicator of an increase in the rate, and direction, of capital formation. If savings are increasing then capital is forming. The net proceeds of productive activity is accumulating in savings - wealth creation. If savings are declining then capital is being destroyed.

In order to try to resolve any conflict between the notion of savings as the source of capital and the classical view I have been working on a definition of savings as: the accumulation of stored value.

We can store value in any classical definition of capital goods, hard assets or stores of wealth (such as fine art) but also including, for example, intellectual “property”. Each of these stores of value could have varying timeframes in which they remain durable. If I had to put a label on this I would call it the Stored Value Theory of Capital Formation (where the increase or decrease in the stock of stored value indicates the productive capacity and/or productivity of the economy).

Totara said...

One of the most thought-provoking accounts about the idea of what capital is, that I have come across in recent months, was an article by Herman Daly, a former Senior Economist at the World Bank.

The full article (subscription required) is at http://www.sciencedirect.com/science/article/pii/S0921800911004137 but there is a shorter version at http://steadystate.org/growth-debt-and-the-world-bank/

It talks about the problem of a lack of 'bankable projects' available to generate an acceptable rate of return. Throwing more 'capital' around a developing country didn't generate the economic growth that the World Bank was hoping for. Daly goes on to question what the limiting factors might really be (scarcity of natural resources) as well as trying to define what capital really is.

One quote Daly cited that I liked was from Frederick Soddy who said that: "Capital merely means unearned income divided by the rate of interest and multiplied by 100".

The article was commented further on at http://thearchdruidreport.blogspot.co.nz/2011/12/future-cant-pay-its-bills.html. John Michael Greer also emphasises the important distinctions between what he calls the 'tertiary economy' (the monetary plane) from the 'primary' and 'secondary economies' (the physical plane) from a Peak Oil perspecive in his book 'The Wealth of Nature' which I found very insightful.

http://www.amazon.com/The-Wealth-Nature-Economics-Survival/dp/0865716730/ref=sr_1_1?ie=UTF8&qid=1331539522&sr=8-1

Sorry for all the links in the long form. My skills at Blogger are pretty rudimentary.

FOFOA said...

Hello Victor,

I agree with you in principle regarding business ownership. But are you suggesting that the stock market portion of the $IMFS is sending price signals that support the Superorganism's drive for economic sustainability? It's one thing to understand business and take on that risk/reward as an informed participant. It's something else to chase paper gains in the stock market. And if the $IMFS stock market is not assisting the Superorganism, how is a stock investor not a jerk under Munger's definition?

If I save (your option 3), am I not entrusting my purchasing power more so to the Superorganism than if I invest (your option 2)? When I buy gold, my deferred consumption (saved purchasing power) is being evenly distributed to all savers (the drivers of economic expansion) rather than to whatever singular choice the $IMFS is telling me will "do well" in the near term, like the iPad 5. If I choose to invest, it seems that I am assuming the risk/reward that my choice is superior to the Superorganism's average. If I'm right I will succeed. But with the pricing signals of the NYSE all you have to do is get out in front of the momentum of other momentum chasers. It seems like that should work, so maybe you're right. ;)

Sincerely,
FOFOA

RJPadavona said...

Hello Friends,

I think we're at a very important crossroads (in the context of history) with regards to savings and capital. I believe it to be a result of the exponential growth in technology.

Some of you may be familiar with the term 'Internet Reformation'. What this alludes to is the comparison between the Gutenburg printing press and the Internet, and the role both have played in reshaping the world as we know it.

At the time the Gutenberg printing press was invented, the Catholic Church was the foremost power structure in the world. The printing press eventually enabled the Protestant Reformation to occur. No longer did people have to rely on the good word of the Catholic Church for their religious texts. They were able to interpret translations, print them how they saw fit, and distribute their writings to the masses. This caused the predominant power structure in the world to have to take a step back. All because information was allowed to FLOW more freely.

Not only was the Protestant Reformation born out of the invention of the printing press, but also was The Renaissance and The Enlightenment. Today, the Internet is playing the same role as the printing press, only at a much faster pace. Honest information is now allowed to FLOW more freely. No longer do we have to rely on establishment sources for our history and our news. As anyone with eyes can see, this is having a major impact on the shaping of world events.

I'm sure some of you are asking "What the hell does this have to do with savings, capital, etc?" Well, if you follow this blog there's a good chance you believe Freegold to be an inevitability as a result of monetary evolution. Many years from now, people will look back at this point in time as being even more monumental than the Protestant Reformation, The Renaissance, and The Enlightenment. Why? Because honest information AND honest money are hitting the world at the same point in time. Not only will value be able to FLOW more freely, but honesty will as well. This is huge.

I have no idea how this is going to impact how people view savings and capital, but I'm sure it can only be a positive force in the long run. Why? Because more honesty is being introduced to the world. Sometimes the truth hurts, but it always makes you stronger in the end.

As a follower of this blog, I've realized that not only are we frontrunning central banks, but we're also frontrunning the next Renaissance or Enlightenment. If we're significantly more wealthy than the average person as a result of owning physical gold, it's only logical that people who think like us will have a greater chance of becoming more influential in the world, whether it be on a local, national, or international level. As events unfold as we foresee them, all the people who thought we were kooks will most likely start to listen to our reasoning. How can this be a bad thing for the future of savings, capital, and humanity?

FOFOA, whoever you are, I hope your last name isn't Da Vinci, because it would be a shame for anyone in the future to confuse you with that other Renaissance Man.

http://www.youtube.com/watch?v=Q3gViF5SIWw

RJP

The Engineer said...

Thanks for the post, FOFOA! Great as always.

A little bit off-topic, but I need some help:

1- I have 10% of my "PM basket" in PerthMint coins, 35% in Pamp Suisse 1 oz bars and 55% in gold bars taken from the exchange of my country. My question is, it is a good choice?

2- The gold bars were taken from the exchange and I would like to know if there is a easy and discrete way to check if they are real or not. Someone have tested theirs?

3- Regarding safety, what you all use to hide your metals? We have few options (I also believe we need to have the physical ownership, so no bank, no exchange can be used).

Thanks and regards!

Bjorn said...

Re The Engineer

The easiset way is of course to check if the density is right. (Easy enough with a good scale and a bucket of water) This way you eliminate all forms of fakes except perhaps gold plated tungsten. If tungsten worries you, perhaps
this seems like a good idea.


Regarding safekeeping, thats more a matter of personal choice, but I certainly wouldn´t keep it all in one place.


Here are some general tips on hiding things around the house.

Winters said...

comments? (no subscribe checkbox)
[oh - 'subscribe by email' hyperlink is visible after hitting preview]

@engineer
it wouldn't be prudent for everyone to tell you where their hiding spots are. use google. think about metal detectors :)

Winters said...

@Bjorn
Interesting stash link. will put that in my iDevice

----

re:

"The $IMFS heaps the greatest rewards on those who invest in consumables, like APPL, rather than infrastructure or higher order capital goods"

Is this saying my iPhone is a consumable? I understand it isn't a tractor say that helps me produce more wheat...but I use my iPhone as a book more than a gaming toy. I think of consumables as paper, toner cartridges. Used once and discarded.
So a capital good is something that helps you produce more widgets, an injection moulding tool say....but an iPhone since it doesn't produce new things is counted as a consumable even if it is durable over a few years?

----

Lastly thanks all for the book recommendations on the last thread for NickelSaver. I'm looking into getting that Hazlitt book.

AdvocatusDiaboli said...

to save / Saving(s) / saver

I really love this posts, since it is one of the first that takes a look at the physical plane.
Especially the island example is great, since we learn: "Saving" does not exist, except when you get your suzi while you can and put your suzi in the fridge. There is no way to avoid getting screwed by the Krugmans and socialists of the world ruinning it.
Let me precise the FOFOA's concept of savings for the individual: "Not getting paid, but instead hoarding tokens, in exchange for the real stuff and labor you parted from".
What we learn: Take your choice between the golden tokens, the paper tokens or take the real suzi in your fridge, since a "holy magical savings" for the individual does not exist.
Greets, AD

Woland said...

I personally find it easiest to think of the relationship between the
monetary (virtual wealth) plane, and the physical (real wealth) planes,
as that between two savings magnets, one in which it is put to use, and
one where it is stored. When government, the banking system or the
securities industry emit paper, be it debt or "equity", they are not
constrained by this "virtual wealth" spilling over into the physical plane,
causing price rises, for just so long as this paper holding can be made
to yield a paper return which is perceived as transferrable back to
the physical plane. To do this, ever rising "market values" must be
shown for these paper assets. The problem with this system is that it is
prone to "go critical" , as in a fukushima type chain reaction.
This is the purpose, in my view, of the futures and derivatives markets:
to be the lever by which the Fed, through its agents, can move the
virtual world via unlimited leveraged activity.
To quote FOA, "By now, everyone should understand that for every
dollar that can be bet on a rising price of "paper gold" (or paper
anything) three dollars can be made available to create and sell them
the other side of the bet". As in suppressing paper gold, so in
boosting of paper assets of all kinds.

Jeff Snyder said...

@victorthecleaner,
Your defense or "clarification" of Munger's position is thought-provoking and in principal ougth to be correct, but I disagree that investing in stock is, in the current system, investing in productive enterprises. Currently, investing in stock is part of the savings hyperinflation that FOFOA is discussing. IF THE SHARES ARE ALREADY ISSUED, all that the 401ks and other "investors" are doing by pouring $$$ into those shares is pumping up asset values in a trading scheme, resulting in ever-increasing out-of-touch-with-reality earnings-per-share valuations. Companies hardly ever issue shares to raise capital for expansion any more (and most IPOs are a scam). Capital can't compete with debt -- the artificially low rates engineered by central banks and the tax advantages of debt. The manipulated "price signals" of debt thus destroy real capital. Munger's defense is always the defense that the paper pushers use: we are raising capital for productive businesses. Except for start-ups, which are not yet exchange-eligible and are outside the stock exchange market, and which raise $$ through private offerings, this is demonstrably untrue. Share capital is not the way companies fund expansion anymore.

somanyroadsinvesting said...

I think the pt that really gets me on Buffett/Munger's pt about saving vs. investing is they seem to greatly gloss over the fact that they are unusual. It takes special skills and temperment to be a great investor. Blindly telling the avg Joe to do the same is crazy. Most average investors buy high and sell low not because you need to be a genius to be a good investor but because their emotions get the best of them. You have to counter natural human emotions that can be very hard.

So yeah if you can find the next Apple right now of course that would be better than Gold. But what are the chances of doing that and how many people can consistently do that. Very few.

Not to mention the bulk of Brk wealth was made in the greatest bull mkt in history(1980-2000), interest fell from high teens to near zero. That cannot be replicated now.

I am currently reading the old usa gold posts. Very fascinating and great knowledge there. The one thing that has stuck out at me though was this focus on oil or cheap oil etc and the global monetary system in creating the atmosphere of paper wealth. I no doubt that played a role but I feel the biggest element was the "fat tail" of interest spread that was created by the Volker actions to move interest rates 7% of above inflation to kill it. So then the next 20 yrs we had a massive spread to create credit which in turn created massive paper gains.

Anyway my 2cents. Thanks for the post. Always enjoy reading. Thanks.

somanyroadsinvesting said...

Also one comment on the saving in gold part. I don't think that people would disagree that if you don't care for stocks and just want to save money then that is what you should do. I think if they knew for sure that gold was the savings vehicle that would be guaranteed to protect them then the flow into the metal would be massive. Its just that there is no guarantee and that makes people nervous. I think they do have a pt here.

If we invested cold fusion tomorrow we would have a new source of cheap energy that could fund our economies for the next 100yrs. I have no doubt in this scenario gold would perform poorly because you would see massive capital flow back into paper assets and people again would feel safe in fiat because growth would be restored again.

Just an example. Thx

Nickelsaver said...

FYI

You don't have to post a comment to subscribe to comments...Just hit the link at the lower right that says Subscribe by email.

somanyroadsinvesting said...

Now on Friday that hero – me – will vanquish the great evil and send the demon Austrians back into the hellfire from whence they came."

Where does this quote come from? Is this the prof from UNC saying this in fun before the debate?

When I first read it I thought it was FOFOA but then realized that did not make sense. Thx

raptor said...

Robert Mish: Front-Line Evidence That We Are Nowhere Near a Gold Bubble

http://www.chrismartenson.com/blog/robert-mish-front-line-evidence-nowhere-near-gold-bubble/72283

JR said...

Hi somanyroadsinvesting,

"The one thing that has stuck out at me though was this focus on oil or cheap oil etc and the global monetary system in creating the atmosphere of paper wealth. I no doubt that played a role but I feel the biggest element was the "fat tail" of interest spread that was created by the Volker actions to move interest rates 7% of above inflation to kill it. So then the next 20 yrs we had a massive spread to create credit which in turn created massive paper gains."

You should read Credibility Inflation!!!

The Setup

Part of the reason the rest of the world did not abandon the dollar in 1971 was that the rate of economic expansion flowing from Middle Eastern oil cheaply priced in U.S. dollars was already exceeding the expansion rate of the money supply. So the switch from a semi-gold-(con)strained monetary system to a much more expandable "balance sheet money system" as I like to call it — or another name I like is "purely symbolic monetary system" — allowed for the non-deflationary addition of many new "quality of life" gadgets, widgets and shipping lanes that the world had never before imagined.

For the next three or four decades we would be able to comfortably afford the new introduction of Betamax VCR's, microwave ovens in every home, personal computers, DynaTAC cell phones, camcorders, digital cameras, LaserDiscs, Compact Discs, DVD's, MP3's, and on and on. Eventually, all of these wonderful products would be built cheaper by someone else on the other side of the world and shipped to us cheaply using the oil purchased from the Middle East with easily available U.S. dollars.

[...]

So the international consensus was to let the U.S. default outright on its gold obligations rather than lobbying for a revaluation of its gold at a new fixed rate. But then continue using the dollar anyway, as long as relatively cheap oil could be gotten for dollars.

And with this decision, the stage was set for a renewed global (Western?) economic growth spurt, much like after the end of WWII. Only this time, the value lost through the non-delivery of U.S. Treasury gold would be more than replaced by the value oil brought to the new world economy, especially with first-of-a-kind products like Pong, released for the Christmas season in 1975.

[...]

But as gold's price began freely rising in the global marketplace, the old alarm bells went off in the dollar's management office. The dollar, which had always been viewed at par with gold, was now seen to be falling as gold soared. So during the mid to late 70's the U.S. Treasury and the IMF held a series of gold auctions to flood the market and quell the perceived danger. But by 1979 the demand for gold was so overwhelming that the auctions had to be stopped.

Through '78 and '79 the dollar plunged against foreign currencies, and in July of 1979 a desperate Jimmy Carter appointed the tough New York Fed President Paul Volker to head the "deeply divided, inexperienced, soft and indecisive" Federal Reserve Board.

cont.

JR said...

cont.

Returning to the U.S. on October 6, Volcker called a secret emergency meeting in which he announced a major change in Fed monetary policy. The Fed would switch from controlling interest rates through the Fed Funds rate to directly controlling the money supply through bank reserves. One of the side effects of this sharp policy change was that interest rates would now be governed by the marketplace rather than the Fed. The Fed did still raise its discount rate from 11% to 12%, but then the market took the Prime Rate up to 20% within 6 months where it mostly stayed for the next year and a half.

,...]

In early 1980, Volcker's new Fed policy began to bite. As interest rates rose, the Dollar first slowed its descent, then stopped falling, and then began to rise. Both the public and the investment community which had stampeded into Gold were lured back into paper by this huge rise in interest rates – and by the prospect of a higher U.S. Dollar.

Many facets went into this change in investment attitude, but one concrete change in the U.S. financial system was the most telling. Way back in March 1971, four months before Nixon closed the Gold window, the "permanent" U.S. debt ceiling had been frozen at $400 Billion. By late 1982, U.S. funded debt had tripled to about $1.25 TRILLION. But the "permanent" debt ceiling still stood at $400 Billion. All the debt ceiling rises since 1971 had been officially designated as "temporary!" In late 1982, realizing that this charade could not be continued, The U.S. Treasury eliminated the "difference" between the "temporary" and the "permanent" debt ceiling.

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

The global stock market boom of 1982-87
The Japanese stock market/real estate boom of 1988-90
The Dow (and then Nasdaq) led boom - late 1994 to March/April 2000
The great global real estate boom of 2002-06
The global stock market revival of 2006-07 [1]

And thus, in 1980, began the modern era of Credibility Inflation.


Salting the Mine

Most simply stated, credibility inflation is the expanding confidence in the fiat financial system to always deliver a higher payoff tomorrow than today. And through credibility inflation we ultimately destroy the currency structure by believing it can somehow deliver more than reality will allow.

JR said...

Hi somanyroadsinvesting,

The quote is from the blog post of the Keynesian, Dr. Karl Smith, tying to drum up interest for the debate. It is linked in FOFOA's comment as " agreed last August."

d2thdr said...

I wonder how many job profiles will be in existence in the era of RPG?

d2thdr said...

RJP good post. IF you haven't read Blondie's old posts from his own blog I would encourage you too. It has changed many of my opinions about future . BW and congrats as well.

d2thdr said...

somanyroadsinvesting....I think future space travel etc may not essentially be all fiction after all. 7 billion people have the potential to benefit from the changes in the current system. The current system has involved just 20% of mankind in its progress. The 80% if the contribute to the progress will potentially take us where no man has gone before.

There is so much positive to look forward to in a system where the reference point is gold.

Motley Fool said...

somanyroadsinvesting

I think it was perhaps one or two threads ago where I said that if we were to develop free energy, such as cold fusion, then the value of gold would explode to the upside.

It may seem counterintuitive, but it is true.

Think on it this way. Gold is a claim on a fraction of the production of all goods everywhere. What would happen to the productivity of humans if we were to discover cold fusion, both vertically and horizontally?

People seem to forget that the capacity for production is also of value, and can be seen as part of the wealth of the world, in addition to land and machinery, etc.

TF

somanyroadsinvesting said...

JR thx for the replies. Yes I have read that post but yes probably worth a reread.

d2thdr, yes I hope the reference pt is gold. More hopeful is that it is in a time frame for us to enjoy it. Seems like the way things are playing out,w issues w the euro, then housing bust in Australia, Canada then who knows maybe china seems like this facade of dollar strength could be stretch out longer and longer.

Motley Fool said...

Hey FOFOA

I am a bit confused. There doesn't seem to be much to discuss here. Nevertheless I shall try.

“Does the $IMFS transmit any price information that is relevant to the Superorganism anymore?” No, with the caveat that this is the broad answer and in some minor ways it still does, if poorly.

“The $IMFS heaps the greatest rewards on those who invest in consumables, like APPL, rather than infrastructure or higher order capital goods.”

Disagree, as a technical point. The highest rewards at present goes to those mentioned initially that simply manipulate the $IMFS to receive goods, and those with the political power to take goods by force and mismanage and steal the proceeds.

“ If they are saving, the economy will expand (sustainably or unsustainably).”

I would generally agree, Ii you define aggregate savings as and amount of excess capital saved after capital depreciation of secondary goods is taken into account. If not then I will point out that technically it is possible for aggregate savings to occur whilst the economy contracts. This of course is when capital destruction due to war/neglect/lack of maintenance etc. exceeds net savings. ( This to a large part is what happened to the American economy as illustrated by your island analogy and due to the messed up signals provided by the $IMFS).

Looking forward to your new post. :)

TF

Michael H said...

victor, FOFOA, and Jeff Snyder, RE: investing:

I agree with Jeff Snyder that, in the current economy, investing in stocks is not the same as investing in a business. With P/E ratios where they are and dividends non-existent, investing in stocks works only due to the ‘greater fool’ effect. Which, incidentally, is just the same as gold: you buy the stock, and your medium of exchange is not eliminated but rather transferred to that previous owner of the same stock.

Of course, I think we will run out of stock-buying fools before we run out of gold-buying fools!

Boefke said...

RJP Spot on!

Our next system will be unbelievable transparent in all different ways. The transition into this system is the last step in a process.

During this process different occasions contribute to the end result. The growing influence of the internet (with it's transparency) plays a key-role here. Very nice comparison with the Gutenberg printing press, which was also a turning point in a process.

JR said...

Hi MF,

There is a reason FOFOA wrote And what of investment? immediately before "The $IMFS heaps the greatest rewards on those who invest in consumables, like APPL, rather than infrastructure or higher order capital goods."

He is talking about investors, and pointing out investors who invest in "consumables," or lower order goods, do better than investors in more higher order goods.

Of course those who manipulate the $IMFs to get stuff for free benefit the most:

Part of what pisses people off so much about the $IMFS is that it seems to direct and facilitate the flow of massive amounts of cool physical plane stuff into the hands of those who contribute little more than tweaking the monetary plane in their favor.

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

capital depreciation = consumption.

savings = production - consumption

If there is a war or capital is destroyed by a natural disaster, then we aren't producing as much. The big point is that savings is what drives economic growth, and irrespective of where an economy is (even if it just got bombed or destroyed in a tsunami), if the economy is savings, economic growth will follow.

Cheers, J.R.

“ If they are saving, the economy will expand (sustainably or unsustainably).”

Motley Fool said...

JR

Thanks, missed that qualifier.

As to the other, was just pointing out that it is necessary to explicitly state definition of savings as glossing over that implicit point can cause confusion.

The current dominant economic theory ($IMFS system) does not take capital depreciation into account when considering savings as illustrated so poignantly by the exchange between Krugman and Murphy.

Peace

TF

AdvocatusDiaboli said...

RJP & Boelfke

"The growing influence of the internet (with it's transparency) plays a key-role here."

WTF are you talking about? I guess you havnt been on e.g. YT without being logged in, and see what the masses of sheeple demand: Education or the dumbest sh!t human trash can come up with?
okay okay, forget about the unwashed masses, just take a look at the "educated masses" OG WarrenBs, Krugmans or Draghis of the world. I seriuously believe that they actually really believe in what they are talking about. Or I guess you have never been personally to any kind of upper management meetings...must be kind of mobile phone radiation toasting the brains or LSD in the water, I dont know, but "awareness" looks different.
Greets, AD

victorthecleaner said...

FOFOA,

are you suggesting that the stock market portion of the $IMFS is sending price signals that support the Superorganism's drive for economic sustainability?

This is a difficult question because the market is so complicated. Here is my honest opinion on this.

When you prepare for your retirement, you should think about how much to save and how much to invest, say 40% saving, 60% investment. With the investment part, if you do not run your own business, you should still try to avoid the middlemen as far as possible, for example, purchase all stocks from a broad index (such as the S&P 500) with equal weight in US$ terms. Then keep these shares until retirement. No trading. No 'professional' adviser. Just use a discount broker and do it yourself.
Then, perhaps once a year, you adjust the allocation. This way, you 'own' a certain share of the whole economy and participate in its "return on equity". The return on equity is the compensation that the business owner receives for his efforts in providing capital to run the business.

There are long term statistics (going back far beyond the Great Depression) that the average return on equity is about 6% to 6.5% in real terms.

Why are there all these stock market bubbles that get gullible investors burnt? Firstly, I think they will always happen, and this is why you should just own and be patient but not trade. This way you capture the long term average and are not exposed to other peoples' follies. Just switch off CNBC for good.

Secondly, I suspect that stock market bubbles and all these aberrations happen primarily when there are speculators in the market who can use a lot of leverage and who operate with borrowed funds supported by artificially low interest rates. Yes, this is a distortion due to the old system. I don't know the full answer, but you might be able to demonstrate empirically that the worst bubbles always happened when interest rates were kept low and lots of speculators were in the market. If that's the case, then there would be fewer and less serious bubbles after the transition, and so investing might even be 'safer'.

...

victorthecleaner said...

Finally a warning. In goldbug circles, people often claim that a gold standard would have a deflationary bias (with respect to goods and services) and therefore the owner of gold would automatically capture a real return on investment just by doing nothing. I find this argument suspect. There must be some sort on equilibrium between saving and investing. Saving has fewer risks, and so investment ought to offer greater rewards - otherwise nobody would run a business. I know this can be distorted in the short run, but it certainly cannot in the very long run.

We know empirically that the real return on equity has been remarkably constant (over time periods of 30 years and longer) at 6% to 6.5% in real terms, over very long time frames, going back well into the 19th century. So I would not expect that to change much after the transition.

This, in turn, means that the return on saving, i.e. the return on holding gold would be substantially less than these 6% in real terms - if there is any return at all.

When I buy gold, my deferred consumption (saved purchasing power) is being evenly distributed to all savers

When you buy gold in order to store your surplus, you pay medium of exchange to the seller of that gold, and so the seller gets to decide what to do with the newly acquired medium of exchange (consume or invest). In aggregate, when people save (by purchasing valuable assets), their purchasing power is transferred to those who wind down their savings at the same time.

How much purchasing power your gold is worth, is determined when you try to sell it. This depends on how many people are trying to acquire gold when you try to sell it. The sellers of gold will receive precisely as much purchasing power as the buyers of gold are trying to store in gold at the very same time.

Jeff Snyder,

IF THE SHARES ARE ALREADY ISSUED

The answer to this question is actually known. There is a fantastic and readable book:

http://www.valuingwallstreet.com/

and also a metric to assess whether people are just driving up prices or whether buying shares actually helps expand the productive capital of the economy: Tobin's q. Andrew Smithers regularly publishes the figures:

http://www.smithers.co.uk/page.php?id=34

The quick answer is as follows: Right now, the U.S. market is quite a bit overpriced whereas the European markets are generally a bit cheaper than average.

If you just follow my advice above (buy a mixture of everything, don't trade, just hold), the present over-valuation of the U.S. market puts you at a slight disadvantage in terms of the long term average.

But it is important to understand that there is no fool-proof way of timing your entry. That's why I still recommend to buy a small amount at regular intervals, unless you know exactly what you are doing and unless you understand the statistics of what you are trying to do.

this is demonstrably untrue. Share capital is not the way companies fund expansion anymore.

This is demonstrably false. If you are interested in this, please get hold of a copy of Smithers-Wright.

Victor

Nickelsaver said...

Perhaps one ought to invest in as much stock as they understand. That would put me at 0%

victorthecleaner said...

The next point is that we are expecting a tectonic shift in the international monetary system and that there is an obvious way of speculating on this outcome. Sure. But that will be a one-time event.

Even though we cannot predict the timing, so far, it has been sufficient to participate in the rising paper price of gold. Since 2001, you have received some 19% annually in nominal terms. That's a fantastic return, and I don't think there are many hedge funds out there who can match this performance.

Why is this the case even without the transition
happening? I have no idea. Perhaps the various CBs have an agreement on how the paper price should behave?

Victor

victorthecleaner said...

Nickel,

Perhaps one ought to invest in as much stock as they understand. That would put me at 0%

Good answer. But since you are already spending hours and hours here trying to understand the monetary system and the role played by gold, this raises the question of why wouldn't you spend another couple of weeks trying to understand investing in stocks.

The stupid ones will always be prone to getting ripped off. Education matters.

Victor
PS: In order to post (since this morning) I have to allow third-party cookies from wordpress.com (my login) and from blogger.com. This was not necessary until yesterday. Blogger sucks.

Bjorn said...

That is my (albeit half-baked)theory as well.some sort of truce must have been negotiated shortly after the release of the Euro. How they have managed to keep it together this long is another story, and quite frankly beyond me.

AdvocatusDiaboli said...

VtC,
about stocks: I always only did "stock picking" about companies I was personally convinced and really wanted to invest in (e.g.Intel, Exxon, CocaCola...) great until now, sold out almost all lately.
What kind of vehicles do you suggest to now go short on certain companies that will definitely fail? e.g. I am 100% convinced that Apple is a piece of crap and will crash in the close future?
Greets, AD

victorthecleaner said...

AD,

"stock picking" about companies I was personally convinced and really wanted to invest in

I am sure you don't know the statistics of this approach. If you knew, you wouldn't do it.

The problem is that when you buy only those companies that you know, these are most likely the companies that everyone knows and whose products are widely known. The problem is that cool and widely known products does not mean future return on equity, and known by everyone means that every sucker is invested which is (on average) a losing proposition.

That's why I said buy all companies from a broad index. This way you are guaranteed to get the average and cannot make any mistake. That's investing. What you are proposing is speculation - trying to be more clever than the others.

It's quite remarkable how easily you can make mistakes, isn't it?

Also the question about how to short APPL outs you as a noob. Shorting something is again not investing, but rather speculation.

PS: This is what I don't understand. When people buy a new TV set or a new car, they read all the geek magazines, do the research and compare all technical features. When people think about what to do with their money, they are incredibly careless although decisions about your savings have a huge impact compared with that car.

If you spend a week trying to decide about your next car, you should at least spend half a year trying to understand what to do with your money. Yet, people behave in exactly the opposite way. I guess we have to acknowledge the efficient propaganda.

Victor

Matt said...

"The physical plane is all that matters"
Or all that SHOULD matter if we could reach an economically efficient & sustainable economy (if humanity is capable of that and IF that is actually desirable!)

"The monetary plane exists only to assist the Superorganism in its drive toward sustainability by transmitting information through prices and lubricating the flow of the physical"
AMEN to that!

"Savers drive everything. If they are saving, the economy will expand (sustainably or unsustainably). If they are not saving, the economy will contract."
Do not agree at all. We all know savings are the excess of capital over consumption but that is not linked to economic expansion per se. A growing economy can often be a net debtor. There is far more to a growing economy than people saving, in fact it is often the opposite that is true.

"The Superorganism's natural drive is toward economic sustainability while the $IMFS is a pedal-to-the-metal consumption binge thrill ride toward economic collapse."
Agree but think it is worth noting that there is almost always an economic agent looking for a 'cheat'. The Austrians point to the thousands of years of fractional reserve credit booms distorting price discovery and leading the way to collapse FOFOA points to the $IMF for similar reasons. Both are right in my opinion but it is erroneous to think it is not part of the reality of the human superorganism or that 'fair dealing' existed throughout human history until the $IMF came into existence.

"The Superorganism's natural drive is toward economic sustainability while the $IMFS is a pedal-to-the-metal consumption binge thrill ride toward economic collapse. "
Savers drive the sustainable productive economy but their efforts represent only one portion of overall economic activity. The efforts of the superorganism are often careening between productive economic expansion and a cliff's edge of collapse for a variety of reasons (normally the same motivations that drive the superorganism itself), and perhaps if economic efficiency is not the primary outcome of the superorganism than this is as it should be.

somanyroadsinvesting said...

Nickel if you have some time take at look at 2 of the posts I have done on my blog. They basically relate to stocks vs gold and investing in general. I come at things from a little different perspective because I was a value investor most of my life.

I just felt like it was getting harder and harder to find some great situations out there. Also to do a very concentrated portfolio of ideas takes a lot of research and I am in a different pt in my life now and lost a bit of the passion to do it again.

Maybe they are on the net now dont know, but you used to be able to get a hard copy of Buffett's pre BRK partnership letters. Its like night and day. Buying a good business w growing earnings for less than cash, toll booths, blue chip stamps. But I learned a lot. I know how to recognize a good business and how to evaluate them. So in whatever the future holds hopefully I get a chance to deploy my savings at some real attractive prices.

http://somanyroadsinvesting.blogspot.com/2012_01_01_archive.html

Woland said...

Bjorn: "How they have been able to keep it together this long is another story.....
FOA: Truly, the market is not manipulated so much as it has found a short
term opposing balance. A timely political balance that has used the
unlimited fiat creation as the gold price controller. A force being used
TO SMOOTH A TRANSITION from one currency to another. Gold bugs use
this very same fiat creation to but long "fiat god contracts" and then complain because the banking reserve system which we all use can do the same. ......Actually, it's the modern Gold Bug's desire to shun
physical gold ownership that's killing him as that desire was discovered
and exploited for political means. It's free enterprise... .Gold Bugs
created a demand for something and a paper supply creation was delivered.

Alien said...

http://www.cus.org/connect/speaker-events/2012/dominique-strauss-kahn

Nickelsaver said...

VTC, SoMany,

I am not interested in stocks, as a general rule, because I don't want to assume more risk.

I am currently as exposed as I care to be in my real estate and other non-liquid assets.

Gold appeals to me as the ultimate risk aversion asset.

That being said, I might be interested in exploring "investment outlets", but not until after the transition.

Thanks

78Rubies said...

@vtc, regarding nail studios: heh, you must live in the same country as I do... Instead of factories we have a bank at every other corner... interleaved with nail studios, financial advisors and pubs. And if you're an incompetent hack (*cough* business owner *cough*), just apply for a EU dotation. Sustainability my ass.

AdvocatusDiaboli said...

VtC,
i do know quite well what i am doing, thanks for your advise on something i didnt ask;)
1.) I try never to put more than 30% in stocks. If I am convinced that a certain company pays good reliable devidend with a good business modell and is undervaluted, why not buy it? Sure, you need to be disciplined to take money of the table when the time has come and to be patient to wait for that time.
And once in a while, why not take a nice small gamble? Got burnt on SinoForrest (bought at 1,72€ now taken off the exchange), but, so what, only the money I won on GeneralGrowthProperties (1000%) before? As long as you know for yourself what small portion is a gamble.
2.) The advantage about stocks I like, is to be "liquid", outside of "currency". Much better than gold: Just stand up in the morning, hit the sell button and shortly after I have my money. Try that with €1Mio. in physical gold coins digged in your backyard.
3.) In my earlier post I stated why I more and more come to the conclusion that savings do not exist in the real world. Try to acknowledge that fact, although many humans reject it (due to some bias...). So the priority is to buy everything for my personal welfare and a nice decent living and distribute the rest which is impossible to spend reasonably, on stuff I consider undervalued.
Greets, AD

AdvocatusDiaboli said...

VtC,
P.S.
Having said that about buying what is undervalued, and taking money off the table when it isnt any longer. The problem I got is to determine, when is gold overvalued, because what I hate is my personal bias I develop towards gold, almost always buy additional yellow stones on every new FOFOA post;).
Any ideas?
Greats, AD

Jaqship said...

Hi FOFOA (and friends, esp. Costata & Totara)

Gripping post, as always. But one claim is problematic:
"If these individuals trade their earned marketplace credits in for physical capital without employing that capital in productive enterprise, then they are either consuming that capital (capital destruction) or denying other producers the use of it (hoarding, also destructive to the capital creation process)."

To me, hoarding is only destructive to the capital creation process insofar as the prevailing practices of that Process warrant confidence. Many in the Peak Oil community (e.g. Greer) blast our current practices of that Process (a lack of hoarding) for leading to a grotesque waste of certain "Land-like assets" (i.e. non-renewable resources).
This waste would be reduced by the hoarding which should (under "normal" circumstances) be seen by FOFOA as destructive. (See OVERSHOOT, by William Catton, at http://www.energybulletin.net/node/6069 , esp. the sections "Solutions That Aggravate Problems" and "Living on Ten Earths" in chapter 3.)

On stocks' historical returns, Greer, Daly etc. argue that those numbers were flukes of a century in which resources were squandered to produce an unsustainable Greatest Party in History, and that the dearth of 'bankable projects' stems from the end of cheap oil.

For those who found FOFOA's post "The Gold Must Flow" to be of interest, the web site (mine) to which his post referred (http://www.collectnobel.com) was critiqued by some commenters as being hard to view, esp. in Firefox. It may be of interest that I have managed to very substantially rectify those problems.

Nickelsaver said...

Hey Bube,

"In my earlier post I stated why I more and more come to the conclusion that savings do not exist in the real world."

We have yet to hear any reasonable argument or basis for any conclusion you have shared.

Grates

AdvocatusDiaboli said...

NS,
I guess you havent read the FOFOA post of Sushi-Island...
If Mr.Krugman with his friends f*cked up the sushi production, it does not matter what tokens you hold. Tokens are tokens, no matter if made out of limited gold or unlimited paper. No sushi means no sushi. So only the sushi in your fridge count, except you have your own fishing boat by then. What is so hard to comprehend about that one?
Greets, AD

Motley Fool said...

Jaqship

My firefox still does not like your site.

Bluntly....your site seems to be a relic of the old internet. As someone else suggested the hire of a website designer would be money well spent.

Consider this constructive criticism that you are welcome to ignore. :P

TF

Motley Fool said...

Jaqship

Purple Gold

Consider this as an example of contrast. A site that also sells things gold related, albeit perhaps with a larger budget for website design than your own.

TF

Jaqship said...

The Engineer:

Being able to prove to any novice (or hard-bargaining coin dealer) that your gold is legit may become crucial. My way of being in that position is to stack up on coins which are testable for weight and size via plastic fake gold detectors (e.g. the Fisch). The obvious coins to start with are Maples, Krugs, Eagles etc. Esp. testable fractionals, so that Shrimp coin dealers will be able to afford to buy them when Freegold puts POG at mid-five figures/ oz., and the incentive to fake gold becomes enormous.

I 'll stay away from bars AT LEAST until I become so Giant that my coins become too numerous. But even then, I'll worry about fake bars.

DP said...

Michael H said...
victor, FOFOA, and Jeff Snyder, RE: investing:

I agree with Jeff Snyder that, in the current economy, investing in stocks is not the same as investing in a business. With P/E ratios where they are and dividends non-existent, investing in stocks works only due to the ‘greater fool’ effect. Which, incidentally, is just the same as gold: you buy the stock, and your medium of exchange is not eliminated but rather transferred to that previous owner of the same stock.

Of course, I think we will run out of stock-buying fools before we run out of gold-buying fools!




I agree with MichaelH (et al). But pulling us back to the physical-monetary schizophrenia of 'capital' for a second, away from the whole side-trail of investing rather than saving, there is another parallel to draw with the above quote. Which is that, to paraphrase our good friend Michael now:

you deposit your cash, and your medium of exchange is not eliminated but rather transferred to a borrower who wishes to consume it in your place

In the monetary plane, depositor and borrower both think they possess this same 'capital' that the depositor gave to the bank, and the borrower subsequently borrowed from the banker. A synthetic paper supply of "money" in the monetary plane has been pyramided on the real world's base money (the depositor has given up control over his capital and for now instead has "money" at the bank, which he may or may not get back some day, and if he gets it back it may or may not be worth something still - but at least it will be capital!).

The base money was capital, and it has left the building. The only "capital" remaining in the real world of the bank and the depositor, is the "goodwill" comprising the faith the depositor holds in the banker (and by extention the central bank, who the banker expects to step in and make more money available to him if it becomes necessary), and further "goodwill" comprising the banker's faith in his lovingly hand-selected borrowers (ahem). Until the borrowers make good and return the depositor's money to the banker, just in time for the banker to return it to the depositor. And everyone lives happily ever after, despite my misgivings about the whole endeavour.

Not hugely unlike the chasm between the real capital of physical gold, as opposed to banker-goodwill paper credit "gold". The first is 'capital', while the second is 'bullshit that might come good if I am lucky'. The credibility of "gold" suppresses the current value placed on gold. When that credibility is removed, so will the suppressive force disappear along with it.

The key difference between the schizo world of "gold"/gold, and that of "money"/money - is a central bank that can and will create any amount of money to disappear any significant problems in the world of "money". This clearly marks out "money", or even money as a poor store of value. But all the same money, like gold is IMO real capital - while "money", like "gold", is the stuff of monetary-plane mirage.

Of course, I think we will run out of "gold"-buying fools before we run out of gold-buying fools! (And that is why the "gold" market price will drop like a rock. Right before the physical gold market price, which materialises to replace it, takes off for the heavens.)

"Money"≠Wealth

Wealth=Capital

Jaqship said...

Motley Fool:

Thanx much for your input.

The items on the site to which you linked could hardly be more different than mine, in that (some of) my items are only incidentally made of gold; the point of my site is to present relics which emerged from and so boast gripping historical context.

AdvocatusDiaboli said...

Jaqship&MF,
about fake gold: What I did, is to diversify. Almost 50% bars, 50% coins. The bars I got are 250g, 500g and 1kg. All tested with an ultrasonic device. About the coins: I bought krugs,marple,phils,eagle,nuggets. All diversified in 1/10, 1/4, 1/2 and 1oz, diversizied over all different years, but the ultrasonic device I got does not work on coins.
So even if one of those items should really be faked, the rest isnt, so I can live with a few fake items (in case there should really be some).
Greets, AD

Jaqship said...

The point being, that site has no text, mine needs tons of text.

victorthecleaner said...

FOFOA,

I am not sure I like the island economy. I think two things are missing:

1) The reason why the islanders focus on consumption (using the boats to catch more fish) rather than investment (maintaining the boats) except that Krugman told them to do so. In the real world, there is a subtle distortion of incentives that tempts people to consume more than is sustainable. This is related to the fact that they overestimate (the future real value of) their personal savings.

2) A criterion to detect empirically whether this is happening. In the island economy, this is rather obvious, just check whether the condition of the boats deteriorates. How do you do this in the real world? One idea would be to look at free cashflows and see whether they turn negative, i.e. whether capital is consumed rather than being steadily replaced by new investments.

But this is helpful only inside a given industry. Now some changes of fashion are legitimate and sustainable (for example, from horse carts to automobiles) whereas others are probably not (from factories to nail studios). Give me an objective way of deciding which one is which?

Victor

Motley Fool said...

Jaqship

Perhaps my example was poorly chosen. I appreciate that text is integral to your site. My point was only that it is possible to present it in a much more appealing way.

As it stands I have no desire to read your blob of text, even whilst the subject is of interest to me.

TF

Jaqship said...

AD

An ultrasonic device that weighs c. 8 lbs. (e.g. GE's Phasor Series) is worth considering. But I'd worry about the inherent vulnerability of any complex device to breakdown etc.

MF

I'd appreciate any elaboration you could provide about your problems w/ my site in Firefox.

Peter said...

@Jaqship,

I think MF is saying you need to put some tits on it.

Peter said...

Preferably of the kind you tend to find in the basement, behind that door with "IT" written on it.

Jaqship said...

AD

I wouldn't assume that repair of such a complex device will be available where/when most needed.

Peter

Pardon my ignorance, but you've lost me.

Jaqship said...

Taking some minutes or so of a break from this. Thanx to all for input.

Peter said...

Pardon my ignorance, but you've lost me.

Yaaaay! WINNING! :)

AdvocatusDiaboli said...

VtC,
I love the Sushi-Island, exactly because of that. How do you know exactly what is reasonable and what isnt? Maybe the Krugman is right on some issues, maybe not, who knows, you, FOFOA? And who is it to decide? Dicator of Sushi Island?
The best thing would be to have a boat owner stock company, a fishing company, a rice company, a net repair company all listed on the sushi island stock exchange (together with their bonds)....;)
That way the "market" would show signals and direct the capital efforts, right decision will be valued and poor decisions punished, but anyway, you never know for sure in advance what the future will be...
Greets, AD

RJPadavona said...

AD,

You said:
"WTF are you talking about? I guess you havnt been on e.g. YT without being logged in, and see what the masses of sheeple demand: Education or the dumbest sh!t human trash can come up with?"

Sure. For every one person who uses the Internet for productive means, there's probably a thousand who use it for garbage. So what? This is life. Would you know about Freegold without the Internet? Would I? Or anyone else who've been enlightened by FOFOA? Hell no. Think of all the millions of people around the world who have discovered some form of truth because of more honest information that they received from the Internet . Your point is ridiculous.

You said:
"Or I guess you have never been personally to any kind of upper management meetings"

Hell no. I'm a damn barber. Why would I go to upper-management meetings? However, my profession HAS enabled me to have an excellent bullshit detector. So, I believe you go to upper-management meetings about as much as I believe I have a 12 inch pecker. If you ever went to an upper-management meeting, I'd say it would end up like this:

http://www.youtube.com/watch?v=dXiRcUNn64o

d2thdr and Boefke,

Thanks for the compliments. Glad you liked my post. I've read Blondie's 'How the West Was Lost' and his posts for maybe the last year or so. I'll have to go back and look at some of his older posts. Thanks for the tip.

Nickelsaver,

Victor's right about investing over a broad index if you're going to invest in stocks. Since you don't have a Supercomputer capable of high frequency trading, the odds are not in your favor if you want to speculate. However, if you do feel like gambling a little, the book that helped me out the most is 'How To Make Money In Stocks' by Bill O'Neill:

http://www.amazon.com/How-Make-Money-Stocks-Winning/dp/0071373616

I don't speculate much. I just piddle a little. If I think something is cheap, I might buy. I basically have a trading account as a slush fund so if I need some cash I can sell some stocks if I need the money for something. Even with my limited abilities, I can average a better return than I could putting my cash in a CD or savings account.

I just don't want to put everything in physical gold for the simple reason that if I needed to raise some cash for an unexpected expense, I'd feel like I had a death in the family if I had to part with some of my Precious!

To each his own.

RJP

AdvocatusDiaboli said...

Jaqship,
for my personal uses, I only got a device that tests the "metal thickness", in order to determine if there is a wolfram core or not (~$300), universal usage for any kind of metal.
If it breaks, so what? I order a new one, if armageddon is already upon us and I cant get a new one, I guess I have other problems and the functioning of the device is a minor problem.
Greets, AD

AdvocatusDiaboli said...

RJP,
I bought gold before I got to know FOFOA. Why I bought it? I guess some typical goldbug instinct: "dont trust this BS system any longer.", looking for avoiding counter party risk, "taking my wealth out of the system".
Trust me for what I say, I have no reasons to lie to you, or leave it.
e.g. The silver community is probably much bigger than the freegold community. So what? FOFOA/freegold is just a great point to rethink your position, nothing more and nothing less.
And when you are saying the internet "spreads the words", wake up!!! it does not, it only enables each one to celebrate once own confirmation bias (just think of KWN).
Greets, AD

The Engineer said...

Tranks @Jaqship & @Bjorn for your help. Appreciated!

Jaqship, my problem is that I`m not in the US. I live in South America and here is actually difficult to buy gold coins from Europe and the US.

I have bought some pamp suisse bars, because of the price offered (smaller spread) and sellers willing to ship here. But larger quantities, I could only get through the exchange.

Regards!

Jaqship said...

The Engineer

My pleasure.
Since the Fisch can test Mexican gold 50 & 20 pesos, I have some. Maybe you can get those in SA.

Jaqship said...

AD

I quite suspect that you getting a new device IN TIME could get dicy well before we'd get to Armageddon, e.g. in a temporary glich / rolling blackout of the grid.

78Rubies said...

@costata re intellectual "property": slightly OT; there's a book by an Austrian scholar Stephan Kinsella called "Against Intellectual Property" where he makes very good case for abolishment of nearly all forms of IP (patents, copyright, …) Since you seem to be interested in the theory you might find it enlightening, perhaps? If so, google it, it's freely available as PDF.

Jaqship said...

MF

My request for elaboration esp. refers to such aspects as the size of your screen (e.g. Iphone size?) and whether the worst aspect is text-wrapping or what?

Nickelsaver said...

Tokens are tokens, no matter if made out of limited gold or unlimited paper.

If you really believed that, you wouldn't own a gram.

AdvocatusDiaboli said...

NS,
you still dont get it: I really believe in that. I am one of the persons FOFOA refers to, saying image there is a superproducer that have everything (farm, canned beef....). Now the only question is what kind of tokens to hold with the surplus not to spend on the physical plane? (free)gold or paper? I guess the answer is simply, still I am not so native to exchange tokens, not matter if gold or paper, with real wealth.
Greats, AD

FOFOA said...

Hey Victor,

"I am not sure I like the island economy. I think two things are missing… Give me an objective way of deciding which one is which?"

My goodness you ask a lot of your island analogy. Who was it that said, "ask not what your island analogy can do for you, but what you can do for your island analogy"?

We can thank El Diablo for introducing a few new aspects to Murphy's analogy. Let's see if we can take it a little further. Let's introduce a taste of reality. Let's say that some of the workers on the island are debtors (net-consumers) and others are savers (net-producers). In fact, let's introduce a few new starring net-producers who each have the foresight to see the destructive capital trend the "new prosperity economy" set into motion. We'll focus on two hoarders, two entrepreneurs, an investor, and we can even add a limited stock market.

The first hoarder we have is AdvocatusDiaboli, the rich CEO of the sushi factory who realized that the way things were going, the island would soon have to get by on less sushi. So rather than waiting for that to happen, he forced its effects to appear sooner by hoarding up pallets of sushi for himself in his secret underground refrigerator. That way, when the economy finally collapsed, his own rate of consumption wouldn't be affected because he could supplement it by consuming his sushi reserves. The only things AD need worry about now are the sushi spoiling before he can consume it and the islanders finding out about his stash and hanging him from a tree as they take back the sushi.

We have another hoarder, let's call him Ronnie James, who only hoards up raw purchasing power like a battery stores electric power. We can also think of his stored purchasing power as kind of like spare horse power in a muscle car. You don't use it all the time, but it's good to know it's there if you ever need to step on the gas to get out of the way of a Prius pileup.

Next we have an Austrian entrepreneur we'll call JR. JR is a high producer/low consumer by nature, so when he sees the trend toward degradation of the capital structure on the island, he invests his excess production hours into a business idea that he thinks will someday serve the island well when its economy collapses from lack of capital. If he is successful, the island will see a paradigm shift not unlike that from buggy whips to foot pedals.

We also have another entrepreneur who sees the trend. Let's call him The Fool. He puts his excess production hours into a nail salon business figuring he'll capitalize on the spare time workers now have by giving them luxurious pedicures.

Finally, we have Victor, an investor who invests (through the SISM: Sushi Island Stock Market) in both The Fool's nail salon (at which he is also a regular patron) and JR's inland fish hatchery. Victor doesn't quite understand JR's silly idea yet, but his investing strategy insists that he include it in his portfolio even without an objective method for comparing the future prospects of raising fish babies versus polishing toenails.

And you see, that's how you give back to an island analogy that has already served its purpose by illustrating the important concept of capital consumption!

Sincerely,
FOFOA

RJPadavona said...

Watch out Irwin and Peter Schiff, I see a new best selling children's book in the making: "How Special Geeks Grow And Why They Never Crash".

I'll go ahead and spoil the ending: "Because they stayed on The Trail and lived happily ever after."

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

Mises wrote a little on the use of thought experiments and used them a lot. They can be completely unrealistic and impossible imaginary constructions like the evenly rotating economy and still help us understand fundamentals, as anyone who reads Human Action will see. The concept of capital consumption doesn't change from the island economy to the one we live in now.

Nickelsaver said...

I heard sushi island has progress a lot in the last few years...installing a mag-lev from the mainland

They wanted a connection to another analogy. The trade off, they had to subordinate their currency to that of the Mainlanders, which is dim sum. The exchange rate seemed fair at first, but it seems they do shipped more sushi than they import dim sum.

go figure

Nickelsaver said...

AD,

Sir, I want to apologize. I had no idea. Here we read of how Another, FOA, and FOFOA recommend that we ought to follow in the footsteps of giants. And all this time we've had one in our presence.

I am certain, now that we all understand this, that FOFOA will invite you to share his bi-line. For what would be more appropriate than to follow directly in your noble footsteps?

I look forward to learning how I too can build a farm and acquire 400 oz bars. And canned beef, they really make that?

And while your at it, you can share all of your incites on financial prosperity and growth. Better still, you can lead by example. You see, we are all just shrimps. But YOU are a GIANT. Surely a man of your stature can see how much the author of this blog would benefit, not only from your unique perspective, but also from an appropriately proportional donation.

Surely a man of your means could part with 50 or even 100 thousand dollars. They are after all, just tokens right?

What do you say? Show us the canned beef. Put up, or STFU.

costata said...

Hi Jaqship,

Nice to see you taking part in the discussion.

78Rubies,

Thanks for the suggestion. The Kinsella book was on my 'must read' list when it first came out but it keeps getting pushed down the list by other publications.

Basically I agree with the premises of the Anti-IP movement. The success of the efforts of James Watt and his partner in holding back the development of steam engines is probably one of the more infamous examples of patent holders inhibiting innovation.

I placed the word property in quote marks because I was in two minds about whether to describe it as such. I wasn't endorsing the current regime. Re-reading that comment there are a few things I would change. I'll probably post another comment or two on open forum before the thread closes.

Cheers

JR said...

Sushi, dim sum, farm raised fish, now spam musubi, time to consume!

JR said...

Well done 78Rubies!!

All,

A tasty appetizer of anti-IP morsels via Slate.

The main course Against Intellectual Monopoly (Cambridge University Press, 2008) by Michele Boldrin and David Levine - Two "daring" professors of economics at Washington University in St. Louis who wrote A Book that Changes Everything!

"Intellectual property" - patents and copyrights - have become controversial. We witness teenagers being sued for "pirating" music - and we observe AIDS patients in Africa dying due to lack of ability to pay for drugs that are high priced to satisfy patent holders. Are patents and copyrights essential to thriving creation and innovation - do we need them so that we all may enjoy fine music and good health? Across time and space the resounding answer is: No. So-called intellectual property is in fact an "intellectual monopoly" that hinders rather than helps the competitive free market regime that has delivered wealth and innovation to our doorsteps. This book has broad coverage of both copyrights and patents and is designed for a general audience, focusing on simple examples. The authors conclude that the only sensible policy to follow is to eliminate the patents and copyright systems as they currently exist.

Of course its available for free

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

Sexy smorgasborg of further consumptive delights - don't pig out too quickly or you won't be able to digest it all!

costata said...

Totara,

Thanks for the link to the Herman Daly essay. There seems to be a lot of common ground between the steady-state economists and the Georgist view of economic rents being capitalized into asset prices under the present regime.

It seems quite clear to me that savings cannot be securely stored in debt and debt cannot function like capital.

Cheers

costata said...

Totara,

Correction - I was confusing the book you mentioned with the Boldrin-Levine book that JR linked.

I bow to the wisdom of you and JR. I'm ordering both books and I'll put aside what I'm reading at the time when they arrive.

Cheers

Totara said...

Costata, I hope you find the book half as worthwhile as I did. Just don't expect to find any mention of gold though. Whilst the Peak Oil crowd recognise the unsustainability of our current financial system, they tend to be focussed on a longer time-line and a bigger overall picture. Somehow, storing individual wealth through a transition using gold just doesn't figure very prominently into their writings. For some, it's because they don't see gold as being of much use during a 'Mad Max' scenario (or maybe when the only items available for purchase are sushi and rice), but Greer is definitely not part of the 'Mad Max' camp.

Bjorn said...

Woland

Yes! But FOA din´t expect the balance to last for so long after the creation of the Euro, because I think he didn´t expect the BIS to continue to support the $IMFS when the alternative was in place. My (as I said, quite half baked) theory is that the managed-appearing 19% yearly increase in the $POG is the result of a deal being made between the $ faction and the € faction to smooth the transition even more, and manage the "slow burn" to unwind the paper mountain in a non crashing way, that FOA was alluding to as a remote possibility in another post. The thing is, that the $POG has barely outrun $
monetary inflation
even with the 19% increase, and the paper market has not been unwound to any significant degree. There must, IMHO, have been some tremendous effort expended to keep the game going for 10+ years after it was "supposed" to blow up.

Motley Fool said...

NS & AD

Ad is correct that both paper and gold are tokens. That does not however imply that the choice of token has no implications.

@Jaqship

I will try to continue being polite, while blunt. It does not matter if I tell you what my specific issues are. That is besides the point. Even if I told you, ad you fixed them, the site would still not interest me. There is a reason we have specialization of trade, and also a reason that webpage developers have work. This is obviously not your area of expertise,as such you cannot correct the design flaws(Obviously it would be possible if inefficient for you to do so; the use of strong language is purposeful).

Not that it is of any import, but here is another gold related example...with more text.

Rand refinery

@costata & et al re. IP

The call for the abolishment of intellectual property is the call of the socialist leeches.

At present intellectual property protection is almost useless. If anyone can refine your concept in any way then they can get a patent and all your original work becomes worthless. I know for example of an engineer that has designed something, found that it is impossible to protect the design, and spent the last ten years trying to break his design and find any possible improvements before patenting it.

Using the example of Rearden metal from Atlas shrugged- if it takes ten years to develop a product and thereafter any tom, dick and harry can make it what goddamned use is it to develop it in the first place? Taking away these protections would kill all drive for creativity in humans. It is only the leeches who has and can produce nothing that want to steal the designs of others, and in the process stagnate our whole society.

I agree, the system is not ideal and needs a overhaul.

Things like mp3 piracy has got nothing to do with copyrights being flawed and everything to do with information being priced incorrectly due to the current $IMFS system. If one could get music easily and cheaply (say 10c a song) then nobody would pirate it. The whole bloated industry is the problem.

Here is a post that relates : http://blogs.fin24.com/bertieduplessis/piracy-part-2

Peace

TF

AdvocatusDiaboli said...

NS,
I honestly thought about donating. But my religion is to pay "after the job is done", not on promises and predictions. So instead of donating $2000 today, I say, if FOFOA is right about his predictions, I have no problems to donate a couple of Krügers (or whatever coins FOFOA likes) after the transition. I really have no problem even flighing over to the US (if the TSA gulag patrol will allow that at that time), just to hand it personally to FOFOA, that would be the greatest thing after all, take my word, here and now.
But not on promises today, we have plenty of those, lets call them promise and prediction inflation.
Greets, AD

JR said...

The call for the abolishment of intellectual property is the call of the socialist leeches.

there's lotsa places better suited for you to show your ignorance fool.

Winters said...

@Jaqship/@MF
After looking at Jaqship's site on my mobile I was going to say "MF is right but the sheer terrribleness of the site adds authenticity" but after a quick look again on my desktop - Jaqship I'm afraid that despite the obvious care and gardening you have put into that site, MF is right. It's terrible :) Find a poor student on odesk.com or freelancer.com and get it fixed for a couple hundred bucks.

@AD
I must have missed the bit where FOFOA was offering Jim Cramer style investment promises. FOFOA's efforts let us view the current system from a different angle and to increase ones understanding of the failings of this system. I consider this job done and of value today. Even if the birds sang at your birth, you shot a hole in one when you were three and foresaw freegold before the big bang, surely someone of your considerable wealth derives value from the erudite discussion that FOFOA carefully cultivates here? It is no accident it hasn't devolved into a ZeroHedge style commentary. FOFOA doesn't post who precisely has donated but perhaps he might reconsider this position in your special case as a defence against the troll calls?

@JR
Seems a bit harsh. I think his point has merit that big projects requiring big R&D capital wouldn't happen if someone was able to cut your grass straight away. As MF conceeds, the current Mutally Assured Destruction patent system is also far from ideal

AdvocatusDiaboli said...

Winters,
everybody has his own reasons to donate whatever amount he considers appropriate, this is perfectly okay, thats why it is called donation. I just wanted to point out my personal opinion about that (but thats just me, everybody else shall have different views):
I hate myself, when I read FOFOA and shortly after purchase more gold. You understand, FOFOA is what it is, but I see that myself is the problem of getting a confirmation bias in reading FOFOA, thats also the reason for "AdvocatusDiaboli" and resisting to donate for this personal confirmation bias. That is basically the reason for what I wrote about my point on donations, still hoping that FOFOA is happy about my coins and accepts them therefore in case of a transition afterwards.
Greets, AD

Motley Fool said...

JR

Instead of being your usual charming self and insulting me, why not tell me why I am wrong, or point me in some direction, where arguments are presented in contrast to my opinion so as to show me the errors of my ways.

TF

Motley Fool said...

JR

Okay, so I noticed now that you have posted some links. Ever open-minded I shall peruse the links. I would be very curious to see a sound argument that disproves my position.

TF

Motley Fool said...

While on the topic... a simple solution to the problem seems to be not disallowing newcomers patents on improvements, but then also directing a part of the income generated in royalties to the producer who created the original idea, based up some judgment of relevance of prior patent.

Everybody wins, nobody is stopped from invention and patent holders are rewarded.

Granted that the judgment of what percentage is attributable to the original patent holder will not be easy, but it is not a insurmountable problem.

TF

costata said...

JR,

..there's lotsa places better suited for you to show your ignorance fool.

I have to disagree on this point JR. No better place on the planet to display your ignorance and get your head taken off eg.

The call for the abolishment of intellectual property is the call of the socialist leeches.

MF, seriously, please review the history of IP as a "value". It's a central theme of Marx. An extension of the "labour theory of value" applied to intellectual output. It's as socialist as it gets.

Motley Fool said...

Costata

Thanks, I will spend some time on it.

TF

Ps. When reviewing Marx's work, in the time Ash was around, I did find that I did not disagree with everything he said. So having been promoted by Marx is not in itself indicative of a flawed idea, though strongly suggestive of course.

AdvocatusDiaboli said...

MF,
trying to find a bridge to the monetary world, let's say with intellectual property it is just like with fractional reserve banking: There is black, there is white and there is grey.
But never try to argue with somebody who is ideologically completely diluted only capable of picking the worst black examples possible to find from some propaganda page as a strawman, having no own knowledge about the reality and the laws himself, or even owning any intellectual property by himself.
Most of these poor creatures are not even capable to distinguish between copyright, utility models and patents, having no clue how different legal approaches are taken in different countries or PCT.
Greets, AD

Nickelsaver said...

Ad is correct that both paper and gold are tokens. That does not however imply that the choice of token has no implications.

Stay Tuned For Updates

Anand Srivastava said...

MF,

There are two major forms of IP. The Patent and the Copywrite.

Patents were meant to make available inventions that were normally kept under wraps till the inventor died and took it with himself.

Copywrite was created to provide a means for the author to make money for himself from his works and work on producing more works rather than doing it as a part time job. Works Literary or otherwise are built on previous works, they don't arise in a vacuum. This is why the author must return his work to the public domain before it becomes useless. This also is important for enriching the public domain.

The major benefit of both should be enriching the public domain.

Now Patents should be given to stuff only that fulfills two conditions.
1) It should not be easily reinvented.
2) It should be really helpful.

The two conditions are necessary. Unfortunately deciding which invention fulfills the two conditions can only be measured after the fact. This means that the inventor must produce the stuff, and then if nobody can copy it then the people should allow him special privileges to give up his secret.

Copywrite should be for a short duration (otherwise it doesn't enrich the public domain), and the author should pay for it, as it is meant for commercial purpose, from his profits.

Both the IP rights are not working the way they should. They have been given powers that they never should have had. And now these are being gamed by the people who have the power and know how to extract the benefit out of it. Winners are the Disney and the IBMs. Losers are the actual small time producers and inventors.

The current IP system is not useful for humanity. The Patent system is a big mess, where you can patent binary arithmatic (somebody did it for kicks), and copywrite lasts forever.

I am a software engineer who has been watching Linux system (and the venerable GNU), from a long time, and have been completely disgusted with the two systems.

Anand Srivastava said...

FOFOA, the current inline commenting is much much better. Thanks.

AdvocatusDiaboli said...

Anand,
plenty of stuff you wrote is simply not true, or only applies to some countries, if at all.
And as a good example, if you are so into this Linux dilution, you should carefully rethink, who is earning the most money from Linux and who is actually providing/contributing most if the real intellectual work in it.
Greets, AD

Michael H said...

AD,
”I honestly thought about donating. But my religion is to pay "after the job is done", not on promises and predictions.”

I humbly propose that FOFOA’s hosting of this site as a forum for discussion constitutes "a job well done".

Michael H said...

DP,

”you deposit your cash, and your medium of exchange is not eliminated but rather transferred to a borrower who wishes to consume it in your place”

Doesn’t this assume that banks make loans from deposits?

”In the monetary plane, depositor and borrower both think they possess this same 'capital' that the depositor gave to the bank, and the borrower subsequently borrowed from the banker.”

‘Capital’ and ‘Money’ should not be conflated. So what the borrower and the depositor both have is not capital, but ‘money’, or perhaps ‘currency’. ‘Capital’ should be reserved for the physical plane only. Its value can be denominated in currency, but currency is not capital since, by itself, it cannot produce new goods and services.

Likewise, even physical gold is not ‘capital’; it is savings. It is a good that can be exchanged for other goods in the future. Just like your uncle Warren said.

AdvocatusDiaboli said...

yes, I apologize for that unappropriate wording. Sure, on one hand a good job done, in terms of showing what can be taken from A/FOA.
On the other hand you also have to acknowledge that it is about pushing a prediction, just remember the "glimpsing the hereafter".
So there are two "jobs" adressed, the one about the past, everybody can make up his own judgement about that one. But for me seriously, the one about the "predictions" of the future is of more valuable, as well as critical, in financial terms ;)
Greets, AD

P.S. And having taken the red pill is not always fun, dont you also wounder if you should have taken the blue one? ;)

Nickelsaver said...

Fool,

Windmills, Paper Tigers, Straw Men and Fallacious Fallacies

I like this post both in concept and in content. I'm going to borrow just the first sentence.

"The essence of a straw man argument is the superficial misrepresentation of statements taken out of context."

Then there is this.

"Ad is correct that both paper and gold are tokens. That does not however imply that the choice of token has no implications

The implication here is that I did not understand that gold is a token (the ultimate token in fact). And, that I need to be educated as to what kind of token it is relative to other types of tokens.

This is a straw man, in the sense that it misrepresents my position and understanding of the facts.

Furthermore, as an avid reader of this blog, I would think that you of all people would grasp the concept of loyalty.

Alas, this would require an appreciation of the difference between the "letter of the law" and "the spirit of the law"

One can fight to be technically correct in the letter, while at the same time, demolish the spiritual construct of a position. This is no more evident than in the total obliteration of the "sushi island" analogy which occurred in the comment stream.

Might I suggest a bit of self reflection.

http://www.audreymarlene-lifecoach.com/the-need-to-be-right.html

P.S. I can point to numerous times in which I was technically and/or conceptually incorrect in the comments. This is not one of those times.

Motley Fool said...

NS

The first sentence was intended as a supporting clarification on your one post, since as it stood it could be interpreted multiple ways.

"Tokens are tokens, no matter if made out of limited gold or unlimited paper.

If you really believed that, you wouldn't own a gram."

The second was intended for AD.

Try not to be so sensitive?

TF

DP said...

1/2

Thank you, MichaelH, for evaluating my stab at ascertaining whether 'money' is ever 'capital'. Your time is much appreciated.

Is it not the case that a lump of steel, a bundle of copper rods, a barrel of oil, a delivery truck, or even a lathe and a factory housing it... by themselves, cannot produce new goods and services? But if I possess all of these things, I have capital, right? I could use them towards achieving the production of new goods and services — but not on their own.

I agree with you that 'capital' should only include those things that exist in present reality (yes I am aware I am diverging from what you exactly said — that capital should be reserved for the physical plane only — but indulge me for a moment?).

For example a FRN exists in the physical plane. I can fold it and put it in my wallet. A dollar in base money reserves at the Fed is a present and inescapable commitment to print a FRN if it becomes necessary. I can use these to pay a skilled workman for turning a piece of that steel into a precision-engineered bolt, using that lathe in my factory, that I need to repair the drive shaft on my delivery truck? Without the steel, the lathe, the factory and the skilled workman's efforts (who wants to get the FRN from me or he won't do the work I need him to do), and of course the working delivery truck, I could not continue my business. So all of these things are part of my means of production: they are 'capital'. No?

By contrast, bank credit money does not exist in present reality, and there is no present commitment to print it. (Although we all know by now that it is a given, when it should become necessary the credit will be turned into base money reserves by the Fed, and will at that point become a present reality.) Since it does not really (yet) exist, I cannot deliver it to my favourite skilled workman. So I will not get my delivery truck repaired and my customers will not pay for the goods I have not delivered to them. If I am to pay the workman, I'll either have to get credit from my customers (payment in advance - good luck me!) or get a loan from someone else to pay the workman and repay the loan later when I have been paid by my customers. Either way, I am borrowing someone else's capital for a while, in order to complete my production and sale.

Physical gold is, to my mind and again like base money savings, part of 'capital' because if I don't have any savings then I won't be able to pay for the other things I will need to complete production of my goods and services. Having this excess production from the past stored in my 'savings' is what enables me to continue my business without the burden of relying on other people to lend me their capital. Without savings in my accumulated capital, I would not have the full means to achieve production. Having gold in my savings means that I can take a coin to my local pawnbroker or coin shop, get the folding base money that I need to keep the workman sweet, and get my truck fixed pronto. I could keep it all in cash, but that would just be stupid given that I know at some point scads of this worldful of banker credit is going to get monetised, thereby devaluing all of it. So I keep some cash and some gold, to offset this risk. As it happens, I keep a little cash and mostly gold - but each to his own right?

...

DP said...

2/2

Doesn’t this assume that banks make loans from deposits?

If the borrower will be able to take the loaned money and spend it, then it must be actual base money that has been somehow presented to the banker at some point or another. IMO you cannot spend banker credit, you can only transfer base money, which you fleetingly possess for the duration of the transaction. Banker credit is what the depositor retains when their deposited base money ceased to be theirs, and it is also what the borrower possesses between the time that they take out the loan and when they get around to spending the borrowed money. The deposited base money might be an overnight deal with another bank, or it might be provided by the CB in exchange for some asset of the bank, who knows? But my point is, wherever he got it, the banker must at some point provide the borrower, and eventually also the depositor when he withdraws it again, with base money that someone, somewhere, has deposited with (or gifted to, perhaps?) him. Because during a transaction where the money leaves that banker's accounting domain and enters some other banker/person's domain, base money is what is transferred. Physical notes/coins, or transferred CB reserves - but either way present-reality 'base money'.




So to cut this, rather longer reply than I had envisaged, back down to size again: IMO base money is part of real-world 'capital', but banker credit is not. Similarly, physical gold is 'capital' and unallocated credit gold is not.

No?

Nickelsaver said...

TF,

I'll meet you halfway. Try not to be so insensitive.

NS

Motley Fool said...

NS

Sure. Apologies.

TF

Nickelsaver said...

TF

http://www.resumecorner.com/images/handshake.jpg

NS

Michael H said...

DP,

For want of a FRN the factory was lost!

While the physical FRN does indeed have a place in the 'physical plane', the FRN is not 'money'. 'Money' is a mental concept, which is why it is relegated to its own 'monetary plane'.

In your factory example, part of the necessary capital is the worker, or even just the worker's skills. These aspects of capital cannot be mobilized without 'money', but that doesn't make 'money' capital.

Further, the worker will accept physical FRNs or bank credit equally as compensation to put his 'capital' (skills) to your use.

"Having this excess production from the past stored in my 'savings' is what enables me to continue my business without the burden of relying on other people to lend me their capital. Without savings in my accumulated capital, I would not have the full means to achieve production.

If you didn't have 'savings' to pay the workman, the workman would have to loan you his capital (skills) so you could produce. Or, someone could loan you 'money' to pay the workman for the use of his 'capital'.

AdvocatusDiaboli said...

DP,
I disagree with your approach, that "money" is capital. From my point of view, capital are the physical means of production only. Why?:
Have to considered to work for yourself instead of paying somebody? Voila, if you have these physical means of production you generate output, even without "payment", but not the other way around. True, your plant will not produce that much, but still it will a little by little.
Okay, you dont want to work, who wants to anyway. Null problemo, therefore you need something somebody excepts as a token in exchange for his labour. But that does not have to be (central bank) "money", it can be anything. Most usefully it will be kind of a promise for some benefit in the future, somebody is convinced that he will receive.
This happend in Germany during the hyperinflation. A large industry tycoon started issuing his own money to pay their workers.
Here the picture of BASF issued money:
http://www.oppau.info/sites/default/files/styles/vollbild/public/files/ortschronik/inserts/inflations-geld_041.jpg
Amazingly, read the text: Upps, again that magical reference point gold :)
Greets, AD

Michael H said...

DP,

"IMO you cannot spend banker credit"

I disagree. What do you spend when you swipe your credit card?

The very fact that you can spend banker credits is the key feature of fiat / credit money systems like we have today.

DP said...

Interesting. Thanks for your further thoughts.

When I swipe my card, am I not taking temporary control over my bank's store of base money, and transferring some part of it to my counterpart's bank? In other words, my banker converts my stored bank credit money into his base money, and transfers it on my behalf. Base money is what changed hands, but I only "possessed" it for the duration of the transaction. No?

Do the FRNs (or base money reserves) exist in two roles at the same time. One as 'money' (UoA) and one as a physically transferred asset (MoE)? So as a UoA they are only a concept, but as a MoE they are a present reality.

I'm not saying you're wrong, only asking your opinion as I consider this myself.

Cheers!

Michael H said...

DP,

"Do the FRNs (or base money reserves) exist in two roles at the same time. One as 'money' (UoA) and one as a physically transferred asset (MoE)? So as a UoA they are only a concept, but as a MoE they are a present reality."

Doesn't electronic money serve just as well for a MoE? If you donate to FOFOA, you don't actually ship a pallet of $100 FRNs, but instead just have your bank initiate a wire transfer:

From 'Just Another Hyperinflation Post, Part 2':

This is important because it happens billions of times a day. But let's envision a large international wire transfer to make the point clear. Let's say you want to wire a million bucks to your buddy in Hong Kong. The wire may go through in a day, but what has actually happened? What happened was that your bank promised the bank in HK that it would ship over a million physical dollars! And the HK bank accepted that promise at full value before it handed your friend a million bucks.

No specially designed or officially approved electrons crossed the ocean through the wires. There was not physical "transfer." Only an agreement between two banks. An agreement to ship a million physical dollars! Now as I said, this happens billions of times a day and most of the agreements are cancelled out by promises in the opposite direction. But whatever is left unsettled ultimately gets settled in physical dollars.


So I think it is credit that gets transferred: an agreement. At the end of the day the imbalances are netted out and perhaps some FRNs change hands, but they don't have anything to do with your particular transaction.

Michael H said...

DP,

To add one more layer: there is base money in the form of FRNs, and base money in the form of deposits at the central bank.

So at the end of the day, the imbalances can be netted out by adjustments to the banks' accounts at the CB -- just a rearrangement of some ledger entries, without any movement in the physical plane whatsoever.

DP said...

Mmm, clearly I'll need to ponder this a little more, when I can dedicate a little more time to it.

Thanks again! ;-)

Michael H said...

FOFOA,

"Savers drive everything."

What is a 'saver'? Someone who produces more than he consumes.

What happens to this 'excess production'? That is the key question for capital formation. Does the excess production get invested into productive enterprises, or consumed?

Presumably, savers today (who save by buying others' debts) could choose to finance productive or consumptive endeavors, by their choice of debt to purchase. In practice I'm not sure if this is the case.

So how would the process of saving be different under freegold?

Savers still produce more than they consume. They chose to buy gold with their savings. Someone who had previously saved in gold, but is now looking to divest, sells them the gold.

Perhaps this former-gold-owner is retired, and needs to now consume more than he produces. Or perhaps he was working for the man for several years and is now ready to finance his start-up business. The gold-buying saver still has no control over where his savings go.

So what is the difference between now and freegold, with respects to capital formation and investment?

Michael H said...

continued ...

There is, of course, a very important difference between debt savings and gold savings: the quantity of gold is strictly limited, while the quantity of debt is not. This one fact should mean that the price of 'savings' (gold) should give relevant information to the superorganism.

Michael H said...

Another difference between debt-savings and gold-savings is that, when you buy someone's gold, that person must have previously produced more than he consumed. When you buy someone's debt, you are merely buying the promise that the person will produce more than he consumes, sometime in the future.

Michael H said...

A thought experiment:

Let’s say that freegold emerged after WWII. The baby boomers saved in gold, and as this ‘demographic bulge’ entered their peak earning years, their propensity to save in gold bid up the real price of gold higher than ever before.

Now the boomers are retiring, and they are trying to sell their gold so that they can consume more than they produce. However, they are finding that the real economy cannot provide the real goods and services they desire! This is because, as a whole (world-wide), the dis-savers and the savers must balance. If our boomers were lucky, then perhaps the savers in the East would buy up their gold, but what if there was a world-wide demographic bulge?

Would there be a signal to switch from saving in gold to investing the excess of our production somewhere else? Would a high price of gold encourage savers to become investors? Or would the boomers think ‘this time is different and the real gold price will go up, always and forever’?

Somehow I believe interest rates must factor into this decision, as a pricing mechanism for productive investment.

DASK said...

AD:

I have to disagree that capital is the physical means of production only. Sure, there are the physical artefacts, but their arrangement and the skills of their operators can surely affect their output and thus worth as much as another machine could.. at its simplest, a company with tuned machines and skilled operators will produce more than another company with an equivalent physical capital.

My point is that knowledge and intangible (or 'tacit') architecture can be invested in the means of production. They can also be lost: imagine a company firing it's old engineers who know 'why' a thing is done or not done a certain way. In this way, I view money as a part of societal capital; it is part of the architecture or relations that puts physical things together in a coordinated way. One can not exist without the other. Smoothly functioning money may be as important as machines and materials, especially if the direction of development is complexity. But as skills can be forgotten, so can the capital value of a currency, which is nothing less than social trust, be 'mined' through counterfeiting; when said currency is also the pool of savings for capital formation this process destroys the root. In your example, do you not need skills before you can produce? And do you not already have enough widgets if nobody can give you something of value for them?

I think money cannot be disqualified as 'capital', particularly at a societal level. It simply means that savings can perform the necessary (to a capitalist economy) capital formation processes without which you wouldn't have any skills or any materials other than clay, wood, stone and grain.

AdvocatusDiaboli said...

DASK,
since today slavery is abolished and I dont own by employees, but also I dont just pay them to be smart or to be nice, why not take a look at the situation from the libertarian point of view: SELFOWNERSHIP.
Okay, I own the "physical factory". They own themself, being each of them their own little company. Let's see if we can come to good result in cooperation that both sides fit.
To come to a conclusion: No, looking at it from the austrian libertarian view, "my employees" are not my capital, although I agree, the idea has a really romantic political correct touch.
Greets, AD

victorthecleaner said...

DP,

IMO you cannot spend banker credit, you can only transfer base money, which you fleetingly possess for the duration of the transaction.

I don't think I agree. Your bank

Assets:
$1 reserves at the CB

Liabilities/Capital:
$0 DP's bank account
$0 employee's bank account
$1 the bank's equity

DP walks into the bank, says "I'd like my employee to create a cool product, but I need some financing to get it done." Banker: "Sure."

Assets:
$1 reserves at the CB
$100 loan to DP

Liabilities/Capital:
$100 DP's bank account
$0 employee's bank account
$1 the bank's equity

Now the gentleman works for you, you give him a cheque, and he cashes that cheque:

Assets:
$1 reserves
$100 loan to DP

Liabilities/Capital:
$0 DP's account
$100 employee's account
$1 bank's equity

You have used credit money in order to make a payment.

Victor

Victor The Cleaner said...

DP,

if you and your employee have accounts at different banks, then, yes, there will be a corresponding transfer of CB reserves from one bank to the other.

But the clients of bank A and those of bank B may have thousands of transactions both ways, and most of them cancel out. Only the balance involves either (a) bank A lending to bank B (if the imbalance is temporary) or (b) bank A's CB reserves decline while B's grow.

Victor

Jaqship said...

Costata, Totara

Taking part in the discussion is indeed my pleasure. Re Totara on Archdruid Greer and gold: Greer doesn't address Freegold, but urges that you give up on "investing" for profit, and "put your money into something that will actually be useful," e.g. skills or insulation. He expects Peak Oil to produce a fairly gradual unwinding of much of the cheap-energy-induced Industrial Revolution, and it's clear that he considers preservation of value to much more realistic than "growth".
Last week he started a series of posts on the history of US empire; I very eagerly await the next episode, which should appear very late tomorrow nite.

MF, Winters

You're doing fine at being polite while blunt. Seeking pro bono advice hardly entitles or behooves me to be addressed via unclear mincing of words.

Hiring a webpage developer is very much under consideration, but not until I know how to steer such a person in the right direction, given what my site is about.

The product line on the Rand site linked to is conceptually very simple, compared to my objects/groups, laden as they are with levels of historical context.
Most sites offer objects with specific uses; my site offers (a series of) historical experiences.

It probably would take a special sort of webpage developer to have the vision to be able to convey these experiences in a manner in keeping with the currently-accepted style of webpage design. I've no idea where to try to find such a person, although I'm told that a "story book" format may work for my purposes.

burningfiat said...

Michael H said:
Another difference between debt-savings and gold-savings is that, when you buy someone's gold, that person must have previously produced more than he consumed. When you buy someone's debt, you are merely buying the promise that the person will produce more than he consumes, sometime in the future.

Unagi....hmm ideally. In the meantime, here in lovely $IMFS-land, the one you buy the gold from could also just be a leveraged jerk, who thinks it is time to cash out...

DASK said...

AD:

I never meant to imply that they were YOUR capital.. the self ownership model (which I agree with) doesn't change my point: your factories are useless without inputs, both intangible and material. Let me try again.

If you lose your most valuable engineer, because of free choice e.g. you couldn't pay him enough, the value of your physical capital may indeed suffer from the loss. The worker gets the win.. if they truly had a higher calling, society as a whole wins because resources are being shifted to their most efficient use; perhaps your business model need change.

The key element though is the signal: abuse of the currency and debt causes resources to shift arbitrarily, and not necessarily to overall advantage. Workers (quite rationally) build capital in skills suited for an unsustainable system. Factories that should be turning out goods turn out less, and those goods get bid up by those who don't produce and underconsumed by those who do but are not allocated conmensurate income. Savers lose real value as their savings fund useless structures. Individual rationality leads to suboptimal systemic outcomes when the playing field is tilted. Thus I argue that smooth currency function, and undistorted perception of 'money' relations is a part of overall societal capital. Societies that have those things will be more productive and thus their presence must constitute capital for all members of the zone; a public good if you will.

sean said...

I love analogies! And sushi, actually.
So, I was thinking about what the role of gold might be in sushi-nomics. If someone decides to eat 4 sushis instead of 5, and defer consumption of the last one by buying gold, they can happily consume it in the future, perhaps when they retire. Or can they? What happens to the economy if everyone decides to do this? Sushi production will have to be scaled down. Fewer fishermen and rice growers and sushi-rollers will be needed. Fewer jobs available. Oh noes!
But then, this labour will be freed up for other productive activities - perhaps studying that rusty motor engine and finding out how to make it work. Perhaps after a few years they'll even nail it, and sushi production costs WILL decrease.
And by the time the first of the sushi-zens retire, gold will buy them even more sushi. And FOFOA might get that long-promised 1 Oz, or perhaps a token there-of. Or at a discount pedicure if nothing else. ;-)

AdvocatusDiaboli said...

DASK,

"you couldn't pay him enough, the value of your physical capital may indeed suffer from the loss."

if that is the case:
1.) I am a bad entrepreneur, unable to determine the overall value of a particular working contract. In that case it is good that capitalism washes me away for better decisions to come.
2.) My business modell does not support the resources I need for the overall output/input ratio. In this case it is also good that capitalism washes me away.
In both cases: The physical plane does not loose anything: The worker does another higher valued employment, good for him. In case of default, my physical resources are taken over by something which is valued higher than my arrangement before.

The only asymmetry about human resources is the legal issues to part from each other or to adjust the salary up&downwards: The worker can leave anytime, but I can not kick him out or lower the salary anytime, some socialist invention disturbing the market flow of seamless optimisation on the physical plane.
And trust me: I more and more getting really tired, feeling that I am of a dying breed, I dont wanna run anything in todays ideocracy any longer.
Greets, AD

AdvocatusDiaboli said...

Sean,
"(4 sushis instead of 5)...What happens to the economy if everyone decides to do this?"

I can 100% predict and answer your question: The released work force will be placed in offices to do SixSigma studies and the rest will engage in Sushi advertisement, because that's the 100% compatible job occupations for Sushi rollers, they arent rocket scientists.
Does not matter of paper tokens or golden tokens, that's just the way it is :(
Greats, AD

Victor The Cleaner said...

sean,

the saver will need someone to sell him the gold. That person is somebody who wants to sell his gold in order to use his savings, either to consume (suhi) or to invest (in JR's inland fish hatchery whose non-existence I complained earlier about).

So just because one person buys gold, the population does not consume less sushi as long as the seller of the gold buys sushi.

Only if people buy less sushi and rather hire the fishermen (who used to go out and catch fish, but who are no longer needed as less sushi is consumed) in order to work at JR's company, consumption shrinks, but investment grows.

So the original tale was a tale of capital consumption (bringing consumption from the future to the present) which was not sustainable. The story of JR's company would be a tale of deferring consumption in favour of investment.

I wonder whether that would be sustainable.

FOFOA, better now?

Victor

Nickelsaver said...

While building the Mag-Lev to Mainland, the construction crew noticed a very small island just a few hundred meters away from the path of the train. On that island were Ben and Chen.

Ben, having become accustomed to island living, decide to take up residence on Sushi Island. While Chen returned to Mainland were he was reunited with family and friends.

Sushi Island and Mainland were never the same.

/SleepingVillage/ said...

What about the part when AD is super producing sushi and the whole island gets the shits?

Nickelsaver said...

Nickelsaver, seeing a market corner opportunity, takes out a small business loan from JR in order to create and produce custom monogram embroidered toilet paper. He calls it ooshits.

FOFOA said...

Yes, Victor. Very nice!

Now let's say that the medium of exchange on Sushi Island is "sushi bites". Perhaps people don't actually carry sushi bites around in their pockets, but maybe they quote the prices of various things in sushi bites. So our saver may have saved up, let's say 400 sushi bites. Maybe he has just caught a good 100 lb. tuna that's worth 800 sushi bites and he wants to save half of that. And let's also say that the last several gold transactions occurred at 1 oz. for 400 sushi bites.

Victor: "the saver will need someone to sell him the gold. That person is somebody who wants to sell his gold in order to use his savings, either to consume (sushi) or to invest (in JR's inland fish hatchery…"

So what if there's no one who wants to part with an ounce of gold for 400 sushi bites that either need to be consumed right away or invested with JR? Maybe there are only three savers that even have an ounce of gold saved, but there are thirteen savers with a half-ounce and thirty with a quarter-ounce. And let's say that the relative confidence in the prospects for JR's idea varies from person to person.

What happens next? (AD opens a bullion bank?)

Hi Michael H,

"There is, of course, a very important difference between debt savings and gold savings: the quantity of gold is strictly limited, while the quantity of debt is not."

This is an important distinction. When a net producer buys gold, he is accepting full settlement. In essence, he is now in balance with the world because he has no counterparty who owes him anything, and he owes nuthin to no one. We could say that he "consumed" the gold (for current accounting purposes) so that he is no longer "net" anything. He is simply in balance with the world. And the only entities capable of settling with this net producer are other net producers who, themselves, settled up in the past. Net producers who are investors or lenders with counterparties beholden to them are not settled up so they can't accommodate this saver. So the savers create this chain of settlement through the time dimension.

This chain of settlement encourages net production by ensuring the rewards of thrift. With debt, the rewards of thrift are not ensured and, therefore, net production is ultimately a losing proposition. Think about China's current account surplus. Today it cycles that currency back to the US by loaning it to the USG who spends it while China stacks up the debt. In Freegold, China will still cycle that currency back into the US, not for infinite promises of future production, but instead for the finite settlement medium of known past production.

The more people that get lured into the rewarding practice of thrifty living, the more valuable that finite settlement medium will become, which will lure more people in—a virtuous feedback loop. Debt just continues stacking up and if you try calling it in from your counterparty, you risk losing it all. So your only option is to keep loaning your excess, keep expanding your imbalance with the world, and hope for the best if the time ever comes that you need to call in that debt because you got old, sick or something disastrous happened.

For anyone who hasn't seen it, here's what RJP so humorously referenced earlier: How an Economy Grows—A Fish Story.

Sincerely,
FOFOA

Nickelsaver said...

That cartoon was longer than an FOFOA post, and almost as cool.

There are two things that have been going through my mind all day. Out of FOFOA's current post, "The physical plane is all that matters."

And oddly enough, "Tokens are tokens, no matter if made out of limited gold or unlimited paper."

I've been trying work out in my mind exactly where tokens go.

I couldn't help but to think of the dual pyramids from Glimpsing the Hereafter.

"And now, what I'd like to do is to take a stab at modeling what this might look like after the transition to Freegold. All modeling up until now has been before and during transition. But presumably things will look a little different hereafter, don't you think? Costata and I have been discussing where gold should go in the "after" model for a while now. Should it be in the monetary plane or the physical plane? Should it be parallel but off to the side of the currency, or what?"

If you remember, the gold was removed from the top of the pyramid.

"So we can cut gold off of the pyramid structure if we want to, and we can put it wherever we want. We can stick it back in the physical plane since gold is physical, just like baseball cards, or we can set it off to the side, or we can just ignore it and cut it off, like this:

Pyarmids Ex-Gold

Where’s gold? Who cares? It is a closed, isolated circuit for the savers only. Now (above) we are dealing with only the parts that involve everybody. And it is no surprise that the monetary plane is so relatively small. At least it is no surprise here. A little currency goes a long way.

It seems like we lost a few tokens.

The only other thing I'm wondering is...

Where's the Beef?

costata said...

In this short interview on CNBC Nassim Taleb says his fear is not inflation it is hyper-inflation and that he holds Euro because they "understand the problems".

http://www.financialsense.com/node/7829

Uber bearish on bonds and he only holds stocks and RE because he has no choice.

He's supporting Ron Paul now purely for the reason that Paul wants to address the problems whereas, according to Taleb, no other candidate will even face up to the issues.

Bjorn said...

Re Costata

Somebody might inform Taleb that he does have Another choice perhaps? ;-)

Jokes aside, if I had a LOT of savings, I would also hold some stocks and RE. (RE of the forested variety that is).

And if I were an US citizen, I would also support RP for exactly those reasons.

cyclecooler said...

A little off topic but even the Perth Mint is running ads on the TV now spruiking 'cash for gold'......'bring in your jewellery'.

I have seen this on a few channels here in oz.

Woland said...

Off topic: For those of you whole love Art, the Da Vinci of the gold
price chart, in conjunction with the Michaelangelo of the Dow are
painting two masterpieces for your" technical analysis" appreciation.
A "lesson" is being prepared for you, whereby you are urged to "compare
and contrast" these to painterly styles. The former is being portrayed
as "degenerate, while the latter embodies the best qualities of Socialist
Realism. It is dearly hoped that you will learn your lesson well, as a
failing grade may lead to "detention". This is starting to smell like
a big desperate push.

costata said...

Cyclecooler,

..the Perth Mint is running ads on the TV now spruiking 'cash for gold'..

Shame on them.

DP said...

Victor,

Thank you for also chipping in to help me clarify my thoughts on "is money ever 'capital'?".

I agree with your comments (surrr-priise!). This explains the desire of the banks to tend toward consolidation - because it reduces the chance of any one of them becoming insolvent; the larger and fewer they are, the more likely it is that the transactions between their clients stay within their own book, or are with counterparty banks that likely have an offsetting transaction going in the opposite direction at midnight when they square the books between themselves.

So, it feels like I can discount the idea that the CB reserves part of base money is real capital. Because these are just an accounting mechanism to smooth the temporary imbalances between the banks. And as you say, push comes to shove and some bank doesn't have enough CB reserves to settle with another bank tonight - well that bank will simply loan him some and all will be peachy.

So that only leaves the physical notes in our wallets, outside of the bank system (and physical gold, outside the bullion bank system). Are these 'capital'?

Hmmm… And the bear, ponders on [while he sleeps in his gold-lined man cave for the winter, not really caring whether anyone calls his gold capital or not - it's just there when he wakes up and that's good enough for him!]

Woland said...

FOFOA; The cartoon of "Schiff the elder" island was both entertaining
and informative, however, on said island, the store of value and the
medium of exchange appear to be one and the same. Not the best of
arrangements long term, no?

Alien said...

http://www.bbc.co.uk/news/business-17301032

Nickelsaver said...

A little music to cleanse the sole

Show FOFOA how much you value this forum.

Donate!

AdvocatusDiaboli said...

Alien,
thanks for the interesting link.
IMHO What it reveals to me that if these "think tanks" from the BCG will really start their "financial repression", it will kill the concept of credit money immediately.
Why? The problem we have is DEBT. And what we learnt from FOFOA, somebody always will pay the debt, either the debtor or the creditor, (and lets even neglect the value of the debt at this point).
But with this "financial repression" plan (lets call it "MMT by law"), nothing will be paid, it will avoid any payment possibilty and only accelerate the current setup: Same money creation, being poured it into the same system setup, to the same people to spend it, forcing the same producers to stack it, the same way as before, but now really waterproof sealed. At that point the yields are the minor problem, because money has become a joke.
Or does anybody interprets the possible outcomes differently?
Greets, AD

JR said...

I have to disagree on this point JR. No better place on the planet to display your ignorance and get your head taken off eg.


Its OT and its just opinion, which begets more inane opinion commentary. If one wants to offer some links to sources and say here, consider this, great!

But this is not the forum to spout off unsubstantiated opinions about off-topic political matters. If you wanna link to reasoned arguments to expand the knowledge of the forum, that is great.

But mouthing off the cuff options about OT matters is the descent of the internet forum to trolldom and irrelevance.

Freegold is a big idea. There's lots to talk about that is **ON TOPIC**. Like savings and capital!!

RJPadavona said...

Hello Woland,

Ironically, Irwin Schiff is now living in the hard money utopia he once wrote about in his comic book.

As you may already know, Irwin was a very outspoken leader of an anti-income tax movement in the US. He is now serving 13 years in federal prison for tax evasion.

In prison, there is always a big black market economy going on and the MoE and SoV are the same unit: The postage stamp.

In the US, we now have what is called the Forever Stamp. No matter at what point in time you buy this stamp, it can always be used to ship a piece of first class mail. In other words, the purchasing power of the Forever Stamp remains the same, regardless of the increase in the official price of postage. It functions a lot like gold.

So Irwin Schiff finally got his wish: A return to hard money.

IMO, this says a lot about a hard money standard: It functions great in a system where you are surrounded by criminals and there is no trust. So, using that logic, I can see why hard money advocates want to return to a gold standard: Because there is no trust in the current $IMFS.

In prison, humans revert back to their most primitive state as a means of survival. Is this the mindset we want to use when developing our new monetary system? I hope not!

I guess this is what FOFOA means when he says going back to an old-style gold standard would be an example of the monetary system devolving instead of evolving.

The gold standard of old gives me the blues:

http://www.youtube.com/watch?v=rX009sWzRQg&feature=related

RJP

Alien said...

AD

freut mich, bitte. Oben is noch etwas Interessantes aber die meisten Typen hier haben ihre Horizonte oder besser Grenzen.

Es handelt sich um einen Vortrag von DSK in Cambridge und dauert ueber 1h. Sehr interessant, da er eine Zukunftsvision skizziert.Keine schoene für uns in Europa z.Z.
Schnauze voll von Sandschloesserbauern hier aber doch noch neugierig wie sie mit dem wertvollem Thema umgehen.

Aristotle said...

Some serious Red Meat here...

Goldman Banker Quits in Disgust, Blasts Firm for Ripping Off Clients

[excerpts]--- Another PR disaster is unfolding for Goldman Sachs (GS), the Wall Street investment bank that has already borne the brunt of popular wrath in the aftermath of the financial crisis.

A senior executive at the firm, Greg Smith, quit today in spectacular fashion, announcing his resignation in a scathing New York Times editorial in which he accused the firm of gleefully "ripping off" its clients and succumbing to short-term greed.

Within today's Goldman Sachs, Smith says, senior bankers often refer to the firm's clients as "muppets."

The firm has lost the culture of integrity, teamwork, and humility that once made it great, Smith says, and instead has become a place that is "as toxic and destructive as I have ever seen it."

"It makes me ill how callously people [in the firm] talk about ripping their clients off," Smith continues... "Leadership [at the firm] used to be about ideas, setting an example, and doing the right thing. Today, if you make enough money for the firm (and are not currently an ax murderer) you will be promoted into a position of influence." ---[end excerpts]

When the gatekeepers to the Monetary Plane (where trust and confidence are of utmost importance) are measured and found wanting, you would do well to keep your feet in the Physical Plane.

Gold. Get you some. --- Aristotle

Jeff said...

Are deriviatives dealers leaving Europe, voluntarily or otherwise?

March 13, 2012

CFTC Vacates CME Clearing Europe Limited Registration as a Derivatives Clearing Organization

http://www.cftc.gov/PressRoom/PressReleases/pr6208-12

AdvocatusDiaboli said...

Alien,
sorry, but I was unable to finish the sick DSK video to the end. Makes me angry and is just the regular dumb socialist wet dream, just as we know from every single person in the EU committee.
The Udssr failed, Yugoslavia failed... so I have no idea what will save the EUdssr, same people same ideas. History does not repeat, but it rhymes, having said that, appearently on the video DSK is already quite concerned about his security, ALREADY?!
The only interesting question is what will be the bodycount this time.
As I said above: I stack my sushi and f*ck'm all, since I dont have children, at least I dont have to worry and lets hope the "secret underground sushi fridge" is big enough for my lifetime.
Greets, AD

Aristotle said...

Why I Am Leaving Goldman Sachs
by Greg Smith

TODAY is my last day at Goldman Sachs. After almost 12 years at the firm — first as a summer intern while at Stanford, then in New York for 10 years, and now in London — I believe I have worked here long enough to understand the trajectory of its culture, its people and its identity. And I can honestly say that the environment now is as toxic and destructive as I have ever seen it.

To put the problem in the simplest terms, the interests of the client continue to be sidelined in the way the firm operates and thinks about making money. Goldman Sachs is one of the world’s largest and most important investment banks and it is too integral to global finance to continue to act this way. The firm has veered so far from the place I joined right out of college that I can no longer in good conscience say that I identify with what it stands for.

It might sound surprising to a skeptical public, but culture was always a vital part of Goldman Sachs’s success. It revolved around teamwork, integrity, a spirit of humility, and always doing right by our clients. The culture was the secret sauce that made this place great and allowed us to earn our clients’ trust for 143 years. It wasn’t just about making money; this alone will not sustain a firm for so long. It had something to do with pride and belief in the organization. I am sad to say that I look around today and see virtually no trace of the culture that made me love working for this firm for many years. I no longer have the pride, or the belief.

... When the history books are written about Goldman Sachs, they may reflect that the current chief executive officer, Lloyd C. Blankfein, and the president, Gary D. Cohn, lost hold of the firm’s culture on their watch. I truly believe that this decline in the firm’s moral fiber represents the single most serious threat to its long-run survival.

Over the course of my career I have had the privilege of advising two of the largest hedge funds on the planet, five of the largest asset managers in the United States, and three of the most prominent sovereign wealth funds in the Middle East and Asia. My clients have a total asset base of more than a trillion dollars. I have always taken a lot of pride in advising my clients to do what I believe is right for them, even if it means less money for the firm. This view is becoming increasingly unpopular at Goldman Sachs. Another sign that it was time to leave. ---[be sure to read it all]
______

As simple as it sounds, our very own CULTURE (and its trajectory) has in modern times been one of the most significant hurdles in gold's pathway towards reclaiming its prominence specifically within our ranks here in Western Civilization. Like a fish that has no relative sense of the all-encompassing water in which it swims (until it is perhaps jerked from that system by a skillful angler), many people remain deep over their eyeballs in an increasingly digital/virtual world (facebook friends, cell-text relations, all things financial) and are naturally clueless or resistant to the bizarre notion that there is something like air up there and dry solid land existing just beyond their daily scope of experiences.

This public OpEd piece is a good wake up call for our sleepy culture. It's good to be roused from bed. Gather up the last easy bits of your treasure seeking exploits... the next 24 months will bring reverberations through our (global) culture as profoundly as is yet possible in this largely jaded and detached age of ours. Even now, can you hear the distant pulsing of air beneath the dragon's wings?

Gold. Get you some. --- Aristotle

Jeff said...

That goldman guy was the head of derivatives in Europe. Coincidence?

burningfiat said...

Aristotle,

Thanks for link, and the great poetry in your commentary.
It hits center of this feeling I have that when we go physical, it won't just be phys. gold that will rise in prominence. A lot more time in normal peoples lives will (at least for a while) focus in on the physical reality, compared to now. If not on a deeper level, then just because of the brutal deflation (or HI) of the virtual (and monetary) plane that now holds too much of our wealth and attention.

/Burning

costata said...

Ari,

Inflexion points are often only fully appreciated in hindsight. Thanks for the link to that GS article. My cynical self says that this may result in at least three junior GS staffers being fired to effect cultural change in the organisation (but that's just me).

Jeff,

Equity derivatives according to the brief bio at the end of the article:

Greg Smith is resigning today as a Goldman Sachs executive director and head of the firm’s United States equity derivatives business in Europe, the Middle East and Africa.

AdvocatusDiaboli said...

Probably that dude from GS was just p*ssed that he didnt got his own kingdom like his buddies in Greek and Italy, or his own printing press like old buddy Draghi, or at some state FED office.
To think that at his position that this has anything to do with ethics is really the most rediculous thing I ever heard.
Greets, AD

P.S.
Talking about GS, this is really great:
http://www.youtube.com/watch?v=Tu8L3N-87mA&feature=plcp&context=C409939cVDvjVQa1PpcFNP3fljADO0ki5cnqi_CY9_B4YZpn42c1s%3D

Michael said...

This is a heads up for all those who have physical gold in IRAs or Roth IRAs.
If I wanted to have Fidelity sell a billion in shares and send me a check that would be easy. To actually take delivery of physical coins however; that is complicated and will take "up to 2 weeks."
I have to have a Medallion Signature from a bank or go to a 'local' Fidelity office. I then must mail it in (no faxes allowed). That is when the 2 weeks waiting period starts, when they receive the letter.
I am doing a small withdrawl now to test the system.
I can only imagine that if this were attempted during a panic that things could get ugly and could even go all MFGlobal.
I doubt at this point that there is much awareness of the possible value of gold asside from its commodity value at Fidelity or in the system as a whole. These are probably the same regs for other physical items.
Still I want to know how hard it will be and indeed as I consider the difficulty of the process and the seemingly increasing danger of systemic implosion....maybe I'll just screw the tax ramifications and get mine close to me now.

Michael said...

Also I was just informed that I might have to pay my states Use Tax. I do not believe that Nevada charges one for gold. They do for items I buy from out of state that I use in my business on which I am not charged sales tax.
All of this is bringing me to the conclusion that it might be better to simply do all this in cash or paper and then get the cash and buy physical.
These are issues that pertain to Americans and our IRA system. As long as gold is freely available it is probably silly to do things the way I did (buy physical coins and hold them in an IRA). I was concerned that gold paper might collapse and I might not be able to buy any physical. After MFGlobal however I believe it is time to give up on all the glorious benefiits of planning for retirement and all the hoop jumping and just save in physical. It probably makes sense to abandon my profit sharing plan, quit the IRAs and just be a simple saver. What do you think? Are we close enough to the final falling apart or do we have enough low risk years that one should continue to get the tax advantages and play along?

One Bad Adder said...

Michael: -

It's not the first ones through the exits that risk being burned alive when someone yells "FIRE".
At the first whiff of smoke, quietly and calmly exit the building ...and let those more attuned to identifying a systemic inferno deal with the impending panic.

As Ari might say ...Nostrils - get you some!

Aristotle said...

Dear cynical costata,

Your cynicism is likely well-placed insofar as the INTERNAL soul-searching (and token dismissal of a few junior staffers) is concerned. I think the REAL impact (to the extent that it could be quantifiable if at all) is an EXTERNAL one and will come in the form of the otherwise meek and malleable Old School clients of the firm taking their own trustworthyselves and their deep pockets to do business elsewhere.

Candidly, I've seen the like firsthand... been a participant of not a mere few conversations wherein no less than Warren Buffet and Charlie Munger were collectively referred to as 'muppets'. In what context does something like that ever resolve to the net benefit of the so-called muppet??? It's probably fair to conclude that the reaction is predicable and universal -- that when you catch the drift of someone trying to get their arm ever more firmly up your arse, you tend to quickly and decisively terminate any further associations with the greedy/manipulative bastard.

Gold. It doesn't try to rape you. --- Aristotle

costata said...

Aristotle,

LOL well said (as usual). Sadly there's a reason that big, institutional money managers are treated by their financial services providers as muppets - also referred to as "hogs".

Late 1980s redux IMH(and C)O. They did not even consider moving until it was too late. Today the situation is even more dire. There appears to be very few choices of direction in which to move from a portfolio perspective or from a service provider perspective. Every large service provider has attempted to become a clone of the market leaders. When in Rome ......

But who am I to pontificate. This time may be different after all.

Sir OBA,

It would appear that you should have your violin tuned as a rather large lady clears her throat ...

Ambrose Evans-Pritchard via JSmineset:

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/9136903/Global-liquidity-peak-spells-trouble-for-late-2012.html

What they see now is that US money is losing its fizz. Both M1 and M2 have flattened so far this year, and even contracted slightly in recent weeks.

Meanwhile velocity has plunged, with the M2 gauge dropping below 1.6 last week for the first time since records began in 1959 (as shown in the chart from the Federal Reserve Bank of St Louis below).


Is this indicative of an accelerating flight to the here-and-now?

Woland said...

Aristotle:
Over the weekend, I was reading some of your old exchanges with
ORO, in particular a great piece about his "Madness and Method"
post, on which you commented. The depth of detail you provide
on the preparations prior to 1971, and who was in on the decisions
versus who was left out (Rogers, Kissinger and the NSC) during the
Camp David meeting, and the role of Volker in preparing so far in
advance for the "default" on external gold convertibility, was
illuminating.
I wonder if you could take a moment to help clear up a statement
by FOA from around the same time, which I am having difficulty
understanding. The quote is as follows"
"The one time the dollar soared too high for too long (1980-85)
it began killing off our economy, forcing us into the same printing
policy other lesser nations must employ to keep their exchange rate level. Yes, even the USA must sell overseas to create jobs and get
profits at home. A huge trade deficit in a RESERVE CURRENCY NATION
induced by an overvalued currency like we are seeing now, RAISES
the currency value even FURTHER above other strong fiats. This is
the way such a reserve system naturally reacts when there is NO
LOCAL REDUCTION IN LIQUIDITY to check it.
FOA 10/20/00 Msg #43, A fireside chat
thanks.

Aristotle said...

"When in Rome ..."

EXACTLY! Those words (but in a slightly different nuance of context) succinctly conveys the sentiment I was alluding to regarding the abiding inertia of our embedded CULTURE -- cultural behaviors and resistance to new ideas (recalling the simple fish that hardly understands its surrounding waters, to say much less of the tangential atmosphere and dry land.)

But whereas culture is not often seen to completely reinvent itself overnight, we do observe that it is incredibly resilient and therefore tends to evolve (sometimes surprisingly quickly) by assimilation and accommodation of the next big idea whose time has come (i.e., fire, the wheel, gold ownership...)

Get you some! --- Ari

Aristotle said...

Hi Woland

Looking no further than the brief excerpt you've kindly provided, I feel I can safely say that FOA was certainly referring to the formal Plaza Accord (1985) aimed at addressing the factors stated.

Edwardo said...

Um, pardon me for calling rubbish on the GS piece-I am not, by the way, claiming that the ostensibly deeply disenchanted executive's diatribe can't, in hindsight, represent some sort of milepost on the way to a new financial paradigm-but, as brilliant journalist Matt Taibbi, who famously dubbed Goldman Sachs the vampire squid approximately years ago, could tell you, the history of Goldman Sach's malevolence goes back generations.

Had I been imbibing some beverage while reading the piece I probably would have had it pass through my nostrils at record speed when my eyes scanned the claim that GS had some sort of tradition of "doing the right thing."

Maybe, but if an outsider like Matt Taibbi could, several years ago, compellingly chronicle how wayward GS were, how did Mr. Smith miss it until relatively recently?

Now, having said all that, I'm delighted to see an erstwhile GS insider going pellmell at The Vampire Squid.

Edwardo said...

Hmm, talk of global liquidity losing its mojo as rates spike.

RJPadavona said...

Hello Friends,

All this talk about Goldman Sachs referring to their clients as "muppets" has me worried about something even more important than the world financial system.

This Goldman story seems to be getting a lot of coverage by the media. Will all this talk about muppets cause people to forget the true meaning of the word?

As a big fan of Henson's work, I hold this near and dear to my heart. His legacy shouldn't be tarnished by having his creation associated with the likes of Goldman Sachs.

If not for muppets, I may have never been exposed to Alice Cooper:

http://www.youtube.com/watch?v=iz0lXNNkqac

And I may have never known there was a version of Bohemian Rhapsody that was better than the original:

http://www.youtube.com/watch?v=tgbNymZ7vqY

So, if any of you assholes in The City or on Wall St are reading this: When you choose words to refer to your sucker clients, please choose those words carefully. They may have a bigger impact than you realize.

RJP

julian said...

"Freegold is a big idea. There's lots to talk about that is **ON TOPIC**. Like savings and capital!!"

"Just a reminder, the concepts up for discussion are the physical plane versus the monetary plane, savings and capital. The physical plane is all that matters. The monetary plane exists only to assist the Superorganism in its drive toward sustainability by transmitting information through prices and lubricating the flow of the physical. Savers drive everything. If they are saving, the economy will expand (sustainably or unsustainably). If they are not saving, the economy will contract. The Superorganism's natural drive is toward economic sustainability while the $IMFS is a pedal-to-the-metal consumption binge thrill ride toward economic collapse. Savers drive the economy, the Superorganism organizes it, and the $IMFS quietly kills it. "

I see a difference of a physical plane and a mental plane. The monetary plane is along that mental plane. It is tied to physical cause effect relationships, but is a mindwork.

Time structure is such a big idea in all of these talks of planes. That's how FOFOA doubled the triangle to create a square.

Humans work on incentives, that's a basic premise in these talks. Another is that there is a collectivity named Superorganism whose innate organizational patterning trend is toward sustainability based on the possibilities afforded by the nature of things. (which, off topic, seem very metallic, mechanic, electric, magnetic, gaseous...i think of concrete, and buildings, and the human world habitat creation and information and information communication technology, from expansive historical perspective)

Saving medium is born out of certain exchange medium qualities in the physical world (secondary medium of exchange incentives too). Storing value. It is a representation of something. The earlier times had cultures monetizing foodstuffs, like salt, and all sorts of other commodities we can think of. That was a closer direct connection between the value represented, and the value of the thing acting as medium to represent that value. Because, stemming from the physical world, things to exchange had to be themselves of value first, before things became monetized.

But that guy, gold. He definitely stood out for those savers. Or those travellers who knew it was value retainer globe trotter number one.

Resources are engaged in the physical cause effect relationships of our world nature, lubricated and directed by the monetary plane, whose pricing mechanism as part of the social rational best-interested organism laws of nature (in a less coerced setting) would accurately transmit information for the complex monetary plane to accurately employ its capital without it getting eroded or consumed without maintenance or replenishment.

(cont'd...)

julian said...

In rudimentary island examples, we see the utter practicality and quotidian nature of economics and human kind. Economics is our life action. Because we are builders. Creators, explorers, thinkers, inventors, we use the possibilities that the world nature affords us, and we build boats and nets use them to catch fish to eat the fish. We have this capital, it is physical capital, it gets consumed, but we use our labour to maintain it or build more, so it will continue to perform its life-supporting function. The human capital in the island example is huge. That economy has very high employment levels on that island.

But when the other guy comes, Krugman, the economy turns to misguided aims that not only don't really enrich them islanders(they enrich the beaurocrat elite), they also allow their capital to erode over time, such that at the beginning the value of the capital was strong enough that it upheld a certain standard of living that was perceived to be better and sustainable. But without maintenance the capital was consumed, and the economy faltered. And continued to falter, as other "fixes" were organized by the Krugman.

During the 20th century, the financialization era really altered that monetary plane (that mental plane of the western mind). People, not recognizing a store of value par excellence to do the job for them, they chased the common theme. Plus, let's not forget The Studebaker Effect. (There is some great history here at FOFOA).

So people put the capital of the world into these instruments that allowed overconsumption and malinvenstment (detrimental movement and use of resources) of the true capital that existed and had needed time enough to build up...and the capital over time was consumed.

The financial capital was supposed to represent the wealth value of the world, but it's been so massively diluted, that the load is going to fly right off due to the force coming down. That's the reverse waterfall.

What RPG does is it allows the capital wealth to be safe from those who would allow it to be consumed massively for their own slimy benefit.

For so long we didn't even recongize (notice) FOFOA's dilemma, let alone have a name for it. Its validity is apparent to me. I wonder if those Euro architects had a name for it.

(cont'd...)

julian said...

I still am not sure about savers and saving and economy. If savers are not saving, the economy will contract. If they save, it expands. They drive the economy. Why is this the case? What does it mean? In the island example, saving could mean saving some ingredients or finished products (sushi), or perhaps saving the ingerdients (components) of the boats and nets, or saving boats and nets themselves by maintaining their functional value. Saving the knowledge, the skills, by passing them on through education? So, if they were not doing those things, those actions of saving, then it makes sense the economy would contract. Those actions drive the economy through the time structure of the world.

In a monetary economy, the idea of a producer saving excess production in the form of physical gold, how does that drive the economy? In a true base hard-money system like in monarchic times, if the hard money itself were not being shaved (inflated) but was kept honest for the purpose of this image, how does someone saving their hard-earned hard-money rather than consuming it expand the economy?

In a fiat money economy, even one of RPG, or just the one from 1971-present, or whatever...where a saver has to potentially exchange the currency for the store of value gold...Is it the forwarding of the excess production to another, whom had over time saved their own excess “capital” represented in the form of gold? The forwarding and retrieving are one act from two parties' perspectives. The cycle of savers passing savings on to savers-turned-spenders, the flow of the store of value medium. Gold. Is this what drives the economy? How does saving in physical gold expand the economy? Somehow it expands value...or capital is expanded...? I have so much to learn.

If savings is capital, and capital when employed expands the economy so long as its not being consumed, and savings by their nature are a non-consumption of capital (otherwise it wouldn't be saved), then on that level it seems reasonable that savings expands and drives the economy.

One Bad Adder said...

cos: -

To QE or not to QE ...that is the Question.

Ben MAY try pouring another gallon of Gas into the economic engine. Putting it into the Radiator AGAIN (as he has previously) clearly doesn't work ...and will simply exaserbate the problem further.

I feel they simply don't know WHAT TO DO here!

BTW - There's more to this GS "muppet" revelation than meets the eye IMHO. Mainstream media is all over it - which inevitably means an orchestrated plot is being hatched.

Bjorn said...

Julian. It may well be that you have a lot to learn. We all do! But I feel that you have come a long way towards (quite beautifully) answering your own question regarding how saving expands the economy. I would however like to make a small addition.

"Is it the forwarding of the excess production to another, whom had over time saved their own excess “capital” represented in the form of gold? The forwarding and retrieving are one act from two parties' perspectives. The cycle of savers passing savings on to savers-turned-spenders (or investors!), the flow of the store of value medium."

The way I see it, investing in productive entreprises expands the economy, not the act of saving per se. But there can be no investment without savings. And without a sound information transmitting mechanism, the superorganism will end up with a lot of investment that turns out to not be productive, wasting savings and make less savings available for productive entreprise.

And as to why saving in gold is superior to any other form of saving, well that is a topic that deserves several multi page posts, or even a book or two worth of text. Thankfully, FOFOA has already done that.

costata said...

OBA,

There does seem to be some indecision. No good options perhaps.

I agree about this GS-exec-getting-religion business. The fact that the story appeared in the New York Times guarranteed wide distribution.

DASK said...

w.r.t the GS story, someone over on ZH made a comment that was as good a theory as any I've seen: basic idea was that it was a vehicle to push certain memes in a trojan wrapper. The other bits of the article, passed off as fact, were:

1. GS is integral to the modern global economy (and is therefore TBTF)
2. GS has had a good culture before (hahaha), meaning that it's just a few bad apples now.
3. .. setting up for a minor purge and 'see we've fixed it.'

It must also be noted that he has already set up his own financial firm and is taking clients, so it could also have been a selfish 'I'm GS quality but care about clients' pitch.

DASK said...

I still have so much to learn as well. I also see investing in productive infrastructure and not savings per se. as the lynchpin of economic expansion. But if you can't build that infrastructure with what you have directly at hand, you need access to a medium that people will accept for access to what they have that you need. I think savings needs to be divided into actual surplus and withheld consumption to get the peg to fit.

Withheld consumption is the societal liquidity that allows factors of production to be determined and allocated and the need and place for new production infrastructure to be determined. If consumption withheld during a period is larger than needed for net new production factors, then it can be called savings. But if such consumption is not withdrawn to a neutral medium (e.g. gold), there are mechanisms to appropriate it that result in the skew of all incentives overall.

Gary said...

Michael,

I took over 4 months to finally make the decision to move away from a defined benefit final salary UK pension fund. It was a difficult decision, but ultimately I feel it was the right one. Time will tell!

In the UK we aren't able to just grab the cash (minus a tax charge), it has to remain within the pension until age 55, but I have used a local dealer, and he's storing it at Viamat (numbered bars), so that's as good as I can do.

I feel highly fortunate to have got into physical gold at the current price (in fact, the actual purchase is going to happen in the next day or two, so I am counting my chickens!), and the main benefit of the move is the feeling of peace of mind, that finally I am master of my own destiny, my chips have been removed from the fiat casino's table. I was going to use Goldmoney, but some sound advice helped me decide to opt for discrete pieces of gold.

So, I wouldn't presume to give you advice, but I think you're heading the right way anyway.

Gary said...

Also for the board, an interesting read from Ray Dalio at Bridgewater Asociates on how various deleveragings in history have been handled in the past (mostly badly):

http://www.bwater.com/Uploads/FileManager/research/deleveraging/an-in-depth-look-at-deleveragings--ray-dalio-bridgewater.pdf

sean said...

An interesting report from Deutsche Bank analysts who attempt to answer the question of how economies can be weaned off CB support (h/t The telegraph). Nicely outlines the quandary the CBs are in. Their conclusion? :

"We can only speculate what may come after a loss of
trust in the central bank money regime. A restoration of trust through a “conservative central banker” (Ken
Rogoff’s description of Paul Volcker’s role in the
stabilization of inflation in the early 1980s) seems unlikely.
For that, the loss of trust in the fiat money system may be too deep. This would suggest that a shift away from the fiat money regime to a real asset-based money regime is more likely. After WWII a new monetary regime was established based on the US Dollar. The latter’s link to gold was credible as the US emerged as the leading global economic and political power from the war. In an analogy to this development, a Chinese currency linked to gold or a commodity basket could emerge as the new standard in a post-crisis global money regime, in which China will be the dominant global economic power."

PS: Dear FOFOA. Any chance of englarging the comment preview and posting box? And of having the preview visible while editing, as it was before? Maybe not possible with the new layout, but it made editing easier. tx

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