Thursday, June 21, 2012

The Debtors and the Savers 2012



Like Dust in the Wind

There are 31,530,000 seconds in a year. A thousand milliseconds in a second. A million microseconds. A billion nanoseconds. And the one constant, connecting nanoseconds to years, is change. The universe, from atom to galaxy, is in a perpetual state of flux. But we humans don't like change. We fight it; it scares us. So we create the illusion of stasis.

We want to believe in a world at rest—the world of right now. Yet our great paradox remains the same. The moment we grasp the now, that now is gone. We cling to snapshots, but life is moving pictures, each nanosecond different than the last. Time forces us to grow, to adapt, because every time we blink our eyes, the world shifts beneath our feet.

Change isn't easy. More often, it's wrenching and difficult. But maybe that's a good thing. Because it's change that makes us strong, keeps us resilient, and teaches us to evolve.
–Tim Kring


Prices change. Don't they? Yes, of course they do! We don't always like it when prices change, but they do nonetheless. And why do prices change? Because values change! That's right, I'm talking about the way humans value things relative to other things. Relative values change constantly, and because relative value is a subjective choice made by each individual, what actually changes is demand.

I remember back in 2008 BlackBerries were all the rage. First generation iPhones were a little buggy and RIM (the maker of the BlackBerry) was rocketing toward $150. Both RIM and Apple were around $140 at about the same time. Today iPhones are cool, RIM is $10 and Apple is $577. Demand changes, relative values change, prices change. We don't always like it when things change, but they do nonetheless.

So why are some people so stuck on that old objective cost theory of value? One thing I have learned through writing this blog is that these people in particular, when they come across my blog, seem to be the most obsessive about "debunking" me. Yes, I'm talking about our old Marxist frenemy Ash. In the first draft of this post I had links to a couple of others as well, one who wrote something like Debunking FOFOA and another who devoted no less than six posts to the cause. But there's really no need to look any further than everyone's favorite Marxian with his ten posts and counting. He has an ongoing series over at "The Automatic Earth" devoted to debunking Freegold!

Marvin the Marxian

The Marxian View

Ashvin Pandurangi: "This series was a comprehensive attempt to debunk the [Freegold] theory by attacking its foundations, which range from Hegelian idealism to the (more concrete) marginal utility theory of value, and by replacing those foundations with what I believe to be more solid ones. Among these were Marx's theory of capitalism, spanning his concepts of surplus value, rate of exploitation, over-production and realization of value…"

In my 2010 post, The Debtors and the Savers, I explained the "Marxian" view of class struggle like this: "Simply put, Marx says it's the rich versus the poor. According to Marx the rich exploit the poor to get themselves a "labor-free income", which spawns a class struggle." This flawed perspective makes it impossible to understand Freegold, which is perhaps why they are so driven to debunk it.

Hegelian Idealism

With the correct delineation being the debtors and the savers (aka the easy money camp and the hard money camp), Freegold simply explains how, with the termination of the $IMFS, what remains is a system in which these two camps will no longer be in a perpetual state of monetary conflict. This is what Ashvin dubs Hegelian idealism; the idea that mutually beneficial coexistence between those whose innate tendency is to net-produce (produce more than they consume) and those who prefer easy money through borrowing, taxing and printing is even possible. His argument that it is not possible boils down to "they" (the evil ruling elite) will never let it happen.

Marginal Utility Theory of Value

Simply stated, the Marginal Utility Theory of Value which Marxists object to is really just the subjective view of value which I described at the top. They prefer Marx's objective view of value which says that value flows up through the costs embedded in the supply side rather than down from the subjective choice of the end user. And while Marx has been thoroughly discredited in economics, this objective view of value persists because it fits the "exploitation of the workers" theme that is so popular among impressionable young minds and scary doomers with batshit-crazy worldviews.


Which brings us to Ashvin's "more solid" foundations of Marxian "surplus value, rate of exploitation, over-production and realization of value."

Surplus Value

In this view, surplus value comes only from the Capitalist's exploitation of workers, be it from selling goods back to the workers for a price higher than the value (value being the cost of production paid to the workers), or from lending to the workers for interest or rent (labor-free income).

Rate of Exploitation

The rate of exploitation, as you can imagine, is simply the rate of surplus value accumulated by the Capitalists at the workers' expense. So if surplus value is the stock, the rate of exploitation is the flow.

Over-production

Here's a quick excerpt from Marxists.org on over-production:

The real problem when goods lie on the shelves is that no-one can afford to buy the commodities; in other words “over-production” should really be called “under-consumption”.

In another sense however, the term “overproduction” is valid; but it is not goods and services which have been over-produced, but capital.

During a boom period – the rising phase of a capitalist crisis – profits run high and a mountain of fictitious capital is built-up by speculation and borrowing for unwarranted future expansion. All this fictitious capital has to be fed by the surplus extracted from workers and this grows to be more and more of a burden on the backs of the workers until profitability can no longer be maintained, and slump takes over.

Realization of Value

Again from Marxists.org:

Realisation is the transformation of something from an ideal or potential form to an actual or material form. Realisation of value is the conversion of a profit or payment in the form of a surplus product or credit into money form.

Commodity production is based on the production of a product which the producer themself does not need, on the basis that their own need can be met by exchange or sale of the surplus product. In particular capitalist production can only complete the cycle of capitalist reproduction when the labour power is used, the product sold and paid for.

The beginnings of crisis often lie not so much in the failure to produce a surplus as in the failure to realise surplus production.

Are you starting to get the picture? These guys don't like the concept that value is in the eye of the beholder. They need value to be an objective metric in order to explain how the Capitalist exploits the worker. How the rich exploit the poor. How the bourgeoisie exploit the proletariat. From my 2010 post, here are Marx's classes in his version of the class struggle:

Marx's classes were:

1. Labour (the proletariat or workers) - anyone who earns their livelihood by selling their labor and being paid a wage for their labor time. They have little choice but to work for capital, since they typically have no independent way to survive.

2. Capital (the bourgeoisie or capitalists) - anyone who gets their income not from labor as much as from the surplus value they appropriate from the workers who create wealth. The income of the capitalists, therefore, is based on their exploitation of the workers.


And here is my corrected delineation:

The two classes are not the Labour and the Capital, the rich and the poor, the proletariat and the bourgeoisie, or the workers and the elite. The two classes are the Debtors and the Savers. "The easy money camp" and "the hard money camp". History reveals the story of these two groups, over and over and over again. Always one is in power, and always the other one desires the power.

1. Debtors - "The easy money camp" likes to spend (and redistribute) money it did not earn, either by borrowing it, taxing the savers for it, or printing it. They like easy money because it is always and everywhere constantly inflating, easing the repayment of their debts.

2. Savers - "The hard money camp" likes to live within their means and save any excess for the future. They prefer hard money (or in some cases "harder" money) because it protects their savings and forces the debtors to work off their debts.


Some of my readers thought this was my most profound post. Others picked up on my theme and wrote their own articles about "the debtors and the creditors" thinking they had corrected my obvious error. It wasn't an error. It was intentional. The Debtors and the Savers are the two inherent camps. They are not, and should not be, direct counterparties! More on this in a moment.

In Time

In The Debtors and the Savers I posted a very short version of a forgettable movie which helped make the point that individual members of the two camps are not as obvious as the superficially rich and poor. In fact, many in the West who are living like kings are actually up to their eyeballs in debt.

For this post I'd like to direct your attention to the movie In Time starring Justin Timberlake and Amanda Seyfried. It's a much less forgettable movie than Tiger's Tail, so check it out. Here's a two-minute trailer:



The premise of the movie is that time is the currency. And since time passes automatically, that’s like inflation. If you just sit on your currency doing nothing, it will leak away with time. In the movie, when you run out of currency, you run out of time and you drop dead on the spot. Most of the people live in the ghetto and they never have more than a day or two at a time, so they have to keep working just to stay alive.

Then there are the rich people who have eons of time. You can literally live forever in this world if you accumulate enough currency which is also real time. And the rich get richer not by producing lots of good stuff, but by loaning their surplus time to the poor at usurious rates.

The story is told from the perspective of the poor, but from another perspective it really drives home the point that wealth is best kept not mixed in with the transactional currency by relying on debtors' servitude. In the movie the rich could only live forever as long as the poor lived hand to mouth, always working, producing, and never getting ahead to the point where becoming a consumer was an option. So the wealthy relied on the production output of poor debtors for their wealth which, in this world, was an endless life of luxurious consumption.

But as a net-producer (one who produces more than you consume) that’s not the best way to store your purchasing power. If you could pick a counterparty for your future, would it be a debtor who lives hand to mouth always on the precipice of bankruptcy, or a fellow net-producer? How about if you could choose between either all of the debtors as your counterparty, aggregated by a government which has every incentive to debase your savings, or all of the net-producers/savers with a 5,000 year track record of their innate drive to net-produce and save for the future? Which would you choose if such a choice existed?

This film is a classic illustration of the popular "Marxian" view of perpetual class struggle: exploitation of the workers. The wealthy live the good life consuming as much as they want on the backs of the indebted poor who must slave away producing just enough to stay alive, plus some surplus for the wealthy to consume.

But is this reality?

With the proper perspective and a little quiet contemplation it becomes obvious that, today, we highly indebted Westerners have a much higher living standard and luxurious rate of consumption than the net-producers of the world. Those supporting our lifestyle are not indebted to us—it's the other way around. And other things become clear as well. Like that credit (debt) is demanded by the debtors (remember, human demand drives everything), not forced upon them. And that banks, whose job it is to extend credit (aka easy money), are actually in the easy money camp along with the debtors. More on this in a moment.

The Mungerian View

Over on the other side of the coin we have Mungerian paperbug Capitalist and fair-weather friend to the "goldbugs" (a term with which I cannot identify), Izabella Kaminska [1], who, after "enduring" a few tweets from Freegolds among others, thought she schooled her buggy friends with a two-part series creatively titled, Debunking goldbugs.

I say she's the other side of the coin because Izabella thinks the savers owe it to the debtors to be their direct counterparty and earn some labor-free income via interest which the Marxians call exploitation. And I called her a Mungerian paperbug in honor of Charlie Munger because she sounds just like Munger and the Dingbat from my post A Winner Takes the Gold. Remember that Charlie thinks you’re a jerk if you hoard gold? Well Izabella says you're a selfish, anti-social cheat.

She even tries channeling John Locke's reasoning into an argument against hoarding gold with this clever quote from the conveniently titled RealitySandwich.com:

Suppose I have twelve loaves of bread, and you are hungry. I cannot eat so much bread before it goes stale, so I am happy to lend some of it to you. “Here, take these six loaves,” I say, “and when you have bread in the future, you can give me six loaves back again.” I give you six fresh loaves now, and you give me six fresh loaves sometime in the future.

In a world where the things we need and use go bad, sharing comes naturally. The hoarder ends up sitting alone atop a pile of stale bread, rusty tools, and spoiled fruit, and no one wants to help him, for he has helped no one.

Here's some John Locke from my post dealing with Munger and the Dingbat:

Furthermore, gold is the most socially responsible valuable good to "hoard" (save), which is another reason it is the focal point. John Locke wrote way back in 1690 that it is "foolish and dishonest" for men to hoard up things of short duration, things that are consumed in the support of life, or any more than one can personally use from the common stock of perishables and truly useful supports of life. This, Locke wrote, is how man came to value durable things of no industrial worth, that "he might heap up as much of these durable things as he pleased… and keep those by him all his life," because "he invaded not the right of others."

Of course you don't want to hoard perishable goods like loaves of bread! That's just silly. But it is an important concept to understand. So why hold someone else in debt rather than simply hoarding a durable thing of no industrial worth, as the real John Locke recommends? Well, Izabella's argument is that you are better off if you lend your surplus to someone so that you can later ask for it back. She calls this the "favour system" and she says that if you hoard gold then you are "opting out" of this "collaborative process".

But how does holding someone else in your debt make it more likely that you'll be able to redeem your six loaves than if you simply sold them and bought a durable thing that is extremely likely to be considered valuable by other savers in the future? In fact, it doesn't! And Izabella addresses this issue.

She says that you're better off not holding a specific person in debt because he might die, but rather holding your government's debt! She says the "sovereign lord" provides the vital service of credit aggregation and central clearing (which is true for the transactional currency) and thereby creates "fungible" and "non-perishable" debts for saving! (At least she didn't go so far as to call government debt infinitely divisible, discreet, transportable and pretty.)

But even though government debt may be relatively fungible and (nominally) non-perishable, you're still at the mercy of the government should it decide to debase your savings. Izabella says this is not only a good thing, but it is your social duty:

Luckily for the system, the sovereign can expand or contract the number of debts that circulate within its community to match the current production/wealth profile of the nation and keep the system in check.

[…]

You could say, the sovereign borrowed from the rich (those with surplus wealth which will otherwise perish) and redistributed the wealth according to the needs of the community. Since everybody received something, including the ‘rich’, a tax (cancellation of debts outstanding) kept the system in balance. Very MMT.

What she's saying here is that too much savings is a burden on the system and the government provides the valuable service of debasing burdensome levels of savings down to a socially healthy level. How does that make you feel? And yeah, Izabella is apparently quite fond of MMT, which is why this part reminded me of someone else who once said that savings above "a certain level" are a "burden". I'm talking about our very own MMT Greg:

I don't disagree with your idea of saving but it cannot be done to much of a degree on a macrolevel. There must be someone to consume your oversupply after a certain level. Savings is a burden when excessive. How to predetermine the "right" amount ? Dont know. How to know it when you see it....... right now. We have OVER produced a lot of things.

As Mosler is fond of saying, economics is the opposite of religion, in economics it's better to receive than to give. If you produce extra and [loan] it to me so I don't have to produce it myself .....THANKS is the proper response.

In part 2 of her bug schooling affectionately titled Gold’s Anti-Social Behaviour Order, here is Izabella expressing the same sentiment as MMT Greg regarding excessive savings being a burden on the system (my emphasis):

…there’s no denying a promissory note is a much more practical unit of exchange and store of value than a bar of gold.

The problem with promissory notes from a goldbug’s point of view, however, is that a sovereign always has the means to “manipulate” supply so as to regulate the system’s excesses and deficits for the benefit of the group: bringing their purchasing power of the notes down when there is an abundance of goods to notes “by printing more”, and bringing their purchasing power up when there is a deficit of goods to notes.

This puts the interests of the group above those of the individual, because — in the words of goldbugs — it “steals” wealth from individuals.

These regulative processes of course are necessary. They’re a correcting mechanism that ensure efficiency and curb wasteful production. And, as we’ve stated before, it is anticipated that promissory notes are eventually extinguished via the payment of taxes. In a perfect system the sovereign should provide for you, once you’re no longer productive anyway.

In other words, it is good that the government can reduce "excessive savings" through debasement. In fact it is the government's job to do that, just like it is the government's job to take care of you when you get old according to Izabella. And here is "gold's anti-social behavior" in a nutshell:

What gold thus represents, we would argue, is an opt out, and a cheat, from participation in the group correctional process. Its existence undermines the sovereign’s ability to regulate the supply of debt to match the needs of the system. In a situation where there are too many goods, and too little monetary sovereign debt, the sovereign clearly needs to create more sovereign ‘debt money’ — and debase the store of value — to encourage more of this overproduction to be used and efficiently allocated.

Since gold can’t be “debased”, it begins to attract investment from those who would rather not consume today’s overproduction (and via that sharing wealth and ‘favours’) but continue to hoard these for the purpose of individual wealth accumulation.

In the opposite scenario, when there aren’t enough goods to satisfy sovereign debt claims and the sovereign intervenes by contracting the money supply — by making it extremely expensive to borrow but extremely attractive to invest in the production of goods — gold attracts investment from those who would rather not delay consumption until tomorrow for the benefit of the community.

Gold in this way symbolises humanity’s selfish streak.

[…]

So while gold may be a workable underlier for a redemption option, this doesn’t change the fact that at the heart of the system it is faith and faith alone which holds everything together. Whether that faith is reflected in a sovereign’s ability to manage the economy on behalf of the group, in the sovereign’s guarantee to honour a gold option, or faith in the gold god himself… faith is the constant. Not gold.

What’s more, while gold encourages anti-social behaviour and hoarding in individuals, a fiat-based system encourages the very opposite: sharing, distribution, collaboration and cooperation.

And then she concludes with two options:

Which leaves two possible plans out of the crisis:

1) The goldbug plan: based on encouraging everyone to hoard ever greater amounts of natural wealth for themselves and themselves in what is ultimately a commodity you might never be able to eat.

2) The fiat plan: based on encouraging society to trust each other again, and via that storing, redeeming and returning favours until the system’s ails are eliminated.

This is obviously someone with both feet firmly planted in one camp telling the other camp what they should do. Almost reminds me of that famous quote about sharing and unselfishness by… hmm, I forget, was it Jesus? "From each [producer] according to his ability, to each [consumer] according to his needs." Funnily enough, here's what Wikipedia says about that quote:

In the Marxist view, such an arrangement will be made possible by the abundance of goods and services that a developed communist society will produce; the idea is that there will be enough to satisfy everyone's needs.

Now compare that idea with Izabella's post one week later titled The end of artificial scarcity:

It’s an environment that we have argued requires a new paradigm for the world. A transition towards a steady-state where money has no choice but to depreciate because its role as a store of value has been made redundant due to the general abundance of goods in society, brought about by technological innovation and efficiency. In a post-scarcity environment there is no need to delay or hurry purchases, or to even have a store of value. You use only what you need.

[…]

And when that happens money itself will die, because who needs to save for their old age, if over the time the system is going to provide ever more “stuff” you need for free or almost for free.

Not convinced?

We’d argue the signs that this is happening are already appearing.


Да здравствует революция indeed!

In truth, Izabella's whole argument in the two goldbug posts was based on a flawed premise considering that they were spawned by her frustration at interaction with "Freegolds" and a few of my other "regulars" on Twitter rather than with true goldbugs. That premise was her assumption that they (we) have, in her words, an "utter and complete hatred of the so-called paper money system."

The truth is that we view the primary and secondary functions of a monetary system separately. Paper money (and electronic currency) is, in fact, the best thing since sliced bread in the transactional role. Here's a quote from our very own Aristotle describing his personal journey and discovery that paper money is not only good, but necessary, back in 2000:

"Going in, I was a charter member of the Goldhearts club [aka a goldbug], and I emerged even more excited about the prospects of Gold than before. The future for Gold is bright, and it is rapidly approaching in the manner I laid out, if I'm reading the signs correctly.

In working on this project, I was personally shocked when I discovered that we absolutely NEEDED paper currency in order to set Gold free."


Freegold is not about making easy money a little bit harder. On the contrary, it is about the debtors and the savers coexisting without the perpetual monetary conflict embedded in all prior systems. (See The Debtors and the Savers 2010 for more about this perpetual conflict.)

Izabella has probably never heard of FOFOA's dilemma. Here it is, from The Return to Honest Money:

FOFOA's dilemma: When a single medium is used as both store of value and medium of exchange it leads to a conflict between debtors and savers. FOFOA's dilemma holds true for both gold and fiat, the solution being Freegold, which incidentally also resolves Triffin's dilemma.

And from that same post, here's my definition of Honest Money: "My definition is that honest money is simply money that does not purport to be something it is not." As I explained in that post, money's two main functions, medium of exchange and store of value, are actually fulfilled by two different media, even today: a primary and a secondary medium of exchange. Today (and in Izabella's ideal world) that secondary medium of exchange is debt denominated in the primary medium.

The quote at the top of my blog reads: "Everyone knows where we have been. Let's see where we are going!" Well, everyone knows we have been where debt is the systemic store of value, its "tier 1" reserves, and Izabella doesn't seem to be arguing the inevitability that this is also our future. Instead she seems to be arguing that it is simply the better of two choices—the socially responsible and unselfish thing to do with your savings. But is she correct? Is debt really better than gold for the overall society?

In order to answer this question I think we need to look carefully at which one is better from two different perspectives; from the perspective of the savers and from the perspective of society at large. I'm attributing the perspective of society at large to that of the debtors as well. As I pointed out earlier, Izabella is clearly in the debtor camp. This doesn't necessarily mean that she's in debt. It simply means that she's in the easy money camp as opposed to being in the hard money camp—what she thinks of as "the goldbugs".

She may in fact have savings, but as she says, she "puts the interests of the group above those of the individual" and she's happy to do her civic duty of letting the government debase her savings when necessary. This puts her firmly in the debtor camp. And being in the debtor camp, she is obviously arguing for the benefit of the overall society or economy. So that's why I say I'm attributing the perspective of society at large to that of the debtors as well, because they are apparently one and the same.

Now would probably be a good time to restate that "the debtors and the savers" is a dichotomy, not a moral judgment. It is a way of viewing the world in two camps that corrects Karl Marx's most enduring (and harmful) legacy. Neither camp is better than the other any more than women are better than men. It is simply a model for understanding how two groups with apparently different innate tendencies have always been placed in conflict with each other throughout history due to the emergence of monetary systems. If you haven't read The Debtors and the Savers yet, now would be as good a time as any! ;)

From the Viewpoint of the Savers

Is money positive or negative equity? Izabella correctly implies money to be fungible claims on each other's goods. And she goes on to explain that these claims can sometimes be too numerous "when there aren’t enough goods to satisfy" all of the claims. This, she explains, is when the government steps in and makes adjustments to keep the number of claims roughly in line with the number of goods.

So when we look at money (or claims against the physical plane of goods and services) in aggregate, we can clearly see that hypothetically doubling or tripling the number of claims actually reduces the specific amount of equity in the physical plane each fungible claim represents. It is for this reason that I like to think of money in aggregate as negative equity, and also why I like to delineate between the monetary and physical planes.

Being a claim, it is merely one half of a physical plane barter transaction. You sold a good or provided a service in the physical plane and received a claim in the monetary plane. Once you redeem that claim for a good or service in the physical plane you will have completed a full transaction. But until that time, while you are holding money, you are only halfway there. And for as long as you remain in this barter purgatory, you are exposed to the effects of your claim being negative equity which I just described.

(I used the term "money" above because if, hypothetically, the gold stock could be doubled or tripled quickly enough, the same principle would apply to gold.)

Clearly it is the well-known exchange rate between monetary claims and the physical plane—as opposed to some intrinsic or cost-derived value—which gives these claims their value. It is the observed completion of other transactions today, yesterday and last week, which informs us of what we can expect to get for the claims we are holding. But as savers, we intend to hold these claims for a long time, perhaps even decades, so we want some sort of additional reasoning as to why they will hold this present known value for such long periods of time.

Of course very few savers hold the primary medium of exchange for long periods of time. We hold what Mises called secondary media of exchange. And the world is full of things other than "the common stock of perishables and truly useful supports of life" which we can hold (hoard) for this purpose, from stocks to bonds to antiques, classic cars or even baseball cards. Here is Mises from his book Human Action explaining the concept of secondary media:

A first-class bond is more marketable than a house in a city's main street, and an old fur coat is more marketable than an autograph of an eighteenth-century statesman. One no longer compares the marketability of the various vendible goods with the perfect marketability of money. One merely compares the degree of marketability of the various commodities. One may speak of the secondary marketability of the vendible goods.

He who owns a stock of goods of a high degree of secondary marketability is in a position to restrict his cash holding. He can expect that when one day it is necessary for him to increase his cash holding he will be in a position to sell these goods of a high degree of secondary marketability without delay at the highest price attainable at the market.

[…]

Consequently there emerges a specific demand for such goods on the part of people eager to keep them in order to reduce the costs of cash holding. The prices of these goods are partly determined by this specific demand; they would be lower in its absence. These goods are secondary media of exchange, as it were, and their exchange value is the resultant of two kinds of demand: the demand related to their services as secondary media of exchange, and the demand related to the other services they render.

[…]

One must not confuse secondary media of exchange with money-substitutes. Money-substitutes are in the settlement of payments given away and received like money. But the secondary media of exchange must first be exchanged against money or money-substitutes if one wants to use them—in a roundabout way—for paying or for increasing cash holdings.

Claims employed as secondary media of exchange have, because of this employment, a broader market and a higher price. The outcome of this is that they yield lower interest than claims of the same kind which are not fit to serve as secondary media of exchange. Government bonds and treasury bills which can be used as secondary media of exchange can be floated on conditions more favorable to the debtor than loans not suitable for this purpose. The debtors concerned are therefore eager to organize the market for their certificates of indebtedness in such a way as to make them attractive for those in search of secondary media of exchange. They are intent upon making it possible for every holder of such securities to sell them or to use them as collateral in borrowing under the most reasonable terms. In advertising their bond issues to the public they stress these opportunities as a special boon.

I included all of that long excerpt so that you could see how he explained, in his own words, the concept of a focal point in this secondary media role. Many items will suffice as a secondary medium of exchange, but the more an item is used in this function, the more value it derives from this particular function, over and above the value from other uses: "…their exchange value is the resultant of two kinds of demand: the demand related to [1] their services as secondary media of exchange, and the demand related to [2] the other services they render."

And then you probably noticed that his search for the focal point led him to government bonds. I figured this would make Izabella smile if she's still with us. So why do you think he didn't mention gold as one of the secondary media of exchange? Perhaps it was because, when he wrote the book in 1940, gold was the primary medium of exchange.

I think I'm now at the point where I can narrow the focus of the discussion substantially. Izabella and I are both talking about government debt versus gold as the two main competitors to becoming the focal point store of value (aka secondary media) of the future. So let's just stipulate that and move on. Also, I think we can both agree that government debt has been the official (and focal point) secondary medium of the recent past. Furthermore, Izabella says that between government debt and gold, gold is the more selfish choice. I'll stipulate to that as well.

In a moment we'll investigate whether the "selfish" choice is the better one for the economy as a whole, but in this section we are looking at it from the "selfish" viewpoint of the savers. Izabella admits that the government debases its own debt, which, taken along with her labeling of gold as the "selfish" choice, leads me to believe that she would be okay stipulating that, at least on the surface, gold appears to be the better choice from a "selfish" saver's perspective. So then the only question remaining is whether or not gold actually is better as it appears to be. Izabella says no.

Izabella warns "us" via Twitter: "The problem with gold (imho) is that it isn't a scarce commodity. You have to physically make it scarce by hoarding it."

The only problem with her tweet is the word "problem". Other than that, she's absolutely right! There are 170,000 tonnes of gold out there somewhere, 60 times annual production—that's a 60 year "supply overhang" in commodity terms—and yet the flow today is barely more than what's coming out of the ground. That's not a problem. That's absolute proof that gold is far more valuable than its commodity price today!

Gold’s value really comes from intergenerational Giants who have no need to ever sell it. They really just net-produce and net-produce and they do it willingly for more and more gold, and then just sit on that gold until they die and pass it on to the next generation. And they will keep doing this no matter what the $PoG does. They're not buying it for its weight, but for proven long run currency exchange value! But if there’s no flow for them to get some, then they have to buy things like extra castles and cars and stuff that drives up prices and drives down everyone else’s purchasing power.

So it’s better for everyone if there’s a steady flow of gold. Remember how Another said they justified the "gold as a commodity" (strong dollar) trade because they thought it would induce the mining industry to produce greater and greater quantities of gold?

Date: Mon Feb 16 1998 14:40
ANOTHER (THOUGHTS!) ID#60253:

Now, back to gold. The deal: you may stand your army for us, in return, "oil will back the dollar if the dollar is made strong by gold" "in as much as our people may replace the lost value of oil with gold" "in as much as we will produce oil in amounts to equate a gold/oil/dollar ratio close to that which existed at our previous agreement in the 70's" And, pray tell, how does the USA make the dollar strong in gold ? The BIS leads the creation of a paper gold market that will lower the world price of gold to the extent that it remains above "production costs".

Guess what, it worked! Contrary to all expectations of oil shortages, inflation, debt collapse and what have you, It Worked! But, there is one small problem?

The BIS and other various governments that developed this trade (notice I didn't use conspiracy as it was good business, as the world gained a lot), thought that the paper gold forward market would have allowed the gold industry to expand production some five times over! Don't ask where they got this, as they are the same people that bring us government finance and such. But, without a major increase in gold supply, the paper created by this "gold control operation" will either be paid by, 1. new supply. 2. the central banks. 3. rollover existing. 4. cash? or 5. total default! As the Asians started buying up everything last year ( 97 ) , numbers 5 and 5 started looking like the answer! When the CBs started selling into this black hole of demand, the discussion of #5 started in their rooms also.


So it’s good for everyone if there’s a steady flow of gold and a stable price for the Giants. These Giant super-producers (including oil producers) will produce the most stuff and leave it on the economic table for us without running up the prices of things we need to buy as long as gold is flowing unrestricted. And also, when CBs and nation-states start valuing gold the way these Giants do, we won’t have the mines running at full steam trying to add more to the supply. First of all they'll want the price to stay steady for the economic benefit net-producers bring to the table, and second of all they'll want their own treasure to hold its value. And to the nation-state, gold in the ground is a treasured reserve as well as gold in the vault.

It may seem counterintuitive, but the flow of gold from the mines will eventually be controlled or regulated by the government and, in most cases, will be just enough to keep the miners economically viable. This is why I view mining shares as a terrible Freegold play. Today the flow of physical gold is mostly from the mines to the savers. In Freegold, the flow will be almost entirely from the above-ground stock, from one saver to another.

As I wrote about in Glimpsing the Hereafter, gold is like a closed circuit for the savers, isolated from the transactional currency system which is used by everyone, debtors and savers alike. Some might call it selfish. I can live with that. Here's a taste from that post:

I think that if we look closely at how the debtors use the fiat money system with and without the assistance of the savers, it will become clear that we will all be better off with a bifurcated monetary system. And it will certainly be clear that the savers have no business taking debtors on as the counterparty to their savings.

[…]

So gold has kind of a double float. It floats with the inflation/deflation of everything else. And then it also floats in a closed circuit consisting only of savers (and their "hoard/dishoard" choices), of whom the majority (measured by value stored) are intergenerational giants.

The way the gold market works today is a little different. It is kind of a flow within a flow. On the surface, anyone can very easily buy exposure to the price of gold. In fact, this "exposure" is all that most Westerners want, including traders, speculators, goldbugs, hedgefunds, anykindafunds, banks, you name it. And most of this group is firmly in the debtors (easy money) camp. But underneath this superficial flow is the physical flow from the miners and physical gold pukers in the West to the true savers like the Giants in the oil-rich Middle East and net-producing Asia.

The key to keeping this gold market humming along, however, is that anyone who asks for physical in any size has to get it. But those who can afford real size also know that hogging the flow and stressing the system is not the best way to get what they want. So here's what we know. In 1997 the LBMA leaked to the Financial Times a paper gold clearing volume far greater than anyone imagined. This was the same time that Another said "the Asians started buying up everything" and that "the CBs started selling into this black hole of demand."

About two years later we heard from the European CBs through the WAG (the Washington Agreement on Gold) also known as the CBGA (the Central Bank Gold Agreement). The agreement came on the heels of the euro launch and, even though it was announced in Washington DC during an IMF meeting with Larry Summers and Alan Greenspan present, it was only between the European central banks. It stated very simply the following:

In the interest of clarifying their intentions with respect to their gold holdings, the undersigned institutions make the following statement:

1. Gold will remain an important element of global monetary reserves.

2. The undersigned institutions will not enter the market as sellers, with the exception of already decided sales.

3. The gold sales already decided will be achieved through a concerted programme of sales over the next five years. Annual sales will not exceed approximately 400 tons and total sales over this period will not exceed 2,000 tons.

4. The signatories to this agreement have agreed not to expand their gold leasings and their use of gold futures and options over this period.

5. This agreement will be reviewed after five years.

Two years later, in 2001, gold began a relentless climb in dollar-denominated price of about 18% per year which continues today:



And then, in 2009, the CBs in aggregate became net-buyers of shiny rocks:



In 2011 the LBMA released a survey revealing not just the clearing volume it began reporting in 1997, but the total daily turnover in LBMA bullion bank gold credits. From my post Once Upon a Time:

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

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

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


Then in 2012 (just a couple of days ago actually), the US FDIC announced that gold bullion is up for consideration as an equal to government debt with a zero risk weighting. And just yesterday Ben Bernanke signaled his subconscious support for this measure by choosing to wear a gold tie. ;)



I'm sure this is all very insignificant information to a Mungerian paperbug like Izabella Kaminska, but let's just think about this for a second as it compares to her racehorse: government debt.

From a saver's perspective—one who wants to hold claims for a long but unknown, unspecified amount of time—debt is attractive in a falling interest rate environment. This is because debt usually has a specific maturity date and yet savers can't know precisely when they'll need their money. So debt is appealing as long as there is a liquid secondary market with plenty of upside to run.

This is most obviously true when interest rates are allowed to be set as high as necessary by the unfettered marketplace and then they begin to fall for one reason or another. As interest rates fall, old promissory notes signed when rates were higher become more dear. Debtors seek refinancing while savers can easily unload their saving without losing purchasing power.

This was the case from 1981 to present. Interest rates fell (for one reason or another) from around 20% down to 0%. Today there's not a whole lot of room for them to fall any further except for maybe going negative, and then you're just losing principle. So there's not much upside for debt today like there was in 1981, but with ZIRP there is a whole lotta potential downside.

Not only that, but in this case we're talking specifically about government debt. And what are our choices today? We can choose between almost no interest (actually negative real interest) from a government which is openly debasing its currency and diluting its bond market, or a slightly higher interest rate from a government with serious budget problems and some non-zero likelihood of default. That's quite a choice for a secondary medium with limited upside and unlimited downside!

Then there's gold, with limited downside and lots of upside potential. It's a tough sell to savers who have been swimming in a sea of Mungerian paperbuggerdom their whole lives, but not to the true Giants who already hold 170,000 tonnes and aren't letting it go at today's paper gold prices. As I have already pointed out, the intergenerational Giants who hold a great deal of this physical gold have no need to ever sell it. This is a key concept you might want to stop and ponder.

Lastly, I want to mention the nominal savings argument. Government debt, especially a government like the USG which can print its own currency, is at least nominally safe. If you save a million dollars you'll get a million back at the end of the day. The only question is what will be the purchasing power of those dollars when you need them. Well the same nominal argument applies to gold when applied properly. If you buy 500 ounces of gold you will still have 500 ounces of gold at the end of the day. The only question is what will be the purchasing power of those ounces when you need them. See?

So, not that I think I have convinced Izabella of anything, but just so that we can move on, let's agree that from the viewpoint of the savers—perhaps even a selfish viewpoint if that helps—who want to hold fungible "claims" on goods and services for a long but unknown/unspecified amount of time, gold beats government debt today hands down. If you don't agree then please return to the top of this section and read it again. If you agree, let's move on to the viewpoint of the debtors, aka the viewpoint of the economy as a whole.

From the Viewpoint of the Economy as a Whole

In the simplest terms, I like to refer to the savers as net-producers. All this means is that a saver consumes less than she produces. It's really the simplest way to differentiate the debtors and the savers. In general, the debtors either consume as much or more than they produce by borrowing, taxing or printing money. Of course everyone consumes, and everyone produces to one extent or another. But at the margin, debtors consume and savers produce.

My delineation does go a little deeper than this, though, to include monetary preference. That's why I use "the easy money camp" interchangeably with "the debtors". The easy money camp prefers easy money for various reasons including not just the ease of repaying debts but also that easy money may be how they make a living. And this is why I put the banking industry, including Wall Street, in the easy money camp along with the debtors.

Banks, of course, are often the creditors to the debtors. And that's why it's the debtors and the savers rather than the debtors and the creditors. The debtors and the creditors are in the same camp together! As I said earlier, it's not a good idea for the savers to be counterparty to the debtors. But, of course, Izabella Kaminska disagrees. She thinks it's the savers' civic duty to be the debtors' counterparty.

In thinking through which is best for the economy as a whole, it is important to understand that the excess money earned from net-producing does not disappear no matter how it is saved. It is always passed along to someone. The money remains in the economy. Hoarding gold does not deprive the economy of your excess earnings any more than buying government debt does.

If you choose to save in debt, your money is passed on to a debtor. A debtor's natural inclination is to net-consume (consume at the margin) rather than net-produce (produce at the margin) if at all possible. So by saving in debt you actually encourage a natural predilection to produce less since you enable specifically those people with the tendency to borrow rather than produce. In the long run you end up with high unemployment.

But in Freegold, the money that comes from net-producing is passed on to other net-producers who choose to sell their gold for one reason or another. These "dishoarding" net-producers (savers) are either going to use that money for consumption or they will use it for productive purposes like starting or expanding a business. All of these uses tend to employ someone. And if the easy money camp is managing the currency prudently, some may even sell their gold for money just so they can lend it for productive purposes, or invest it in promising ventures.

Debt-financed consumption only expands the total amount of debt and the ranks of the unemployed. The idea that debtors borrowing to consume can sustainably raise employment levels is pure hogwash.

So in no uncertain terms, Freegold is the key to true full employment! Debt as an alternative to gold ultimately leads to high unemployment! Izabella, Munger and the Dingbat are all dead wrong!

The Winds of Change

Are you enjoying high unemployment yet? The $IMFS is, even though its leaders will never admit it. One of the Fed's (quote-unquote)
"mandates" is full employment and Obama touts (quote-unquote) softening unemployment while the number of PhDs on food stamps has tripled.

Everyone would enjoy full employment, right? The debtors, the savers, the economy as a whole? Well, maybe everyone except the welfare junkies. And who's the biggest welfare junkie of them all? The only hint I'm gonna give you is look at the picture at the top of this post. See? Welfare junkies don't always look like this:



The flight plan to global unemployment was filed in 1922 when they came up with the brilliantly circular idea of using credit as the store of value foundation for credit. Of course global unemployment is a fantasy island destination, so here we have had an emergency hard landing on the island of reality with a brief layover before heading toward our new destination, change.


Banks can provide all the credit the debtors need beyond their ordinary income (and that includes governments). There is no fundamental economic need for the savers to contribute their surplus earnings through debt securitization as a store of value. All that does is encourage unemployment.

The savers have no business being counterparty to the debtors. A German economist, uber-easy money camper and social justice activist who wrote the book on easy money a century ago even said as much. From his book cleverly titled 'Free Money' on which John Maynard Keynes showered fulsome praise, here's Silvio Gesell:

"And it is clear that money cannot be simultaneously the medium of exchange and the medium of saving - simultaneously spur and brake.

[…]

I therefore propose a complete separation of the medium of exchange from the medium of saving. All the commodities of the world are at the disposal of those who wish to save, so why should they make their savings in the form of money? Money was not made to be saved!"


And a fun quote from Keynes:

"I believe that the future will learn more from Gesell’s than from Marx’s spirit."

The Debtors and the Savers is simply a common sense adjustment to the prevailing dichotomy of the Capitalists and the Laborers, or the bosses and the workers. It is a slightly altered lens with which to view the history of the world. The old lens has a bloody history of leading to dangerous and deadly confrontations. It will also prevent you, personally, from understanding Freegold early enough to profit from that understanding.

Of course all present goods and services get used in the present, but that doesn't mean that surplus value is only an illusion based on exploitation. Surplus value is very real, and savable through any length of time and in theoretically limitless amount. But not if you're using debt as the medium. Using debt, too much "savings" becomes a burden which is then dealt with one way or another.

Everyone will understand this eventually, although it may not specifically be called "Freegold" in the end. Thinking for yourself pays. Seeking reassurance feels good, but it doesn't pay. Waiting for official confirmation is also rewarding, but the reward isn't money.

"Change isn't easy. More often, it's wrenching and difficult. But maybe that's a good thing. Because it's change that makes us strong, keeps us resilient, and teaches us to evolve."

FOA: "It has everything to do with a changing world financial architecture. And I have to admit: if you hated our last one, you will no doubt hate this new one, too. However, [and here's the all-important caveat] everyone that is positioned in physical gold will carry this storm in fantastic shape."

Sincerely,
FOFOA

[1] Note to Izabella: When I use you in a post like this you shouldn't take it personally. I never expect to change a fixed mind. You were simply used as a literary device, so please don't take it personally. Or do… that could be fun!



555 comments:

1 – 200 of 555   Newer›   Newest»
Aquilus said...

Just what the doctor ordered. Thanks FOFOA.

victorthecleaner said...

Thanks, FOFOA, that's fantastic.

One technical detail that struck me was the argument that lending surpluses to consumers as opposed to saving (=investing) it, tilts the allocation of the national income from savings to consumption. So excessive consumer credit should lower the savings rate and thereby tend to reduce GDP (because there is fewer investment).

Now this isn't rocket science, but should rather be textbook macroeconomics. Where is this argument in the public discussion: In order to grow the economy, we need to invest, i.e. we need to increase the savings rate, and so we better don't lend that much to consumers.

Blondie, JR, Jeff,

concerning the question of how did we get into this mess, I agree that 1922 provided the academic and diplomatic cover. But until 1971 I think the system would have been possible to fix without collapse, simply by raising the official price of gold - as demanded by most of the Europeans at that time. It was only after 1971 that the dollar became a dead end political tool. I like Jeff's brief synopsis.

On the question of the timing:

1) I don't think anyone in the Euro zone will use gold as a collateral before the revaluation - I don't think the individual governments can just pledge their gold for additional credit without ECB approval. Why would they do this?

2) I don't think the ECB is ready for the new system unless the majority of their governments have learnt to fund their expenditures without new budget deficits. They are on track to put some further serious squeeze on the governments. Note that they said that Spain has not yet properly dealt with their commercial banks, and indeed they are letting the interest rates on Spanish debt rise. If you ask me to guess, there will probably also be a clash with the French government before this is over.

At the moment, the Euro is harder money than the gold standard in Jim Grant's wildest dreams.

3) If someone decides to press the red button, it will probably look like an investment banking accident in London. Then some GATA people will be on TV telling viewers that the evil banks sold investors some 10000 tonnes that they didn't have. When J Dimon then has to testify before Congress and explains that 10000 tonnes short a currency is typical day-to-day forex trading and could not have been expected to turn sour, that would provide a nice scapegoat for the events to follow, wouldn't it?

The other option is, of course, that the London market breaks as the consequence of a dollar crisis.

(I always thought that the U.S. government has an incentive to crash the dollar suddenly. But they do need a scapegoat, don't they?)

Victor

Michael said...

and then he spikes the ball!!!

Robert Mix said...

Excellent, FOFOA! I will respond when sober... LOL!

Robert Haines said...

One comment about Munger and the evils of hoarding gold - it's nonsense. By "hoarding gold" I am simply releasing dollars (or other paper currency) for someone else to do social good works with. Arguably I am being socially responsible! If I was a hoarder (in style of Munger's objection) I would go to the bank, withdraw cash currency and stuff it in a mattress, denying others the ability to use it.

Beefy said...

That follows from the Keynes quote that money (currency) should not be used for savings. If it is then the velocity of money falls and this action is therefore deflationary. But don't we have freegold right now or is the purpose of this to highlight that debt based wealth (bonds) should be removed from that Tier 1 status?

JR said...

Victor,

You say:

But until 1971 I think the system would have been possible to fix without collapse, simply by raising the official price of gold - as demanded by most of the Europeans at that time.

The issue in discussion is where the credibility inflation came from, specifically the "modern era of Credibility Inflation" that began in 1980. I have no idea what you think other people are discussing or why the above is pertinent to that.

costata said...

FOFOA,

Good follow up to a very difficult post to top (Debtors and Savers). Ash will be spanking his keyboard like a fiend I imagine ;)

I liked the increased clarity you provided in this post on your perspective of the counter-party relationships. I think it may help to clear the air for some readers.

Cheers

Dr. Peter T said...

Class!

AdvocatusDiaboli said...

nice piece!!!

I'm just not so sure about 2things:
1.) "focal point" - looking at society, although german public might be considered very pro gold (compared to other european countries), still in comparision much more money "flows into" other "focal points", e.g. appartments, luxury houses...
2.) "sterilized by the paper gold" - I dont see that ending. Actually it is increasing, since "generation facebook" does not like taking personal responsibility for physical.

You might scream, "those are dumb and shouldnt do so...". I know, but I am just saying like it is.
my2cents, Greets, AD

Motley Fool said...

“Banks can provide all the credit the debtors need beyond their ordinary income (and that includes governments). There is no fundamental economic need for the savers to contribute their surplus earnings through debt securitization as a store of value.”

Well, the debtors might not admit it, but there is one reason they would like that. Using savings this way reduced the real value of the savings. For governments, even though they have printing presses and any debt can be paid in nominal terms, if there were no savings that could be abused this way the depreciation rate of the currency if they kept up current levels of overconsumption would be politically unpalatable. For debtors the situation is no better, as they would then have to pay very much higher interest rates for their loans to compensate for currency debasement. This is the civic-duty , as mentioned by Kaminska.

“ How does that make you feel? “

Angry.

“But not if you're using debt as the medium. Using debt, too much "savings" becomes a burden which is then dealt with one way or another.”

This was a nice little aha! for me, as to why they are complaining about too much savings. :)

As always thanks for a insightful post. :)

TF

DASK said...

Yet another killer post.

"If you could pick a counterparty for your future, would it be a debtor who lives hand to mouth always on the precipice of bankruptcy, or a fellow net-producer?"

was one personal favourite among many.

Bjorn said...

What MF said! I hadn´t understood that side of it before, although I had the feeling that there must be something more to it than just savers not consuming enough for the consumer driven economy drivel. (Because that argument is just too stupid) And also nice to see some Scorpions up in here!

ChrisF said...

Brilliant. So the way to reduce unemployment in the West is for China to rapidly sell their trillions of Government $ debt and buy Gold... !!
I can't wait. Thanks for explaining it all so clearly. Wonderful.

poopyjim said...

Nice piece!

Societal benefits notwithstanding, if you're using, as a rationale for investment (or savings), whether a particular investment is "socially beneficial" or whether it will "stick it to the man" (GO SILVER LIBERATION ARMY!) I'd say that's a pretty shoddy investment calculus. Who invests for altruistic reasons? Soon to be broke people most likely. If gold is a selfish choice that means it is a GOOD choice.

AdvocatusDiaboli said...

social welfare is something americans appear not to like so much.
But let's look at it from the physical plane:
Those spendings waste what kind of resources on the physical plane? Poisoned plastic crap from china and fast food. Not really something to worry about that much. You should come to Germany, here every muslim immigrant, living from SW, drives Mercedes&BMW, THAT is something to see, not comparable to your EBT.

But looking back at the US. How about the military spending (+Homeland+TSA+....)? Just think about what those resources (human&commodities) are taken from physical plane, wasted on additional destruction of the physical plane.

Simit Patel said...

i don't fully understand your point about mining shares being a terrible option. are you saying you suspect they will under something resembling nationalization and thus their profit potential will be curtailed by government?

thanks for your thought-provoking posts, as always.

Polly Metallic said...

The only point I am not clear on is this: wouldn't some people argue that the debtor borrowing to consume does not produce unemployment because he is borrowing to buy things he could otherwise not afford, and therefore increasing consumption and increasing the need for workers to produce goods. It seemed that this borrowing to live beyond one's means is what artificially kept the US economy going for the last couple decades or more. What am I missing here? Thanks

Anand Srivastava said...

@Simit Patel: Exactly :-). They will be nationalized or have to pay enormous taxes. Anyway they will not make any money. So those shares are nearly junk, maybe not as junk as paper gold.

Anand Srivastava said...

@Polly Metallic: This is true only when the economy is growing and debt is balanced with savings. Once the balance is gone its no longer true. With Debt given to Consumers this will surely happen later. That is why we have the boom and bust cycles.

matrixsentry said...

Remember our fine host has a donate button. I personally find exceptional value here. So much so that I feel compelled to pass along a little MoE. Since I am a saver and would normally remove this surplus productivity from the $IMFS and transfer it to my stack, it speaks to the degree I assign value to FOFOA's writing. I urge everyone to assign their own value and act accordingly.

FOFOA: fine post sir! May you accumulate a surplus in MoE. I know you will find a good use for it just as I have. After all, I followed your lead in that department ;>)

MnMark said...

FOFOA's dilemma: When a single medium is used as both store of value and medium of exchange it leads to a conflict between debtors and savers. FOFOA's dilemma holds true for both gold and fiat, the solution being Freegold, which incidentally also resolves Triffin's dilemma.


There's a problem - collectivists like Izabella don't want to resolve the conflict between savers and debtors by giving the savers a way to happily store their excess wealth independently of the debtors. I keep getting this nagging feeling that the Freegold paradigm is based in part on a false assumption: that everyone wants a nice system where people can happily save and maintain the value of their savings, and that people will recognize that Freegold provides this very beautifully and thus will adopt Freegold.

But my feeling is that the world is about 80% Izabella types and 20% (or less) producers of, and savers of, excess value. And the Izabellas don't want you to be able to have savings of your own - that's selfish. Your excess production needs to be taken from you directly through taxes or indirectly through inflation by the All-Powerful and Benevolent Sovereign, to benefit the masses.

Imagine that the powers that be are forced by the mathematics of the national debt and by a loss of faith in the dollar to revalue their gold reserves to $50k an ounce. This is going to make multi-millionaires (in dollars) of a lot of the readers of this blog and give them a one-time massive increase in purchasing power for their savings in gold. I do not think the 80% of the population that are Izabellas are going to stand by and let that happen. Because their worldview, their idea of The Good, is based on collectivism and envy, it would be the most basic affront to their sense of what is right for some people to become multi-millionaires while at the same time the great majority are suffering because they accumulated no savings, or did not save in gold. The Izabellas will look for a way to use the force of government to outlaw gold ownership or to confiscate the great majority of the value of it when it is exchanged for dollars.

Could someone explain why an Izabella would not try to do that when the Freegold transition occurs? Could you explain what possible series of events would change the mind of someone like her (obviously a reasonably intelligent person)? Collectivist types rarely change their minds, in my experience - and they are going to be out there telling the 95% or 99% of people who did not benefit from Freegold that they have a right to take that gold "for the collective good" in some manner or another.

DP said...

RT @darenpa72: "This puts the interests of the group above those of the individual" … [Shrugs].

RT @darenpa72: … let's see how good it is for the group when the individuals at the table no longer like the odds of playing.

http://www.youtube.com/watch?v=Dn8vzTsnPps

poopyjim said...

MnMark, you are correct that most people are collectivists. You are also correct that many of these individuals seek only to whip productive people like slaves for their benefit. However, there are limits to coercion. The draft horse needs at least a carrot dangled in front of it or it collapses.

The system works as it does today because today's "savers" really think their "savings" have value and voluntarily save in the debt of profligate governments. Once the perception of these savers changes (as it must when USD hyperinflates), the system as we know it is done for and we move towards this "compromise" by necessity, not because the collectivists really desire it.

If coercive measures are implemented to confiscate or tax gold post-collapse, the gold will not flow. And the gold must flow!

DP said...

Anand,

@Polly Metallic: This is true only when the economy is growing and debt is balanced with savings. Once the balance is gone its no longer true. With Debt given to Consumers this will surely happen later. That is why we have the boom and bust cycles.

Right. The savers like China and Europe chipped in to help the US government encourage a consumption binge beyond all precedent. Can't really use the US as a theoretical example of a debtor who spent their way to prosperity by pulling employment from the future. They spent their way to bankruptcy, at first slowly… soon all of a sudden.

Or are we supposed to believe artificially stimulated demand and employment can be sustainably, indefinitely, pulled from the future? That the future never comes and deficits don't matter?

When you've pulled your consumption and employment forward from the future via artificially created demand, what happens when you arrive at 'the future'? So far so Deflationary Collapse Squad, right? Better get Rick on the phone for some survival tips I guess.

Except... didn't somebody say something about making sure 'it' doesn't happen here? Oh my! You mean they might change the rules? But but but, where does that leave me and my life's savings invested in stocks and bonds and shit that're all denominated in their devalued money?

Ooops.

Indenture said...

If you enjoyed this post please don't forget to Donate to FOFOA! Click the button, visit Paypal, and help FOFOA increase his 'Savings'.

He deserves to be "Selfish"!

Edwardo said...

VTC wrote:

"I always thought that the U.S. government has an incentive to crash the dollar suddenly. But they do need a scapegoat, don't they?)"

Yes, they do, but, in my view, it won't come from the financial sector even as the scapegoat's actions effect the financial sector.

FOFOA, thanks again for another insightful and thought provoking piece which has, provoked the following thoughts.

Where is it written (other than by you in this post) that what you assert here is accurate for all debtors.

A debtor's natural inclination is to net-consume (consume at the margin) rather than net-produce (produce at the margin) if at all possible. So by saving in debt you actually encourage a natural predilection to produce less since you enable specifically those people with the tendency to borrow rather than produce.

Further, you claim,

"Dishoarding" net-producers (savers) are either going to use that money for consumption or they will use it for productive purposes like starting or expanding a business. All of these uses tend to employ someone."

Before you reply, or someone else does, I am aware that the planet's greatest debtors presently are sovereigns, and, as such, almost by definition, though they do provide employment, they are, by no means, net producers. But what of the behavior of the rest of the debtor cohort?

JR said...

Hi MnMark,

In line with to poopyjim's comments:

Blondie's View

FOFOA:
"It's just a shift in the perception of savers. Can't change that."

“Savers”: those producers who currently do not understand gold.
Consumers (shrimps) are just along for the ride.


=========

Reagrding this:

The Izabellas will look for a way to use the force of government to outlaw gold ownership or to confiscate the great majority of the value of it when it is exchanged for dollars.

Could someone explain why an Izabella would not try to do that when the Freegold transition occurs?


Start with http://fofoa.blogspot.com/2009/08/confiscation-anatomy-different-view.html. An Excerpt:

Well, if the US ever put gold back on the table through another confiscation of its citizens' gold, the BIS would call in all of its outstanding claims in gold at the rate of $42 per ounce. And the BIS would not be alone. Other entities would have legal claims for gold at $20.67 per ounce, and others at $35 per ounce. How much gold was either confiscated or defaulted on without due process of law? Claims of perpetual entities never go away. If the US government ever exposed its own gold (or its citizens' gold through confiscation) to the light of day, it would expose itself to all kinds of claims and an international legal mess. Under international law, the US is still an OUTLAW when it comes to gold!

This is why gold is off the table. This is why we can never go back to a gold backed dollar. It is also why they cannot call in gold AGAIN under the same dollar that they did in 1933. To call in gold at a specific exchange rate now, the US would first have to back the dollar with gold at that rate and then call it in. That would expose the US gold to international legal challenges for redemption. If they simply called in the gold without backing the dollar, the US government would be exposed to thousands of internal law suits. These law suits would rightfully demand a retroactive reversal of 1933 before any new confiscation could take place. They would demand that US official gold be distributed to all citizens at $20 per ounce BEFORE it could be turned back in to the government.

The US government will never take this risk! It will never expose itself to this legal nightmare! The US is already a golden outlaw!


cont.

JR said...

cont.

and then Confiscation Anatomy – Part 2. An excerpt:

Fact: Back in 1933 when physical gold was still plentiful within the system and circulating through the banks as a currency equal to dollars, the USG was only able to “confiscate” 500 tonnes. There were no “jackboots” going door to door grabbing gold coins. This has never happened. And it never will outside of total war where pirates (soldiers) grab coins for their own personal bounty.

If the USG (poorly/suicidally) decides it wants to steal some gold in the future, it will ONLY go after soft targets, like bullion bank accounts (most probably unallocated since there is no direct claim) and funds (like hedge funds, ETF’s, and other publicly reported/traded large hoards). It will also go after the gold mines to which it issues digging permits and therefore retains control. And it will not outlaw the physical gold trade. More on this later.

In the same way that bankers fear bank runs more than anything, governments and politicians fear civil unrest more than ANYTHING ELSE. Everything they do is to keep the public calm and sedate. And there’s no faster way to arouse your worst nightmare than ordering your underpaid forces to turn on their friends.

At the peak of the US-administered gold exchange standard, the US had 22,000 tonnes of physical gold. The 500 tonnes “confiscated,” at a time when it was easy because gold was circulating through the banks and could simply be swapped for paper dollars, was only 2% of that hoard. Any “jackboot confiscation” today would net much less than that. And it would carry significant (deadly) political risk.

Additionally… having New York City on US soil, those fancy funds holding OPG (Other People’s Gold) make a much softer target.

No. The US will NEVER confiscate physical gold directly from its citizens again.

Fact: There is plenty of gold at the right price. At the right price, there is no shortage of gold. At the right price, there is no profitable risk/reward calculation under which any major global entity would decide to steal someone else’s gold, especially its own populace. The risk would be much greater than the potential reward.

And if that “right price” is a FREE price, a FLOATING price, then there will NEVER be a shortage of gold to keep the gears of global trade lubricated. And as long as they are lubricated the USG will have international trade that can be taxed.


and on to The Gold Must Flow - an excerpt:

The point is that the questions of taxes and confiscation on plain bullion are important to someone who is already holding hard assets and considering his options. And part of Jeff's reasoning was that gold bullion would be the most likely metal to be taxed "precisely because gold is useless" to the economy. So I thought this was an important enough topic that I'd take a stab at answering his questions in a post, so that everyone can benefit and discuss these issues.

[...]

The Gold Must Flow

The bottom line is that private gold needs to flow as a fertile member of the balance of trade. There will be no advantage for the USG to confiscate or tax above-ground gold this time.

JR said...

Hi Simit Patel,

here is a FOFOA comment:

I can see that you like the macro value in owning a fractional interest in a corporation licensed to dig up a country's gold! But what we are talking about here is maybe a 30x revaluation of gold against other commodities as well as against the cost of mining. This will happen as a functional change for gold, a global shift away from its present treatment as just another commodity.

When that happens the mines will be treated in one of three ways: 1. They will be nationalized as gold in the ground will suddenly be viewed as national reserves (unlikely). 2. They will be forced to sell all production to the government at a low "commoditized" price (less likely). 3. They will be able to sell to the public at market prices but will have to pay a windfall profits tax and deal with many restrictions (most likely). In other words, the windfall profit of a 30x revaluation will not be passed on to those holding a government license to dig up gold that is still in the ground, a profit that can thereby be claimed by the hungry collective.

As a commodity, with the price of gold only slightly higher than the cost to mine it, governments grant license to the mining companies to dig it out as with all economic minerals. But when the value of that natural resource is suddenly worth 30 to 40 times the cost of mining, that government license will suddenly become very expensive.

When that Sunday evening announcement finally comes, that the banking system will be on holiday starting Monday morning, you want to be sitting on gold that has already been pulled out of the jurisdiction governed by the classification of gold as a simple economic mineral or commodity. FOA may be right that there will come a day on the other side of the punctuation when gold mining will be very profitable. But between now and then, few investors will be able to stomach the ride down to zero:

FOA (1/6/2001; 9:49:51MD - usagold.com msg#52)

Gold production, everywhere will eventually be extremely controlled with citizens reporting unofficial mining in much the same way as people report each other to the IRS. But, make no mistake, miners and citizens will all benefit. All mines, both big and tiny will make huge profits on the limited production allowed because the price will be so high. ($30,000+ in dollars (big smile) But, the road between here and there will more than likely price mine owners close to zero, first.

You see, gold will be a major wealth / saving asset to just about everyone. Not a currency. Make no mistake, $30,000 dollar gold divided by ($10,00 to E1.00) Euros = E10,000 in Euro gold. Gold moving to this level over the next number of years will allow the Euro reserves to cover its issuance in a dual asset world. We will all save both Euros for interest and spending and gold as permanent wealth.

FOA (05/14/00; 20:39:25MT - usagold.com msg#22)

There will be some huge profits to be made by holding certain mine stocks. But, almost all of them will go close to zero first. I doubt many investors could hold their current percentage through this price action. Physical gold will find a new market and soar in that medium of trade. In the face of this, few if any stockholders will hold their falling mining shares while watching gold soar. Yes, some will (like me) hold through thick and thin because they have a right percentage of (the best) mine shares to bullion. But, many, many others will pressure the market as they attempt to adjust to (our) level of holdings.

Cont…
December 2, 2011 9:04 PM

http://fofoa.blogspot.com/2011/12/unambiguous-wealth.html?showComment=1322888665472#c4872613172909940212

JR said...

FOFOA said...
2/2

FOA (12/02/00; 11:40:02MD - usagold.com msg#49)

Nowhere will this process be more vividly seen than in our physical gold markets as they reemerge from a total paper default. During the initial default stage, the entire gold industry as we know it, both paper trading and mining, will utterly fail to perform its function of tracking the real value of physical gold.. But once the smoke is cleared, physical gold will first soar beyond every other asset medium, both precious and not precious, then it will be at the starting gate with all other real things. Then it will again run the fastest race against the onslaught of hyperinflation.

FOA (8/2/01; 12:52:55MT - usagold.com msg#87)

An investment in the gold industry, not just mining, can be nothing more than an investment in a business that balances fiat production cost against fiat market prices for its product; gold. The return, if any, is always in fiat and places this portion of one's wealth smack on the tracks of more political manipulation. Today, we can see this play out all over the world as fiat returns in the gold business head towards and even sink below zero. The investor watches this fiat illusion of his net worth drain away while the opportunity to build a real wealth of "bullion ownership" escapes yet again.

FOA (10/23/01; 10:30:12MT - usagold.com msg#123)

Truly, if ever there was a way to profit from gold mining, today, it's by buying this almost free physical gold the mines are producing; while mine players and paper gamblers pound their wealth into the dirt. This is what PGAs call benefiting from the leverage in mining (smile).

I'm not trying to scare you or to tell you what to do, Steve, only to share with you these solid concepts that have been circulating for more than a decade now. The decision of what you are comfortable holding and what brings you peace of mind is totally up to you.

Sincerely,
FOFOA


http://fofoa.blogspot.com/2011/12/unambiguous-wealth.html?showComment=1322888958038#c447933353146309641

MnMark said...

Thanks poopyjim and JR for your responses.

OK let's say the government doesn't outlaw private gold ownership, and sets an initial Freegold floating dollar/gold price of $50k.

The Izabellas cry bloody murder...there are selfish people (FOFOA readers) who now have multi-millions of "unearned" purchasing power, who have gained immensely during this very difficult, hunger-wracked time.

Why wouldn't the government simply pass a "windfall profits" law declaring that any gold that was obtained before the Freegold revaluation is subject to a 80% windfall profit tax, collectible when the gold is exchanged for dollars? They can institute a withholding tax that gold merchants are required to collect, which you can get back when you file your taxes the next year IF you prove that you obtained the gold AFTER the Freegold transition.

Now you might argue that that would drive the pre-Freegold-obtained gold underground, and it would not flow, and thus the government would not do that, or would not do it for very long. (I believe I read that argument in one of FOFOA's previous posts.)

I would respond that the Izabellas don't care if the gold doesn't flow and don't care if it means starvation - at least everyone will be starving equally.

Look at how long the Castros have been starving the Cubans, and how long the Kim regime has been starving the North Koreans. The envy mentality, the collectivist mentality, once adopted, is very strong and seemingly immune to counter-proof. The last 100 years has seen Stalin, Mao, Pol Pot, the North Koreans, the Cubans, etc, etc, and still there are plenty of intellegent Western Izabellas out there who STILL believe in collectivism. Their highest vision of the good is equality, "sharing" - even if what is shared is hunger and want. What bothers them most of all is if some people are able to "opt out" and avoid their share of the pain. I don't think reasoned arguments about how it would be best for us all if the gold was allowed to flow are going to change the minds of the Izabellas.

Look how the giants have learned to hide themselves - to operate in the shadows, quietly, out of view of the Izabellas. That maye work for them. I'm not sure it will work for a shrimp with a few dozen gold coins.

A book came out fifteen years ago called "The Sovereign Individual." I found it very inspiring at the time because the authors predicted the end of government tyranny was nigh because unbreakable encryption and the internet would allow people to conduct their economic affairs out of view of the government, and thus break the hold of government over the individual. Government would be forced to negotiate a much smaller tax share of the wealth being created in return for not being cut out entirely.

But that turned out to have one major flaw. Even if you conduct the transaction in an encrypted internet communication, you still need to pick up the physical good somewhere, and the government goons control the physical world. And sellers/employers don't want to risk jail by helping you avoid taxes via encrypted internet communications and digital money. The idealism of the Sovereign Individual authors did not prove out.

I think the arguments for a dramatic, one-time revaluation of the fiat price of gold are very strong. The place where the whole scenario gets weak is where I am actually supposed to get to profit by having bought gold ahead of time.

Aaron said...

Why wouldn't the government simply pass a "windfall profits" law declaring that any gold that was obtained before the Freegold revaluation is subject to a 80% windfall profit tax, collectible when the gold is exchanged for dollars?

Hi MnMark-

Would you sell your gold if there were an 80% tax on the profits? Neither would I. I'd just keep it buried in my yard. So with an 80% windfall tax on gold, gold won't flow out of private hands towards the USG. Given gold will be used once again to balance trade, no flow of gold to the USG = no more imports for the USA unless the USA "immediately" starts producing and exporting goods commensurate with its imports. Inflow of goods to the US will lock up if the USG tries this trick.

Freegold isn't just about rich people swapping gold or turning it in for currency, it's about balancing international trade. In Freegold the USG absolutely needs gold to settle the difference for its international (structural) trade deficit.

ElaisaKasan said...

“while you are holding money, you are only halfway there. And for as long as you remain in this barter purgatory, you are exposed to the effects of your claim being negative equity which I just described.

(I used the term "money" above because if, hypothetically, the gold stock could be doubled or tripled quickly enough, the same principle would apply to gold.)”

So, if there are in fact millions of tons of gold, as referenced in the Lien against the Federal Reserve by Scott and Keenan, then this would render all gold less valuable by a factor of 10 or more.


http://www.scribd.com/doc/93549901/LIEN-Affidavit-Against-Federal-Reserve-The-Fed

Simit Patel said...

@JR, thank you very much for taking the time to cite previous comments and create a thorough response. it is much appreciated. you've given me lots more stuff to think about! :)

Jeff said...

Hi Elaisa,

That's a pretty funny link. Nuff said.

FOFOA: A few thoughts on "Black Gold." I hate to draw attention to ridiculous notions with no basis in history or logic. But apparently this notion of massive secret storerooms of gold is still providing some with the comfort they seek in their aversion to taking action to protect their own wealth. So I suppose it is worth a brief comment.

I have noticed that the most cynical among us tend to view the world as an ant might view the giant humans that massacre hard-working legions of his own kind whenever passing by. And while I can, and often do, entertain such perspectives without accepting them, for the purpose of exploring probability, I can find no logical train of thought that leads to the existence of massive stockpiles of gold as the source of power for our evil overlords.

In fact, massive stockpiles of easily printed cash make a lot more logical sense!

FOA (1/11/2001; 11:35:06MD - usagold.com msg#54)
The Curve!

One more point on Black Gold as we walk:

All that gold, more than triple what we think is out there, would have been in existence for some time prior to our life spans,,,,,, given the timeline required to produce the stuff. Remember, Black Market production could not have existed prior to, say 1971, as even public mines were not making cash profits. Also, it takes real cash and investment to produce both White Gold as well as Black gold.

Indeed, simple extension of physics concludes that nowhere near that much "EXCESS" gold could have been dug over the last 25 years. It didn't happen, even with slave labor. Because, as in above, even lawbreakers have to sell most of the gold in the open just to cover the illegal "Cash" they invested in digging the ore in the first place. These guys don't do such a "wash" business when their cash works just as well in the first place?? Get my point?

Also, the gold would have been moved into the open as the majority of goods and services bought with illegal money, to create their evil lifestyle, must involve the White Market Economy too. Black market wealth is mostly in cash, it's just too easy to move and spend. So, there is no reason to go through gold first, just to buy in the real marketplace.

Further;
With all that gold out there, the Dollar powers would not need to create paper gold debits to placate strong dollar backers. In fact, I suspect they would have created channels to flush all that gold into the market. Illegal or not, this action would have suited their end result.

No, the natural trend of easy money humans, both good and bad would be to spend said gold for other consumable wealth and keep cash in the background. Indeed, this is truly what has been happening as regular investors trade physical for non-physical substitute gold. The small amount of physical supply vs the monstrous paper trading denotes how such existing gold has bridged the industrial use gap. It didn't take a vast new unaccounted supply to make paper seem real, just moving the existing into new hands did the trick. OK, we finished burning that story in the fire.

Jeff said...

MnMark, did you read the Gold Must Flow, or did you ignore it and state your own conspiracy theory?

FOFOA: So if the gold in private hands in the US doesn't flow in sufficient amounts, given that US debt has been discredited through the Freegold phase transition, the government will have no choice but to continue printing money in its vain attempt to support the US trade deficit and its own status quo as Uncle Sugar to the people. And in a last-ditch effort to support its own failing currency, it will have to ship Fort Knox gold overseas. FOA mentioned something about this: "…the US will find itself shipping ever higher priced gold to defend an ever lower valuation of dollar exchange rates."

In this scenario, the need to continue printing in the face of an ongoing currency collapse will obliterate any miniscule gain that comes from the few shrimps who actually decide to sell their gold in an untimely way and pay the tax. The US has precious little gold in private hands as it is. And it will need that private gold to flow. It needs you to sell your gold to your dealer so your dealer can export it to our trading partners. That's how trade flows will resume under the new paradigm, with savers choosing to let their gold flow because of the amazing purchasing power it delivers.

And with international trade flowing again, the government will have much more economic activity to tax than it did when it tried to tax real capital in its purest form based on the silly notion that the hungry collective deserves a windfall nine times greater than the gold investors who kept gold inside the zone through a turbulent transition. The bottom line here is that I do not know if the USG will try to tax the windfall profit that comes from Freegold. What I do know is that, if they do, it won't last very long.

Aaron said...

Thanks for posting that, Jeff. You just made me realize how lazy I am. ;-) I think I need to take a few tips from JR.

Jeff said...

Victor,

Re: 3) Are you saying they would blame JPM or the London market for blowing up the $IMF? Doubtful; that is too close to home and some of the blame could spill over onto the politicians. If HI starts abroad it would be easier to blame the crash on foreigners, wouldn't it? Especially if those foreigners massive Treasury holdings get wiped out in the process.

JR said...

Here is a link to a great comment from Reference Point: Gold - Update #2 about the importance of privately held gold.

In reality, gold reserves are any physical gold inside your currency zone, no matter who owns it. It's not just CB gold that counts, but all gold inside a zone.[...]

The fact of the matter is that my statement at the top is true whether anyone understands it or not. Kind of like gravity exists whether or not you understand why. That's why I prefixed it with "in reality." It is true in Freegold, it is true today, and it was true back in the 80s and 90s when the dishoarding of private Western physical gold (in favor of paper gold) lent credence to the "oil-backed dollar" of the time. In Freegold, large centralized gold reserves like you'll find in CB vaults will be somewhat superfluous to the real reserves that are in private hands within any currency zone. The total reserves in any currency zone should be viewed as Centralized Reserves + Private Reserves, of which you'll never, ever know the exact count.


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

This comment was also linked in The Gold Must Flow because privately held is that important. Read the comment to appreciate why:

The Gold Must Flow

The bottom line is that private gold needs to flow as a fertile member of the balance of trade. There will be no advantage for the USG to confiscate or tax above-ground gold this time.

MnMark said...

Jeff, thank you for posting that portion of FOFOA's post on the possibility of a windfall profit tax.

I am a US citizen. I hope that the government is sensible enough to see that it is in the best interest of the country not to implement such a tax. I hope that the government sees that it will get more by taxing the flow of goods that occurs because "gold is flowing" and balancing international trade. I hope common sense prevails.

But I have also hoped for decades that the government would see that its Social Security and other massive spending programs were unsustainable. I have hoped that smart people in places of power would not award Nobel Prizes in Economics to nincompoop Keynesians who think even more money printing is going to solve our problems. I would have hoped that our institutions of higher education would not be turning out Marxists like Izabella after a century of economic and civilizational catastrophe because of the collectivist view of the world.

I imagine there are poor souls in North Korea who have hoped for fifty years that the people would see that communism doesn't work. Same with Cuba.

So I am not too convinced that governments adopt laws that are what make the most sense for the good of their people. I think they adopt whatever reassures the masses that things are "equal" while putting in exceptions for themselves and their buddies that aren't generally accessible to people without a lot of specialized tax/legal knowledge and the resources and connections to make use of them.

I started buying physical gold ten years before I ever heard of FOFOA/Another because I recognized that there is no real fiscal sense in government, at least not in our time. I remember when the Gramm/Rudman/Hollings balanced budget law was going to solve our budget deficit problems...until it was simply ignored and left to expire.

So arguments about why governments will see it is in the best of interest of their people to do something don't sway me much. If you can show me that it's in the best interests of the people in power, OK - but often what is in their best interests is punishing the savers in order to give the mob their bread and circuses.

enough said...

that was an awesome film. One of the few I've actually made the effort to go to the cinema to see.

For anyone interested, it borrowed quite a few ideas from an 80's B scifi film entitled "Logan's Run"

JR said...

Hi MnMark,

It would be best if you just read The Gold Must Flow instead of telling us what you think its says.

That way you can see that what you think its says it not what it says and avoid further regretfully silly and trite statements like "I hope common sense prevails."

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

Also, no one is arguing the Government will act in its people's best interest:

So I am not too convinced that governments adopt laws that are what make the most sense for the good of their people.

Rather, the government is acting its own self-interest:

So if the gold in private hands in the US doesn't flow in sufficient amounts, given that US debt has been discredited through the Freegold phase transition, the government will have no choice but to continue printing money in its vain attempt to support the US trade deficit and its own status quo as Uncle Sugar to the people. And in a last-ditch effort to support its own failing currency, it will have to ship Fort Knox gold overseas. FOA mentioned something about this: "…the US will find itself shipping ever higher priced gold to defend an ever lower valuation of dollar exchange rates."


More on this theme can be read in Moneyness:

The bottom line is that the USG cannot crash its own lifestyle. And when the dollar starts to "sink", that pile of pennies in the video above will be insufficient (not enough money). Luckily, that pile of pennies represents the budget of the currency issuer himself. So he’ll just increase it, to defend his lifestyle, while scratching his head at why the trade deficit has nominally widened rather than narrowing as he thought it would when he trashed the dollar.

Andrew said...

MnMark,

I see where you're coming from and sympathize. My view however is that Freegold will happen and gold holders will not be penalized for all the pragmatic reasons stated heretofore. Does this mean the Left (undoubtedly ascendent for decades) will pack up its things, admit defeat and go home? Not a chance. Post-Freegold the Left in America will resume their push for re-distribution using tax (taxes on commerce and income, not gold) and regulatory policy since budget deficits, as we've come to know them, will no longer be possible. I think Freegold will have the effect of widening the breech between the political Right and Left that will ultimately require (likely violent) separation.

JR said...

And i was hoping:

Freegold simply explains how, with the termination of the $IMFS, what remains is a system in which these two camps will no longer be in a perpetual state of monetary conflict.

They will always be conflict, as some like hard and some like it soft. But the fight won't be over what the G does with the monies, and maybe that's the key. ;)

Flore said...

Great post Mr Fofoa..wonder if lady Izabella will honour you with a blog visit and some comments...I think she is a bit cross at me.. cause I cannot access her tweets anymore..;)
Freegolds

Desperado said...

@VtC:

"1) I don't think anyone in the Euro zone will use gold as a collateral before the revaluation - I don't think the individual governments can just pledge their gold for additional credit without ECB approval. Why would they do this?

2) I don't think the ECB is ready for the new system unless the majority of their governments have learnt to fund their expenditures without new budget deficits. They are on track to put some further serious squeeze on the governments. Note that they said that Spain has not yet properly dealt with their commercial banks, and indeed they are letting the interest rates on Spanish debt rise. If you ask me to guess, there will probably also be a clash with the French government before this is over.

At the moment, the Euro is harder money than the gold standard in Jim Grant's wildest dreams."


Sometimes I cannot believe that we are talking about the same group of craven sociopaths. Jim Grant, in his wildest dreams, could never conceive of a non-existent gold-standard central bank bailing out countries who could never have even built up a fraction of the debt under a gold standard that they have under the Euro. And these PIIGS bailouts are being done with ECB money conjured up by levering out promised contributions from other bankrupt PIIGS nations that actually need their own bailout even more. Italy is supposed to contribute €40B to Spain that they don't have and will be just printed by the ECB. Then we have the upcoming EU summit and the rush to cram the ESM down the throat of the EU. The EU and the Euro are nothing more than a power grab by the globalist NWO.

Spain is not facing 7% interest rates because the ECB wants austerity and hard money, it is because the markets, unlike the friends of the Euro here, realize that the ECB and the Euro are as bankrupt as the PIIGS. You Europals stick to some kind of dream about the viability of the Euro the same way Hitler in his bunker dreamed about non-existent armies.

AdvocatusDiaboli said...

MnMark,
100%ACK, maybe to add to your examples: Former EastGermany, UDSSR, FormerChina. Oh, by the way, these collectivist totalitarian regimes had never a HI, as long as these existed in their setup. How do the HI advocates explain that?

JR,
you are much too caught in your theory austrian explanation attempting world, ignoring how things really played out in the real human world over and over again:
We probably agree that "moneyness" is the nerve system of the superorganism for allocation of resources. Now, in collectivism this is not true. Nobody in collectivism cares about the tokens (both fiat+gold). Collectivism is about abandoning tokens. It only cares about the real physical stuff and will take it, no matter how: (forced)selling bonds, taxing, fraud, changing the rules back and forth or simple brute expropriation in the open.
The attempt to offer FG as a peace-offering or alternative, solution or whatever you wanna call it, to the concept of collectivism is just simply naive. Nice theory, but just simply lacks common sense.
Greets, AD

insteadofablog said...

Marx's law of value does not deny the kinds of things that the STV claims. As Ian Wright puts it:

An actor engaged in free exchange derives personal benefit from transactions and the immediate apprehension of this fact may motivate subjective theories of value. However, an exchange has causal consequences beyond the immediate moment and the satisfactions of mutual commerce that derive from its embodiment within a system of generalised commodity production. Actors do not normally think money into existence although they do decide to spend more or less of what they have. Their income is a local representation of a global resource constraint not under their subjective control. Although money exchanges according to demands for use-values, and is normally accompanied by the satisfaction of desires, it refers to amounts of social labour-time. Local flows are easier to apprehend than global reference, and this partially accounts for the relative neglect of objective theories of value.

Marx's law of value is none other than what people refer to as "the invisible hand." Labor values are the signals that operate "behind the backs" of the producers to motivate reallocation of resources.

Also, ironically, it's Marx's theory of commodity money that seems most in line with Freegold's understanding of gold.

Lord Jim said...

Why in hell is there an argument instead of a mutually beneficial exploration of one of several options available for a gold standard. Most using the term imply a reversion to the old pegged one. Re-introduced, it will fail again, and the naysayers will have a field day. There are several alternatives which have been put forward which are worthy of consideration. None will solve all the problems of the world, but one or more has the potential to resolve some of the difficulties we have encountered since Nixon. Gold is like the sun and the currencies, like planets, revolve around it. Their values can be established relative to gold in reserve. Done cooperatively, there is a way to address debt, misallocation of capital and to address trade imbalances to a degree. Other problems will have to be resolved outside the realm of money - real and/or fiat. This cannot be done on a battlefield of clashing fanatical beliefs in one system versus another. Once simply and properly defined, agreement should be possible as to which one to try first, retaining the options in case they are needed.

Having seen the effort to centralize power and money in the EU, I cannot understand why our leaders do not see the problems inherent in globalism as currently espoused. It flies in the face of history and human nature. They will likely make one last totalitarian effort to enforce their vision, but will fail.

But like them, sadly, on this list, I seen further proof that we are emotional not rational creatures. This dooms us to another turn of the wheel and a great catastrophe. Because I have compassion, this saddens me. We create most problems for ourselves....and will most likely continue to do so.

MnMark said...

JR@:
It would be best if you just read The Gold Must Flow instead of telling us what you think its says.

That way you can see that what you think its says it not what it says and avoid further regretfully silly and trite statements like "I hope common sense prevails."


Huh. I've found your postings useful over the years I've been reading here but this is the first time I've been on the receiving end of your rudeness. It's not becoming or useful. I post nothing that I consider trite or silly. You'll pardon me if I don't stop to read the hundreds of hours of reading that is linked here before presuming to post a question or comment.

Andrew: thanks for the feedback. I think the case for Freegold is powerful. But I still find it difficult to believe that the political Left is going to let a small group of people become multimillionaires as a byproduct of a period of serious political and economic turmoil without serious attempts to confiscate some portion of that windfall in some manner, whether it is wise or not. If there was wisdom or foresight or understanding there, they wouldn't be on the political Left in the first place.

FOFOA said...

Hello MnMark,

When I see Freegold coming at us with the momentum of a runaway locomotive, in no way am I expecting wisdom, foresight or understanding in those who have never demonstrated such characteristics in the past. On the contrary, I am expecting the same self-preservation instinct they have shown time and again, and I have spent many hours explaining how this expectation leads to Freegold.

You are looking at one small thing, the "windfall", because that will be a big part of Freegold to you personally, but I suspect that you are still missing the bigger picture. It's like a guy who just won the lottery walking around paranoid that everyone knows he's rich. But that's just in his head as long as he keeps his mouth shut and doesn't go crazy with the bling. In any case, let's look at this "windfall". Who do you think are going to be all these new multi-millionaires the left will go after in the name of fairness? How many are there in your neighborhood?

If someone has 1% in gold, will that be a windfall? What if he has 5% of his savings in gold today? What if he's only in miners and paper gold? How many people are "all in" with physical? 10? 20? 100? 1,000? I know a guy who is very wealthy and he was actually about 20% in physical, to the tune of about 1,800 ounces. He panicked out last month and sold all of his physical. I wonder how many more will do the same before this is all over. I wonder how many "goldbugs" and "gold investors" will actually report a capital loss to the IRS because they were either in the wrong metal, the wrong kind of gold or they panicked out at the wrong time.

So tell me, how many people total do you imagine will go deep enough into physical to get this huge windfall you are describing, and not panic out at a bad time? Will it be more than the amount of "new millionaires" created by the Facebook IPO? I heard that the janitor at Facebook became a millionaire on his stock options. Fortunes are won and lost all the time, all around us. So one last time, how many people in total, within the 300 million here in the US, do you think will be deep enough into actual physical bullion and not panic out so that they receive the huge windfall you are talking about? And out of that number, how many will be stupid enough to sell it all right away just to book the paper profit? Enough to become a viable target for the political left? Is it possible that the other parts of the big picture you seem to be missing will greatly outweigh trying to go after an unknown and tiny group when considering that "self-preservation instinct" I mentioned above? I think the answer is a resounding and obvious yes.

Sincerely,
FOFOA

/SleepingVillage/ said...

Not to worry, Mark. From your perspective (fears) you're best served by "crossing that bridge" if and when we get there. Please take some time to absorb what others have written here regarding confiscation. And remember, you wouldn't be the only one Headin' For The Texas Border, maybe Canada, or the land of Sacred Cows You'll have plenty of options if you're not afraid of a little adventure. A "windfall tax" would quickly become a "dipshit tax" . They'd have to pry it from my cold, dead hands before I'd pay %80 tax! A few trips to a country run by people with a brain? I'd wait, as has been mentioned.


Great work, as always, FOFOA. It's about time I sent you a small nugget of appreciation.

synarchy said...

@AdvocatusDiaboli says:

"Former EastGermany, UDSSR, FormerChina. Oh, by the way, these collectivist totalitarian regimes had never a HI, as long as these existed in their setup. How do the HI advocates explain that?"

Not necessarily an HI advocate, but... Seriously?

Non-convertible currency. Wage and price controls. Police state.

FOFOA said...

Hello Polly,

You wrote: "wouldn't some people argue that the debtor borrowing to consume does not produce unemployment because he is borrowing to buy things he could otherwise not afford, and therefore increasing consumption and increasing the need for workers to produce goods. It seemed that this borrowing to live beyond one's means is what artificially kept the US economy going for the last couple decades or more. What am I missing here?"

Foreign CBs selflessly stacking up our debt allowed us to live beyond our means and led directly to EBT cards. It is wrong to attribute our employment to our debt. Our debt only employed the marginal Chinese worker who produced 1 and consumed ½ because he had no EBT card alternative. Meanwhile the US produced 1 and consumed 1 ½. Because foreign support for our debt enabled us to hand out EBT cards, you could say that our debt-based consumption led to our rising unemployment even though it did employ some Chinese workers. I'll grant you that.

But truth be told, those Chinese workers don't need our money. It's only making their leaders rich at their expense. Without us, they would be producing 1 and consuming 1 just like our marginal workers.

Debt-based consumption either encourages a net-producer who is already employed to produce more or consume less in favor of stacking paper, or else it forces everyone to consume less through paper inflation. It does not employ the American marginal worker. The American marginal worker produces 1 and consumes 1. The debt-based consumer consumes 1 but produces 0. Put them together and you have production = 1 and consumption = 2. You can't consume 2 if you only produce 1, so what you get is marginal worker produces 1 and consumes ½ while debt-based consumer produces 0 and consumes ½. This is a losing proposition to the marginal worker. The winning proposition is the EBT card which enables production = 0 and consumption = ½.

The marginal worker has no need for savings and so he has no incentive to produce in exchange for paper. Only a paper saver does, and he's already employed. Not only that, but his saving in paper enables the marginal worker to drop off which then creates a new marginal worker facing the same losing proposition.

Sincerely,
FOFOA

FOFOA said...

Anyone who is stuck on this idea that debt-based consumption can grow an economy might want to revisit the island analogies. There's Ben and Chen and Irwin Schiff's book in Sushi Island Savers Saga. There's a big difference between borrowing a net to catch a fish and borrowing a fish to eat. Borrowing a fish does nothing for the marginally unemployed who also wants a fish. And lending fish encourages people not to catch fish themselves.

ElaisaKasan said...

Jeff said:

“funny link. Nuff said”

Elaisa Response:

Try this link:
http://www.scribd.com/doc/93058461/LAWSUIT-Complaint-SDNY-11-23-2011-Neil-Keenan

Same Plaintiffs. Same basic issues. Funny? I don’t think so. The Plaintiffs are literally signing their livelihood away if they are wrong. That’s not funny. That is as serious as it gets.

Their assertions at least deserve thoughtful consideration.

Call the law firm that accepted and filed the case, Bleakley Platt & Schmidt, LLP. Check out the history of cases of their partners, including Mulligan, which are in the public record. Call or email the firm and ask who is the new Judge assigned to the case, since the original Judge Holwell, resigned three months after the case was assigned to him.


FOFA said:
“apparently this notion of massive secret storerooms of gold is still providing some with the comfort they seek in their aversion to taking action to protect their own wealth”

Elaisa response:
No. Actually, FOFA, your excellent arguments and insights persuaded me years ago to take action and put 99% of my disposable wealth into precious metals. I just feel this is significant information and needs to be evaluated objectively. Nothing more.

“I can find no logical train of thought that leads to the existence of massive stockpiles of gold”

Elaisa response:

Try this:

Gold traded in equal weight for Consumables, such as Salt and other Spices for thousands of years. Salt was an essential preservative and consumed. This practice required a continuous flow of salt and hence gold. Do the math.

Early Gold recoveries were of “visible deposits” hence were rich. Consider the concept of “low hanging fruit” as it applies to ancient gold finds.

Jeff said:
“All that gold, more than triple what we think is out there, would have been in existence for some time prior to our life spans,,,,,, given the timeline required to produce the stuff. Remember, Black Market production could not have existed prior to, say 1971, as even public mines were not making cash profits. Also, it takes real cash and investment to produce both White Gold as well as Black gold.”

Elaisa response: Try 1971 BC, or 2500 BC. No one was using paper “cash” back then, Jeff.

Jeff said:
“the natural trend of easy money humans, both good and bad would be to spend said gold for other consumable wealth”

The nice thing about gold is, no matter how many times gold is spent, it does not disappear. It still exists. It just winds up in the hands of the most productive. Every ounce of gold held by any man since Adam, is still around today. Do the math.

Motley Fool said...

No, don't do the meth. It's bad for you. :P

Beer Holiday said...

ElaisaKasan said:

"Gold traded in equal weight for Consumables, such as Salt and other Spices for thousands of years. Salt was an essential preservative and consumed. This practice required a continuous flow of salt and hence gold. Do the math.
"

My problem with this old argument is that the small placer type deposits you refer to are tiny compared to modern mines post industrial revolution.

A good example is Australia. Here is a country which was unmined until the 1890's gold ruch, when the then largest ever surface gold field was discovered (the only type that could be mine up until that time).

You can look up the amount of gold extracted from that gold field in the 1890's, and it's a quite small amount comared to todays super-mines, like the Kalgoorlie super pit

FOFOA said...

ElaisaKasan,

You quoted me from the post: "(I used the term "money" above because if, hypothetically, the gold stock could be doubled or tripled quickly enough, the same principle would apply to gold.)"

And then you said: "So, if there are in fact millions of tons of gold"

You missed the point. I was precise when I wrote "if, hypothetically, the gold stock could be doubled or tripled quickly enough". How much is out there already today matters not one bit! The more the better!! If there are "in fact millions of tons of gold" (which is absurd by the way), then gold is so much more valuable than I think it is!!! Stock v. Flow. You say there's more stock. I say so what? The flow is still the same. If there's more stock then it's more valuable! See?

What I was talking about was not hidden stock but the hypothetical doubling or tripling of the stock through magical mining, mythical alchemy or the arrival of scaly aliens with megatons of gold. Today's price is not based on the known stock. The 170,000 tonne stock number is just a guess by the WGC. Today's price is based on the FLOW, not the stock. When you can see the difference you will stop obsessing about this absurd black gold thing.

Sincerely,
FOFOA

Bron Suchecki said...

FOFOA: "Izabella's argument is that you are better off if you lend your surplus to someone so that you can later ask for it back. She calls this the "favour system" and she says that if you hoard gold then you are "opting out" of this "collaborative process"."

Izabella's weakest part was the reference to the benevolent Govt (or banker) to adjust money supply or intermediate between savers and those who want to borrow for productive purposes. I mean really, what a crap job they've done - all the lending has went to those consuming or playing leveraged games with asset prices.

The collaborative favour system has been corrupted and doesn't work for the good of society. Given her job, I'm surprised Izabella doesn't realise this and surprised why she hates those who have indeed opted out of this system by holding gold. Seems like a perfectly rational response by those who feel this way, particularly when democratic processes do not give one a way of expressing this view.

FOFOA: "There's a big difference between borrowing a net to catch a fish and borrowing a fish to eat. Borrowing a fish does nothing for the marginally unemployed who also wants a fish. And lending fish encourages people not to catch fish themselves."

There's a big difference between borrowing a fish, eating it and doing nothing all day and borrowing a fish and eating and using the time saved from having to catch the fish to instead build yourself a net so you can catch more fish, out of which you repay your fish debt. This is the weakest part of your exposition, IMO.

MnMark,

Re the windfall tax, it already exists - its called capital gains tax. You bought gold at $500, you sell it (or barter, no difference from IRS point of view) at $50,000, you made $49,500 "profit" and pay tax on that, leaving you with half or so (depending on your country's tax rates). That will be satisfactory for the Lefties I think, particularly if in after inflation terms you are actually backwards.

JoyOfLearning said...

Thank you Fofoa for another great post, and many many thanks to all the brilliant commentors and regular gurus for the captivating discussions and analysis of present day events.

Börjesson said...

I find it a bit disconcerting to discover after all this time that FOFOA is in fact, at least based on his comment at June 22, 2012 10:40 PM, one of those ideological extremists (and we sadly have a few of them here in Sweden as well) who believe that unemployment is simply a matter of choice; that those who don't work are just lazy, and if you take away all kinds of benefits and social safety nets, then jobs will magically appear out of thin air for them to take up.

I really hope that this skewed view of the world is not an integral part of the Freegold theory, because then the whole thing is built on a pillar of sand.

burningfiat said...

Hi FOFOA,

Thanks for an awesome post. I really got a lot out of this.

Hi Börjesson,

How did you take away the lesson that unemployed folks are lazy from this? I linked because maybe we didn't read the same comment? I didn't see any prejudice in FOFOA's comment, only an illuminating answer to Polly.
Care to elaborate a bit?

/Burning

ElaisaKasan said...

Thank you FOFOA for your response.

I understand, and agree what matters is the price at which the stock flows.

I am obsessed with wanting to know the truth. I believe it matters.

Dr. Octagon said...

Something that clicked for me in this article was Another's statement above: "in as much as our people may replace the lost value of oil with gold". I've read the gold-for-oil statements many times, but this time, I think I fully understand it. In short, Saudi Arabia (for example) has a large amount of timeless wealth, in the ground, in the form of oil. They are willing to sell some of this wealth to the rest of the world in exchange for nice things, like cars, houses, food, etc. But the world demands much more oil than the Saudi's can possibly spend. At some point, the Saudi's have everything they could possibly want, so why sell any more oil? At that point, it makes sense to stop selling, but again, the world demands much more oil than the Saudi's can possibly spend. So the solution is to replace one timeless store of value (oil) with another (gold). And so with this arrangement, the oil will flow. It's not that the Saudi's want gold because they have lots of cash and are particularly attracted to it, it's because gold is the only store of wealth for which they are willing to give up their valuable oil.

Dr. Octagon said...

I too find FOFOA's 10:40 PM comment a bit disturbing. I think I'm going to have to reread it a few more times to be sure it says what I think it says.

burningfiat said...

This comment by Enough in the last thread, got me thinking about OneBadAdder-geddon and One Bad Adder's calls earlier this year.

The short end seems really well-managed from February till now:

http://finance.yahoo.com/echarts?s=^IRX+Interactive#symbol=^irx;range=ytd;compare=;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=off;source=undefined;

What's going on? Is all the money hiding in negative rate swiss bonds or what?

MnMark said...

FOFOA:
So tell me, how many people total do you imagine will go deep enough into physical to get this huge windfall you are describing, and not panic out at a bad time? Will it be more than the amount of "new millionaires" created by the Facebook IPO?

I think you make a good point. I hadn't thought of that before.

Bron: Re: capital gains tax....I believe FOFOA's argument is that gold will not be subject to the capital gains tax after the Freegold transition.

JR said...

Hi Börjesson,

I just wanted to confirm that the word lazy does not appear in FOFOA 10:40 comment.

Also, nowhere is there anyone "who believe[s] that unemployment is simply a matter of choice" or who discusses taking "away all kinds of benefits and social safety nets."

Instead, FOFOA points out debt-based consumption does not employ the marginal American worker.

Debt-based consumption either encourages a net-producer who is already employed to produce more or consume less in favor of stacking paper, or else it forces everyone to consume less through paper inflation. It does not employ the American marginal worker.

What do you see that is different?

somanyroadsinvesting said...

I finally read MA's recent article. He goes off on some tangents but I thought he made some good pts. His point about a 'core' country going into HI won't happen I thought was compelling. His comments about the movement of capital was also.

He also hit the pt I have been struggling with but never find good answers for; this idea that the 'paper' price of gold will dissconnect from the physical. Another, FOA and FOFOA are clearly experts on monetary, economic history etc, however, are they experts in trading market mechanics?

I agree with his comments that probably more people would buy gold if they didnt read all this sort of odd theories that get passed around. It removes credibility and frightens people.

Believe me I am positioned in gold big time. I am just starting to question this whole 'paper' price idea. I have never read a very detailed explanation of how this 'paper' price does not reflect reality. Constantly referring to comments that were made 10-15 yrs ago as proof does not do it for me.

Why not write a book or detailed post with actual interviews with people who trade the gold, expose this 'paper' price game and then have an open and wide discussion with people that actually trade gold vs. most people here who have little to no experience on how the gold trading mkt works(me included). Invite 5-10 people with large amounts of gold trading mkt experience to openly debate this issue vs people here discussing it who have probably never worked in the London gold mkt. Lets do our own research and not rely on what someone said a long time ago. Its more work but it may be worth it in the end, plus we may learn something along the way.

Woland said...

A new favorite word, born in this post: "Paperbuggerdom"
Was this designed especially for our British friends? It surely
would have a different overtone for, say, Izabella than for most
U.S. readers. I'm just now exploring the permutations:
paperbuggeree......

Gary said...
This comment has been removed by the author.
Polly Metallic said...

Somanyroadsinvesting

Paper traders only know the aspect of gold they deal with which are all derivatives of physical gold. They would provide no proof of anything aside from how the paper gold arena functions.

Polly Metallic said...

Thanks FOFOA for the reply to my question. I wasn't sure, if asked about this issue, if I could explain the concept to someone else. I have a better grasp of it now. I remember reading the very effective island analogy. The issue of debt based consumption creating employment reminds me a bit of the crazy logic I have occasionally heard on CNBC when certain financial analysts are actually happy when communities have to be rebuilt after a hurricane because it stimulates the economy. They would be challenged in this view by someone like Peter Schiff who would say, If that's so great for the economy, let's just bulldoze a few neighborhoods and then rebuild them all! They couldn't seem to follow his reasoning and see how stupid their own viewpoint was.

Bron Suchecki said...

Somanyroadsinvesting - Paper/physical, my favorite topic. These may help:

http://goldchat.blogspot.com.au/2011/09/physical-v-paper-page-discussion-on.html
http://goldchat.blogspot.com.au/2010/07/basis-does-not-lie.html
http://goldchat.blogspot.com.au/2011/12/fofoa-new-vaults-and-physicalpaper.html

jojo said...

"as some like hard "

That's what she said.

somanyroadsinvesting said...

Thanks Bron, will take a look.

jojo said...

I thought rules were rules!?

Politicians never change them up, right?

enough said...

FOFOA wrote....

"I know a guy who is very wealthy and he was actually about 20% in physical, to the tune of about 1,800 ounces. He panicked out last month and sold all of his physical. I wonder how many more will do the same before this is all over. I wonder how many "goldbugs" and "gold investors" will actually report a capital loss to the IRS because they were either in the wrong metal, the wrong kind of gold or they panicked out at the wrong time."

I am a member of the "all inn" club. For all the reasons, repeated many times here and my own intuition which led me to begin the journey to the "all inn" years before I stumbled across this blog.

But that does not bring me "peace". Intellectually I'm sure its right but my emotions get in the way of my reason sometimes. I do not like to see the paper price move so violently. I understand why it does this intellectually but emotionally, it takes a toll.

Hey, dont misunderstand, I felt the same way when I owned structured products, illiquid fixed income and a yoyo equity portfolio. I had some AIG bonds that I thought was clever to buy in the $80's and watched them go no bid and then re-open in the $20's....yikes. I did eventually get out back in the high $70's (funny, they are probably back above par)

But anyway...I fear I would do what FOFOA wrote above....panic out. So even though I know FOFOA does not agree with me, I am short paper gold and long physical......

I will attempt to interpret FOFOA's reasons for not doing this...

1) it would just be better to use those funds committed to the hedge and just buy more physical.

2) when the paper gold world implodes it is possible even probable that this hedge will be as worthless as all the paper gold longs.

3) the vehicle I've chosen, an 2x inverse ETF (GLL) states quite clearly that it may not track accurately for more than ONE DAY !!

Well even with FOFOA's misgivings, I've put it on (again) anyway. I "hedged" 1/3 of my gold position at $1625 last week

I understand what FOFOA is saying but I fear my emotions will overcome me if the beeline to zero of paper gold occurs. This hedge helps keep my emotions in check. Also if the paper gold mkt continues for the forseeable future I beleive that premiums will rise dramatically anyway. GLL has tracked beautifully over years of monitoring carefully. This has given me confidence in the product.

I certainly would not ride this thing all the way down in the event that spot does plunge $100 an hour. Hopefully I can pull the trigger and sell it before realization of what is occuring causes put products to fall instead of rise as they "should".

Bottom line, I am not at peace completely naked at the ALL INN. I was even less so being in the paper boat.

Weird how it feels nice that spot has fallen instead of bad !!! I made $10,000 and can buy another five ounces with some fiat to pay the bills.

Some could argue that the substancial funds I have in GLL mean that I'm not at the ALL INN. Well, I couldn't be at the mini all inn without my short paper/long physical emotinally stabilizing strategy.

Just thought I'd share my strategy for nullifying my insecurity.......

cheers, Enough

JR said...

Yay Polly Metallic,

"The issue of debt based consumption creating employment reminds me a bit of the crazy logic I have occasionally heard on CNBC when certain financial analysts are actually happy when communities have to be rebuilt after a hurricane because it stimulates the economy. They would be challenged in this view by someone like Peter Schiff who would say, If that's so great for the economy, let's just bulldoze a few neighborhoods and then rebuild them all! They couldn't seem to follow his reasoning and see how stupid their own viewpoint was."

Opportunity costs! The Parable of the broken window, or That Which is Seen, and That Which is Not Seen

The parable of the broken window was introduced by Frédéric Bastiat in his 1850 essay Ce qu'on voit et ce qu'on ne voit pas (That Which Is Seen and That Which Is Unseen) to illustrate why destruction, and the money spent to recover from destruction, is actually not a net-benefit to society. The parable, also known as the broken window fallacy or glazier's fallacy, demonstrates how opportunity costs, as well as the law of unintended consequences, affect economic activity in ways that are "unseen" or ignored.

cont.

JR said...

cont.

The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.

Economics in One Lesson

Let us begin with the simplest illustration possible: let us, emulating Bastiat, choose a broken pane of glass.

A young hoodlum, say, heaves a brick through the window of a baker’s shop. The shopkeeper runs out furious, but the boy is gone. A crowd gathers, and begins to stare with quiet satisfaction at the gaping hole in the window and the shattered glass over the bread and pies. After a while the crowd feels the need for philosophic reflection. And several of its members are almost certain to remind each other or the baker that, after all, the misfortune has its bright side. It will make business for some glazier. As they begin to think of this they elaborate upon it. How much does a new plate glass window cost? Two hundred and fifty dollars? That will be quite a sum. After all, if windows were never broken, what would happen to the glass business? Then, of course, the thing is endless. The glazier will have $250 more to spend with other merchants, and these in turn will have $250 more to spend with still other merchants, and so ad infinitum. The smashed window will go on providing money and employment in ever-widening circles. The logical conclusion from all this would be, if the crowd drew it, that the little hoodlum who threw the brick, far from being a public menace, was a public benefactor.

Now let us take another look. The crowd is at least right in its first conclusion. This little act of vandalism will in the first instance mean more business for some glazier. The glazier will be no more unhappy to learn of the incident than an undertaker to learn of a death. But the shopkeeper will be out $250 that he was planning to spend for a new suit. Because he has had to replace a window, he will have to go without the suit (or some equivalent need or luxury). Instead of having a window and $250 he now has merely a window. Or, as he was planning to buy the suit that very afternoon, instead of having both a window and a suit he must be content with the window and no suit. If we think of him as a part of the community, the community has lost a new suit that might otherwise have come into being, and is just that much poorer.

The glazier’s gain of business, in short, is merely the tailor’s loss of business. No new “employment” has been added. The people in the crowd were thinking only of two parties to the transaction, the baker and the glazier. They had forgotten the potential third party involved, the tailor. They forgot him precisely because he will not now enter the scene. They will see the new window in the next day or two. They will never see the extra suit, precisely because it will never be made. They see only what is immediately visible to the eye.

Texan said...

FOFOA,

I understand why Giants will keep buying gold post-reval. In fact having been proven vindicated, they might buy more. But I can't see there being much improvement in the flow. I can't see Giants selling their hard to obtain gold.

Why and for what do you think the typical Giant will sell, say, 50 tons? What kind of size do you expect will trade?

FOFOA said...

Hello Texan,

"I can't see there being much improvement in the flow."

Let's say for simplicity that the flow today is about 4,000 tonnes per year. At $1,600 that's an annual flow of about $206B. (You gotta think in currency terms, Texan. Stop thinking in weight!)

Now let's jump to Freegold. At $55K $206B is 116 tonnes, or .07% of the stock that needs to flow in one whole year to keep the flow the same. Anything above .07% would be an improvement in the flow.

"Why and for what do you think the typical Giant will sell, say, 50 tons?"

He won't ever sell 50 tonnes! Never!

"What kind of size do you expect will trade?"

He might sell a tonne if he needs $2B to buy a company or something. Texan, stop thinking in weight. All that matters is the currency exchange rate. The Giants earn and spend currency. They simply store it in gold. And they don't do it for capital gains. Stop thinking in weight!

As for why they might sell, it's in the post:

"These "dishoarding" net-producers (savers) are either going to use that money for consumption or they will use it for productive purposes like starting or expanding a business... some may even sell their gold for money just so they can lend it for productive purposes, or invest it in promising ventures."

Sincerely,
FOFOA

Tony said...

FOFOA,

Do I dare showcase my ignorance by asking a follow-up question to Texan's? What do you foresee the shrimps from the All Inn doing with their gold at the Freegold stage? Though there probably isn't enough gold held by shrimps to make much difference, I would still think flow would increase in Freegold from shrimps, as they liquidate gold for real estate, amongst other things. In other words, for many shrimps from the All Inn, the onset of Freegold will represent opportunity to live a lifestyle only dreamed of in the past. Still not sure how much this will affect flow, however.

FOFOA said...

Everyone,

One of my readers sent me the book "The Age of Inflation" by Jacques Rueff last year. My Once Upon a Time post was based on chapter 2 which begins on page 30. It is a very hard-to-find book, but another reader just posted it online.

"The Age Of Inflation" by Jaques Rueff [worldcat info].

He writes: "This book is currently unavailable in either physical or digital format except in a relatively small number of libraries, so I decided to provide a copy of this very important piece of history online for everyone to read. It is too important to be left gathering dust unread in libraries.

It has been converted to text by OCR and manually corrected & proof read, however, invariably there will be errors that have slipped through and I would appreciate any corrections so I can put up a revision. I've included a link to the original image files in the second page for reference.

Hope you enjoy this piece of history, if you don't already have the book. Feel free to use and link to it as you see fit. Thanks for your contributions to restoring "Sound Money" for us the little guy, I hope I can provide a small piece of the puzzle in my own way.

Ben"

Michael said...

enough
I too strive to be all inn but...
I still have physical 'in hock' ...it is in a profit sharing plan and to get it out I will have to pay taxes on the amount I take out. So I love it when gold goes up because it makes what I have more valuable...but I'm praying for a big drop so I can ransom my plan coins. So...every day is good...simple huh?
I would also note that to be of good cheer I found I simply HAD to keep large sums in cash or other liquid, riskless instruments. Like the ECB when my cash goes to zero my gold will rise to make me whole (and hopefully them some). If I can't protect the precious there in no point in having it. I'd sure hate to find myself selling gold for some minor creature comfort.

FOFOA said...

Hi Tony,

If you read my comment to MnMark, I think you'll find your answer in there! :)

Sincerely,
FOFOA

Tony said...

Thanks FOFOA. After rereading your comment, I suppose the shrimp flow will be much less than I originally thought---miniscule even!

FOFOA said...

Hello Börjesson,

I am talking about systemic incentives at the margins. The marginal worker is that worker right at the cusp of either employment or unemployment. In some cases, yes, unemployment can be a choice *for the marginal worker*.

But even going farther than that, I'm talking about how the savers (those who produce more than they consume) behave at the margin due to the systemic incentives of debt vs. Freegold and how that behavior leads, in the long run, toward higher or lower employment levels.

When the systemic SoV is debt, too much net-production from net-producers ultimately becomes a burden on society. It piles up in the monetary plane as debt owed and, at some point, becomes unserviceable. Productive debt is fine, as Bron pointed out, but with debt as the focal point reserve in the system, demand for this debt by the net-productive sector ultimately exceeds the borrowing demand from productive borrowers and so consumer debt begins to pile up.

But I can definitely see why you like your Socialism in Sweden! Free medical, free dental, hot chicks and no Cribs!

Sincerely,
FOFOA the ideological extremist!

RJPadavona said...

Another masterpiece, FOFOA!

I just got around to reading D&S 2012. I've been recuperating from the Iron Maiden concert on Thursday night, so I'm a little behind schedule.

I don't have anything bad to say about frenemies like Ash or Izabella. They mean well. Their intents are noble. They desire a fair and equitable society, even though those are quite lofty goals.

The problem with their logic is that LIFE is not fair and equitable. They discount the inherent desire of individuals to take care of themselves before they take care of anyone else. We can't help it. It's our survival instinct at work. That's what makes separating the SoV function from the MoE function so compatible with human nature.

I've found in most cases, the collectivist mindset is usually brought about by spending too much time in a classroom instead of the real world. Thank goodness we have a trail guide who has spent plenty of time in the real world and has helped us realize that the world is made up of debtors and savers, not capitalists and proles.

No, Freegold is not economic utopia. There will always be poor people and rich people, regardless of our system. But it's about the best system we can hope for in an imperfect world. The Savers can save and the Debtors can owe and neither the twain shall meet in the monetary plane (until they choose to do so).

Life is not fair and life is not equitable. That's just The Way It Is. But life CAN be a hell of a lot less complicated when you know your savings aren't being destroyed. And who knows, maybe some of those "selfish hoarders" might have a change of heart one day? They may even decide to dis-hoard when they realize that it makes them feel good to help someone in need ;)


RJP

/SleepingVillage/ said...

RJP,

Very well said. Great tunes, I actually just got 100 Ton Chicken on vinyl(orig) last week. Fairly obscure album and an interesting little synchronicity there, my friend.

FOFOA said...

I get the sense that a few of you are having a hard time seeing that there is a difference between directly taxing the rich to support the poor, and indirectly taxing all net-producers through dilution, debasement and devaluation. One is overt and the other is covert. I'm only discussing the latter.

There is also a difference between Sweden, a local community that has freely chosen the former, and the US exorbitant privilege which relies on the whole planet suffering the latter. US Treasury debt has been the systemic reserve since the 1920s. I am arguing that this has led ultimately to a systemic dependency on globalized exorbitant privilege.

This is not a left-right argument. Börjesson and Dr. O have apparently mistaken it as such. I presume the mistake comes from conflating overt local and covert global taxation. I'm sure the whole world could be as wonderful as Sweden if all net-producers agreed to such overt redistribution. (But then again, *at the margin*, the winning proposition would be to become the recipient rather than the provider.)

As an American, I am a recipient of the US dollar's exorbitant privilege. So in that way, my exposition is rather on the selfless end of the selfish spectrum. The purpose of the Debtors and the Savers is to offer a perspective from which you can understand what I'm writing.

Börjesson: "I find it disconcerting that FOFOA is one of those ideological extremists who believe that those who don't work are just lazy."

Dr. O: "I too find FOFOA's comment a bit disturbing."

I can imagine that with the wrong perspective, "the collectivist mindset" as RJP termed it, some of what I write in the context of debtors and savers could be disconcerting.

Sincerely,
FOFOA

FOFOA said...

Tony, I see that DP tweeted his response to your question!

He's referring to this. ;)

Aaron said...

RJP-

That must have been an awesome concert. Falling just within the short end of the 40+ crowd curve I recall many a night driving to the beach with Run to the Hills blaring on 11 (with a few speeding tickets to boot. ;-)

Ivo Cerckel said...

In the long run the community of interests among the members of a group and the contrast between their interests and the interests of other groups arise always from limitations of the right of ownership, of the freedom of trade, of the choice of occupation. Only in the short run can they arise from the condition of the market as such.
+
Because Marxian theory does not define its notion of class more closely, people have been able to use it for the expression of the most diverse ideas.
+
Thus in its most fundamental contentions Marxism has never risen above the level of a doctrine for the soap box orator.
(Ludwig von Mises, "Socialism", Chapter 20 "The Clash of Class Interests and the Class War", Section 3 "Class War")

FOA could not accept Mises.

Many said that the "bond vigilantes" would hamstring any effort to price inflate a credit driven money like the dollar reserve. Perhaps causing our Fed to eventually lose the war as it "pushes on a string"? Many of you have read countless opinions as to why our credit markets would implode into deflation as a "mise" style economic theory surfaced to control the controllers. Truly, these people confuse theory with human action as much as they do not understand real physics! Indeed, strings that cannot be pushed are either thrown or cast aside in the real world.
(Goldtraiil Six
FOA (11/2/01; 12:35:27MT - usagold.com msg#128)
Gold,,,,,, Gold,,,,, Who has the Gold? )

Aaron said...

Human action driving economics. What a concept!

It seems people just don't understand choice and preference and its role in the economy.

victorthecleaner said...

enough,

get out of this f**king GLL immediately. Sell it right on Monday morning. In a sideways market, this is a constant cash burner. Don't ever touch any of these short or ultra ETFs. They are complete garbage if you hold them for longer than a single day.

Their fault is that they recalibrate the leverage to -1, -2 or -3 every single trading day. This causes considerable losses through friction in a sideways market, for example up 2%, then down 2%, then up 2%, then down 2%, and the underlying is back where it started, but your stupid ETF will be down. Don't ever do this.

If you desperately want to short paper gold, I am afraid the only 'solution' is to sell spot unallocated, to sell the future or to buy put options on the future. Don't buy puts on GLD or short GLD because GLD might eventually not go down that much when the large pukes come.

Victor

Texan said...

FOFOA,

Ok, so current flow in currency will be sort of constant, but flow in terms of "weight" will effectively approach zero (assuming a 30-60x reval of gold). Maybe a couple hundred tons a year post-FG, vs 4000 tons a year (est.) now.

So how are Giants going to add to their savings, if they can't buy gold? In weight. What will they be willing to trade surplus production for, if they can no longer obtain more than a few bars here and there?

I have never really thought about how trade would settle post FG, but I think it would need more "gold content" and quasi-barter, no? Which implies to me a whole lot less trade, and a lot less overall economic activity.

Ivo Cerckel said...

Hegel thought of nations as the vehicle of dialectic movement. Marx substituted classes
(Bertrand Russell, "History of Western Philosophy", Routledge Classics, 1996, (first published 1946), p. 711)

The EURO is the first currency that has not only severed its link to gold,
but also its link to the (Hegelian notion of the) nation-state
(and thus to the Marxian notion of class struggle),
said European central bankster Duisenberg in his 09 May 2002 Acceptance speech of the International Charlemagne Prize of Aachen for 2002.

The USA DOLLAR is toast.
Civil war will break out in the USA.
Soap-box oratory will then try to define the inexistent classes.

FOFOA said...

Texan,

You're sooo close, and then you go back to weight again:

"So how are Giants going to add to their savings, if they can't buy gold? In weight. What will they be willing to trade surplus production for, if they can no longer obtain more than a few bars here and there?"

The flow will be *exactly* what the Giants require "to add to their savings". And the high price will make it so! See? If a Giant wants to add to his savings he's going to pay the price required by another Giant to sell some of his!

First of all, you're thinking like a shrimp goldbug who is only in gold for the gains. That's not the way the Giants use gold. They use it for preservation, not gain. And they don't think "I'm going to get some bars." They think "I'm going to exchange some currency." Whatever the price is determines how many bars they get. Currency in, currency out. Doesn't matter how many bars they have to lug around and store in the meantime. The less the better!

Trade will be settled in currency because currency will be exchangeable for gold. If you end up with more currency than you want to sit on, you'll exchange it for gold at the price required by another saver to sell you some. That's what a floating physical price is all about! Trade flow will no longer be hampered by the fear of ending up with too much depreciating paper like it is today.

Sincerely,
FOFOA

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

Ivo-

I sincerely hope you are wrong, but unfortunately I doubt it. All the more reason I'm thankful for my actions which are in concert with my preferences and choices.

Chico_hawk said...

So, to paraphrase, after the reval, you will need a lot less gold (measured in weight) to flow to support the same level of economic activity as before.

And since the economic distortions brought about by fractional reserve bullion banking (e.g. $US exorbitant privilege) will disappear along with paper gold, leaving only a physical bullion market, that will ultimately lead to a much more effective & efficient allocation of capital, including labor, which will serve to create employment and increase overall economic activity, etc.

As for the giants (at least the oil producers), they will find that the value of their oil (at least in terms of gold), will go down considerably after the reval, but since they are already sitting on tonnes of gold & huge newly added wealth, they will then be looking more to employ that new found wealth by selling a tiny fraction of their gold reserves (thx reval!) & investing the proceeds into productive enterprises where the return on investment after the reval is expected to exceed the return on simply continuing to hold all of their gold...

If their marginal (after tax) ROI on Charlie Munger's favorite productive enterprises in percentage terms exceeds the return on their gold holdings, they will naturally continue to re-invest profits &/or divest some more of their gold, in those productive enterprises until the returns make them either indifferent or favor adding tiny amounts of gold to their already huge stockpile...

sound about right?

enough said...

VTC

Thanks and I do mean that sincerely. If you didnt care, you wouldn't bother.

I understand in theory GLL's shortcomings are but in practice, I have not seen any leakage. Nor with DZZ.

You are a numbers guy and smart. If somehow you can show me that these have indeed had leakage I would be grateful. I am certainly open to better ways of giving myself all-inn-security.

FWIW....I know for a fact that family members I have convinced to put some savings in physical gold would indeed panic out at the worst possible time and I'm not prepared to just say, it;s their own fault.


Sincerely, E.

Chico_hawk said...

Actually, as I was composing the previous post, it occurred to me that after the reval, gold will likely become a global geopolitical, strategic asset, much like oil is viewed today.

If you have significant gold reserves, oil will suddenly become very cheap...and if you have oil (Saudi Arabia) you also have accumulated so much gold over the years (much of it likely stored in vaults located in Zurich, London & New York) that security of same may become problematic, especially if the value of your gold holdings exceeds the GDP of most countries (perhaps combined!).

Repatriation would not necessarily be a solution, (since it could perhaps invite aggression to "secure" both gold & oil)

security at the above mentioned vault locations may in any case be considered more secure, especially if held at multiple sites & I suppose if some gold was destroyed, the remaining gold would simply be revalued higher to account for the revised stock amount.

any thoughts on how the reval impacts the current geopolitical landscape, eg. middle east, iraq, iran, afghanistan, etc.?

jeb said...

Fofoa,
Than you for the link to Jacques Reuff's book. Much appreciated. And than you for taking the time to share your thoughts and understandings on monetary issues. I can attribute my current peace of mind and future wealth to your writings.

Bron Suchecki said...

MnMark: "I believe FOFOA's argument is that gold will not be subject to the capital gains tax after the Freegold transition."

I find this highly unlikely. This would require change of law. Usually changes to tax laws are not retrospective, which means that everyone holding gold pre the law change would have to pay CGT or only on gains up to the date of the law change.

I cannot see a politician having any luck convincing "lefties" or the average voter that the newly rich gold holders need to be retrospectively exempted from CGT so that "the gold can flow". You're just going to get a lot of WTF responses.

FOFOA said...

Hey Bron,

"Gold" is poorly defined today, even by law, and the segment we're talking about his held discreetly, physically. I've always said that gold held by a third party who is answerable to the USG is easy pickins. Try thinking outside of the current paradigm box. Imagine you had something really valuable. Something small, that would fit in your pocket like a coin. Imagine it would fetch $60K anywhere in the world except where you live. At home with your fellow suckers it would only fetch $6K. Would you sell it to an "official" dealer? Would you smuggle it out yourself? Maybe you would do neither. Maybe you'd be happy to sell it for $30K cash on the (THRIVING) black market and let someone else smuggle it out. Or maybe you simply wouldn't sell period. Show your stupid politicians you can wait longer than they can. So how's the current "gold" tax regime going to be a benefit beyond the initial easy pickins?

Sincerely,
FOFOA

fonoah said...

Hi Bron - (I live in Australia), and my understanding is that Capital Gains Tax does not currently apply to (physical) Gold held in a SMSF ( = 401K's for our US friends?)

Can you/anyone please confirm this? I agree/hope that if they do change the rules it will not apply to metal already purchased.

Thanks/Cheers - FoNoah

victorthecleaner said...

enough,

the leakage is about 20% per year. In order to see this, click on the following

Link to a chart at Yahoo!

The blue curve is GLL, the red one is GLD (which I use as a proxy for spot gold). You see that compared with June 2011, GLD is almost unchanged, but GLL is down 20%.

Victor

victorthecleaner said...

I am not sure I would want to short paper gold though. Even if FOFOA's idea from 'Today's quote-unquote gold' is right that the main danger is a drop in the paper price of gold which then leads to a loss of too much physical reserves, I don't think I would want to go short. The reason is that it is still possible that someone else (US govt, Fed, ...) may decide to rescue the paper gold market by purchasing a huge amount of paper gold, trying to get the price up and make the reserves last longer in terms of dollars. The entire game has too many unknowns, not only the timing.

If you worry too much about falling paper gold prices, you might want to think about the following.

a) Do you have too much gold in relation to your other assets?

b) Timing the market almost never works. Stock investors are a famous example. Those who try to time the market in the short run, systematically lose money in the long run. This is not because they are too stupid to get it right, but rather because it cannot be done. So what's stupid here is the decision to try it. (With physical gold it is worse because even if you could time it, there would still be a price below which the market will become illiquid). Another nice example of how timing the market fails, is the gold bugs. I am thinking of the pertinent websites and their proposed futures trading. I don't want to know how much cash they have burnt over the years.

Victor

d2thdr said...

The problem with Ashvin Pandurangi, Isabella and others is they see the world from an American (western) perspective.

The sooner they realise the world also includes the 75% not represented by the west, they pieces of puzzle fall directly into place.

Perhaps Dr Octagon and Börjesson can also take this into account.

I still think Credibility Inflation was FOFOA's best post.

Gary said...
This comment has been removed by the author.
Texan said...

FOFOA,

Ok, thanks.

Woland said...

For all those with an understandable nervousness regarding
their capacity to hold their position during a downturn, it
might be time to re read Aristotle's wonderful "Stepping
through the looking glass", (10/17/02: 2:29:28MT,
Msg # 87615) It just might change your perspective (and
comfort level) for the better.

Gary said...
This comment has been removed by the author.
DP said...

@google

site:usagold.com "stepping through the looking glass"

;)

Bron Suchecki said...

FoNoah, CGT applies to gold, I'm not aware of any special exemption for gold or any other asset in a SMSF.

Gary said...
This comment has been removed by the author.
Jeff said...

Bron,

How quickly can a law change when the G needs it to change? How quickly did the I-banks become commercial banks when they needed government support?

Under freegold the gold must flow; either from private hands or from Ft Knox. Why would the G try to squeeze tiny holdings from shrimps who will trade on the black market? So they can ship their own gold overseas? It makes no sense. The law will change.

FOFOA: Tax laws always change, and this is a fact that will also be factored into the decision "to sell or not to sell" that strong hands in the US will face. Another factor is black market arbitrage. A strong hand in the US won't have to engage in smuggling gold out of the country himself in order to gain more purchasing power than $6,850. With $48,150 per ounce in potential black market profit (that's $1.5 billion per smuggled tonne), it's not hard to imagine a vibrant black market that would gladly pay you twice your $6,850 off the books.

Woland said...

I do not understand the importance of the debate regarding
the tax treatment of gold post revaluation.

If I own a building, free and clear, and it is worth $1 million
this year, and $10 million next year, and if I want cash, I can
borrow from any bank against that value. With gold as the
world class reserve asset, it should surely be as good a form
of collateral as my building, no? In neither case do I owe any
tax at the time of borrowing. Why would this not be my
preferred avenue to obtain cash from part of my gold holdings?

sean said...

Great post and comments!
Thanks to the reader for the Jaques Rueff upload, the aptly titled "The Age of Inflation", price: $1.45!!

Jeff said...

Hi Woland,

Because if you lend me gold I will pay you back in legal tender fiat, if at all. Thanks for the gold, bro!

FOA: "Keeping gold out of the fiat arena would be more simple than many hard school advocates envision. The key to that is found in the implementation of international law. The leading economic countries (EuroZone in the future) would have but to establish a protocol that forbid the enforcement of collateral attachment anytime physical gold is traded, lent or involved in a trade. In this context, no banker would lend you gold to buy a house if, in a default, he could not claim your house in a court of law. Even private parties would never lend gold if the asset behind the loan could not be claimed for nonpayment. It's that simple. With a stroke of written law, the trading of gold as wealth would become a final payment with no possible credit implications. Our official fiats and wealth without a country would never again function as one.

somanyroadsinvesting said...

I have a small anecdotal question. I have been traveling a lot lately and you end up meeting other people from around the world. Why is it so many europeans, austrailians etc tend to travel for a year or more at a time and still be able to keep their job, health insurance etc. Where the few americans I meet are always rushing back so they don't lose their job or health insurance. I was just thinking about this net producer thing and that hit me. If we are consuming so much more than we produce why does it seem like we have to work harder and longer than most other 'western' countries?

Gary said...
This comment has been removed by the author.
DP said...

Isn't Woland proposing he will possess gold and it will be encumbered as collateral to a loan he wishes to take out, like your house is collateral to your mortgage. Nobody takes anyone's gold, unless and until the borrower ceases to keep up with the loan payments.

#GELOC

Woland said...

Gentlemen: Please do not assume that when I borrow against
my perfect collateral (gold) for fiat cash (post revaluation) that
I necessarily intend to default and surrender my gold. My use
of that fiat was for PRODUCTIVE purposes, not consumption!
How did I get all that gold if I had not been productive before
the transition? Why would I change my MO after it? Nobody,
not even FOA, had all his wealth in gold. Remember the term
he used, "in goodly proportion to all my other wealth?"
Post Freegold, cash will still be used to generate more cash,
just as it is today. Cash thus generated will be able to repay
loans, just as today. It will even generate "spending money"
again, just like today.

Woland said...

Jeff:

If I borrow from the bank using my office building as collateral,
I don't lend them my building, no? I keep it and continue to
collect rents just as before. I NEVER have to surrender it to
the bank as long as the terms of the loan are met. I meet those
terms (in cash) from the cash generated by my building and the
uses made of the cash borrowed. Same with gold. They don't
get to take it, any more than they get to take your house, as long
as you pay your mortgage and RE taxes.

Woland said...

DP: YUP!

burningfiat said...

SMRI,

Good question.
Who's on the recieving end of the nonstop deficit-financed consumption of the USA? It is, as you mention, obviously not hard-working Americans.

I think FOFOA has touched on this subject in several of his posts. Links, anyone?

Here are some candidates on the top of my mind:
1) Government/DC employees
2) Welfare recipients
3) US military (takes a lot to run an empire)
4) Bankster bailouts

You have surely have chosen the wrong career if you're not gettin' any "free" USG money.

enough said...

Thanks VTC,

I see it, unfortunately.

I still believe, in the right "short paper" product, I want to have this on.

If/When "paper gold" burns, as long as I don't push for too much, it will be help with my anxiety and offer a good "return". I understand the better "return" is just long physical but that does not alleviate the emotional trauma.

I repeat, I know intellectually that all inn is where I need/want to be. I have less anxiety here than I would back where I was.

I owned alot of "bank pref" $25 par value, non cumulative. In early 2008 many banks issued 8+% coupons. Seemed a no brainer. The BAC 8.05% dropped to $3 !! Barclays, Citi, Credit suisse to $5 and good ole RBC to $1 !!!

I actually entered these at these levels but sold way too soon but who knew what lengths the FED would go to protect pref holders, especially after they let FNMA pref go.

Point being it's about "relative" insecurity. I am both emotionally and intellectually insecure with being long paper products. At least I am only emotionally insecure being all inn. My instincts have always been pretty good, it's my emotions that get in the way.

But enough, by being short paper gold, you are "long" a paper product......yes, I know and see the contradiction....

But some form of short paper gold is one paper product I need to own to keep my emotions in check.

In the right product, as a pure arb., if paper gold does go on, I still think it's a good arb as premiums on physical over paper will rise substantially.....

any further comments or insights are welcome...

thank you all !!!

JR said...

Who is gonna give you a collateralized loan if they can not obtain senior lien rights in the collateral?

Why would I loan you cash against gold if I have no legal right to get the gold if you default?

Jeff said...

You cannot use gold as credit in freegold:

Trail Guide (05/11/01; 14:32:34MT – usagold.com msg#: 53425)
[...]
The ongoing over taxation, deficit spending, fiat inflation, deficit trade balances and mismanagement of private economies has always been with us. Yes, under different names and different degrees, that’s true, but no recent period in money history, gold or not, was without an ongoing effort to cheat the system. It was always in a process of decay, no matter what the books tell you. To think otherwise is to disclaim humans as they are.

How often have we heard that some special “hard school of thought” has all this terrible process documented and neatly explains where it all went wrong? Then, goes on to show us how to set it all up again so as to start over on the right foot.

So, trying to present the society as a whole, as “the awful, all controlling big government” on one side and the “good private economy on the other side” argues the lesser side of the larger issue;

—–hard money policy cannot work for long in a credit based system—-!

It makes absolutely no difference if we are even on a 100% gold use money system, if we as a society engage in credit commerce, we will break links with gold.

Consider:

I borrow 100oz of money gold from ten people so as to spend that gold doing commerce business. The hard money theory has us thinking that if I fail and cannot pay back the gold, this little portion of the money supply contracts. Thereby the gold system is perfect, as it slows the economic excess.
This is a minor example of gold banking. On a tiny scale. It works, as long as we don’t act out our motions in a political way.

Conversely, if gold was not part of a banking,,,,, credit,,,,, lending system,,,, rather it is just a tradable, non-lendable non-official money asset,,,,, then those ten people would have given me their gold and became part owners in my (ours now) enterprise. When it fails, our gold money is gone and no credit contract is lost in the process. Society at large will not come to our collective defense, no matter the scale of the loss. You see, we lost our assets, not society’s official money!

The difference:

When gold is lent,,,,, when it’s part of the banking system,,,,, when it becomes the object of a credit contract,,,,,, this whole hard money system falls into political RISK! No matter how perfect the “schools” have show this to work, in real life, political risk degrades our perfect credit money. This is the gray area that’s not ironed out because we cannot iron out society’s emotions. Let’s see:

In the above, the ten people I borrowed gold from would be holding my IOUs for that 100 ounces. Be they private citizens, banks or corporations they have effectively lost their gold money. The very money of the nation state!

Rather than see their losses made final, and cause harm, they partition the government to intervene by recognizing those money (gold) loans as good on the books. Further, the government is asked to lend some of it’s gold (collected through taxes) to me to extend my business life. I continue to function in a small way as I pay on those gold (money) loans. Further, those loans (held by ten lenders) become marketable as they become seasoned. Then, at a discount to their face value, they can be sold or kept as collateral assets. Over time, this is the political risk that seeps into any hard money system. Over time, even a gold credit system is expanded,,,,,, inflated,,,,,, until outright fiat must come into play.

It never starts out as “big corrupt government and their awful bankers” controlling the “good honest people”,,,,,, rather,,,,, it’s when a large enough segment of the “good honest people” are threatened with losing enough (gold) money that it could take down the economy,,,,,, they demand (elect into office) that their government and therefore bankers, expand the (gold) credit enough so as to slow the fall.

JR said...

FOA: "Keeping gold out of the fiat arena would be more simple than many hard school advocates envision. The key to that is found in the implementation of international law. The leading economic countries (EuroZone in the future) would have but to establish a protocol that forbid the enforcement of collateral attachment anytime physical gold is traded, lent or involved in a trade. In this context, no banker would lend you gold to buy a house if, in a default, he could not claim your house in a court of law. Even private parties would never lend gold if the asset behind the loan could not be claimed for nonpayment. It's that simple. With a stroke of written law, the trading of gold as wealth would become a final payment with no possible credit implications. Our official fiats and wealth without a country would never again function as one."

FOFOA's comment on Bron's blog on thsi theme

FOFOA said...
Hello Bron,

On gold leasing:

I don't know where you got the idea that I have strict Freegold rules. I think you are putting more emphasis on this leasing thing than necessary. I guess it's understandable since your business involves borrowing gold. But as I have said, it is not a prerequisite of Freegold, but more like a natural consequence. The only prerequisite to Freegold is the collapse of confidence in paper gold. The leasing idea is about making a natural concept as clear as possible to the banks that might not get it. Keeping gold out of the business of credit money. Eliminating the lending of gold (or credits denominated in gold ounces) for monetary purposes in which fiat loans will do just fine.

FOA: "Keeping gold out of the fiat arena would be more simple than many hard school advocates envision. The key to that is found in the implementation of international law. The leading economic countries (EuroZone in the future) would have but to establish a protocol that forbid the enforcement of collateral attachment anytime physical gold is traded, lent or involved in a trade. In this context, no banker would lend you gold to buy a house if, in a default, he could not claim your house in a court of law. Even private parties would never lend gold if the asset behind the loan could not be claimed for nonpayment. It's that simple. With a stroke of written law, the trading of gold as wealth would become a final payment with no possible credit implications. Our official fiats and wealth without a country would never again function as one."

Note that the first time this was discussed was in 2001, 3 1/2 years into the Freegold discussion on USAGold. That's because it is not a primary concern and not a big deal. This discussion came about from one of the commenters pushing FOA on the legal issues that might be faced by a currency zone (Eurozone) that wanted to support a sustainable future after the collapse of the old system. Here's the sentence immediately preceding the above paragraph:

"In my discussion with Econoclast, I took his legal meanings and applied them to this "wealth without a country" position…"


cont.

JR said...

cont.

cont.

Bron, I believe you said your business borrows without having to post collateral because of the WA Government's AAA rating, right? Also, you are not borrowing gold for a purpose that would be equally well served with a fiat loan. So I don't see how your business even applies to what FOA wrote above.

So why do we not want banks lending gold the same way they lend fiat? And why did FOA even have this discussion? Here's a little more. First, Econoclast writing to FOA:

Econoclast: "Any system that could possibly be thought of or proposed must include the use of law. Part of the answer (transparency) includes a complete treatise of the "new" laws written in simple, direct English (8th grade level-2 pages instead of 2000). The laws would be directed towards controlling the bankers, not the people for a change. The laws would be written with input from bankers, but not by bankers. Penalties for financial fraud/counterfeiting/etc. would be severe.

This new gold dollar system would function alongside the current FED system. Any large debts (mortgages, business debt, most importantly, govt debt) would be denominated in fiat dollars. That way govt could continue to operate (maybe, ha ha) and the banksters could still have their play money to manipulate and try to capitalize on. A free market would exist to redeem back and forth as necessary. This free market would show the relative worth between the two currencies."


cont.

JR said...

cont.

FOA's reply: "Excellent thought sir. Econoclast, using your thrust as my platform:

One of the major problems faced by past hard money planners was that any time real wealth, gold, is denominated as credit money, it always placed the relationship between the rule of law and the rule of gold at odds. If our laws defined gold as official money, and lent it, then by association the law had to define a portion of gold that did not exist in circulation. That portion was the contract asset held as bank savings. Yet, a person's claims against it identified said gold as real. This was and is an inherent contradiction because no law can define the value of real wealth held in contract.

This particular fiat form of hard money owed its existence upon a continuous function of the economy. What the above means is that you cannot take something real and lend it over and over, as banks do when lending fiat, and still demand that the law recognize said contract moneys as hard legal tender.

I would state that no form of lent gold be recognizable or enforceable in the court of law as a legal tender contract. One may borrow gold, relend it, or even borrow against it, but that gold would not be valid in the payment of all debts both public or private. It could not, by law be legal tender. This is not to say the trading of gold would not somewhat supplant currency in function. It could and most likely would to a degree, but it would no longer carry a credit quality that fiat would in the form of a time function. Indeed, in our modern economic structure, a credit time function is very valuable and gives digital contract currencies their demand.

To deal in the future,,,,, to borrow,,,,, to capitalize would require the use of a fiat function. Gold could / would be a final trade; I'll give you ten cars (or gold) for your house,,, deal done. If I want more time to pay, I and we must engage a fiat loan."

JR said...

Please get this fundamental point.

Our legal system tries to force gold into the money game. This is what is ending as we see Freegold emerge and gold is freed from these shackles. A Wealth asset not trapped in the MoE system:

The Free in Freegold

Okay, here it is. What you've been waiting for patiently, I presume. This is what gold will be freed from: The fractional reserve banking practice, which is a carryover from the gold standard.

This is the free in Freegold.


Freegold Foundations

Jeff said...

FOFOA: ** Spending Gold into the marketplace, whether by the owner or by a borrower, would tend to result in prices "that weigh more"--cost more Gold, that is.

** As ever more Gold is borrowed out of other people's savings to be spent into the economy, the Gold's purchasing power is lessened from what it otherwise would be...hurting those who have elected to hold their Gold instead of risking it by lending it out as a source of income.

[notice in the above that we have all the bad devaluation effects without a single bank entering the equation!]

** For Gold to find its truest value, all savers must retain their Gold for their own use. Its properly retained value will more than make up for the foregone interest income. Gold must not be lent! [Gresham's law alone is adequate to achieve this.]

Jeff said...

Lending gold increases velocity and suppresses the price. It takes the free out of freegold. See also:

http://victorthecleaner.wordpress.com/2012/03/18/how-credit-suppresses-the-gold-price/

JR said...

Ivo Cerkel,

FYI

Bear in mind, here, that FOA used the term "Mises" to represent the modern "hard money/gold standard crowd" or as I called them, modern practitioners
The Return to Honest Money

Surprisingly, as FOFOA has repeatedly shown, if you read Mises you often go 1) wow, this sounds like A/FOA (like the secondary medium of exchange idea discussed in the above post), and 2) this doesn't sound like all the Rothbardian HMS tomfoolery put out by LvMI, aka the "Mises Crowd."

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

As many others have pointed out, financial advice and libertarian politics under the guise of Mises the ideological symbol, not Mises the analytical economist, or anti-fed politics and hard money advocacy, not the works of of Menger, Bahm-Bawerk, Hayek, Kirzner, etc. is not economics. So don't treat it as such.

As an experiment, over the past six months we have been tracking the use of the term Austrian economics in the news and in the blogosphere. Less systematically, we have also been listening carefully to the use of the term among fellow professional economists and what they think the label means. The results do not fit our intention. Google alert, for example, inevitably points to financial advice or libertarian politics, rarely to the research paradigm of F. A. Hayek, never to the scholarship of Israel Kirzner. Mises is often mentioned, but Mises the ideological symbol, not Mises the analytical economist. The "Austrian" theory of the business cycle is mentioned, but only in relationship to anti-fed politics and hard money advocacy, and never as an ongoing research program among professional economists.

These trends are not recent, but have been constant throughout our respective careers.
We have always been among those who attempted to offer resistance to this use of the term. It has become evident to us that our efforts have been futile. Rather than resist the pure ideological identification, we are choosing to devote our efforts elsewhere. The name Austrian economics has been lost as a focal point for a tradition of economic scholarship, and is now a focal point for something else. We have to let it go.


New Thinking for a New Decade

Woland said...

There is a complete difference with the concept of LENDING gold,
with which we are all familiar thru the writings of FOA, FOFOA, and
Aristotle, and which JR has just highlighted, and the damaging
consequences which inevitably result, and the use of gold as collateral
for a fiat cash loan. If you MEET the terms, you KEEP your gold. If you
do not meet the terms, you must SURRENDER it to the bank. Your loan
is nullified (excluding the possibility of a deficiency judgement) The
net consequences are identical to the situation where you sold your
gold to the bank. You have the fiat, and they have the gold. Unlucky
you!! But you took that chance, and you always had the alternative,
didn't you? You could have just sold it in the first place.
Or am I a complete idiot, and the world's most perfect form of
collateral will NEVER be allowed to be used as such post revaluation?

JR said...

Yes Jeff,

Lending gold increases velocity and suppresses the price. It takes the free out of freegold.

Woland,

In your gold loan scenario, I give you fiat, what do you give me in return?

That's right - a paper claim on your gold I can exercise if you default.

Paper gold you say? HMMMM, sounds like Freegold is not too free from that paper game

Remember:

FOA: The world is heading towards a huge financial / currency crack up, but it won't work out with gold coming back into the money game.

http://www.usagold.com/goldtrail/

Jeff said...

Woland, did you read Reply to Bron? Or From the Treasure Chest?

Question: You refer to freegold as the natural consequences of the end of fractional reserve bullion banking. I can see how a worldwide run could crash the system, but in the aftermath what would prevent an eventual return to fractional reserve bullion banking? Giants may someday once again have some risk appetite to lend out their bullion holdings, no?

FOFOA: Against what collateral? Gold is (will be) the ultimate collateral. To protect gold’s status as such, and its invaluable contribution to a stable monetary system, courts will not enforce the forfeiture of any lesser collateral in the failure of a loan of the ultimate collateral. This will be enough to prevent the lending of gold, which will be frowned upon by the system.

The only reason to borrow the ultimate collateral is to short it. Can you see why a newly stabilized system would frown on this and therefore not support it if and when it goes bad? If you want to put your gold to work you just sell it and then put those dollars or euros to work. You don’t lend it out because you might not get it back.

JR said...

Woland,

Or am I a complete idiot, and the world's most perfect form of
collateral will NEVER be allowed to be used as such post revaluation?


In a sense, private parties can do as they please, subject to applicable laws.

When private parties have a dispute they can't resolve, they look to the legal system to resolve the differences.

I can promise to forfeit my gold collateral If I default on my loan. Okay, now I am defaulting on my loan. How are you gonna get the gold? If you go to a court, they will say "your contractual promise to pay gold (aka paper gold) is not enforceable under our laws."

Sure you may resort to self-help and I may get beat up or shot, but do you see the bigger implication?

Paper gold, aka trying to make gold subject to the legal system by contractually defining its value visa-vie the MoE, is not gonna be enforceable:

FOA: The world is heading towards a huge financial / currency crack up, but it won't work out with gold coming back into the money game.

http://www.usagold.com/goldtrail/

Woland said...

Jeff: Please help me. IS there a difference between borrowing
or lending gold, and borrowing or lending fiat, with a collateral
asset as a guarantee? Do you think they are identical? If so,
please explain. Please also show that they have identical
consequences in the event of default. Thanks.

JR said...

People won't lend gold, nor will they borrow against it, because the "rights in the" collateral in each case is not legally enforceable.

And for the demand side, who wants to borrow in gold? It appreciates, making it harder to pay off in real terms, not easier like depreciating fiat.

Gold is for savings.

Fiat is for lending.

Don't mix the two. Leave the mixing to the professionals.

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

Woland,

IS there a difference between borrowing
or lending gold, and borrowing or lending fiat, with a collateral asset as a guarantee?


Where they are similar is both involve contracts defining gold as security (thus purporting to establish contractual rights in actual, discreet physical gold) and therefore require a legal system that recognizes and enforces those paper gold contracts.

Physical gold is not paper gold but both loan scenarios require a legal system the views them as the same. Why would you expect this view to survive the $IMFS collapse? Do you not think Freegold is what comes next?

Woland said...

JR: Thanks for the thoughtful reply. My response is as follows:
I am a private party. I own physical coins. I wish to borrow fiat,
and post those physical coins as collateral. I entrust them to a
neutral third party institution (a fiduciary entity) to retain
possession of the collateral during the term of the loan. The lender
(a bank) and the borrower, (me) agree that an event of default
will trigger the release of the collateral to the bank, in full
satisfaction of the loan. Just like a foreclosure. That's the end.
I am unable to see how this in any way harms the operation of
Freegold. I can CERTAINLY see the problem where the bank LENDS
me gold (a collateral whose price floats free) and where I have to
repay a fixed quantity of gold, whatever the price. Bankruptcy
for one of us, or both. Just like the old Gold Standard.

Jeff said...

Woland, what if the third party doesn't give you your gold back?

JR said...

I am unable to see how this in any way harms the operation of Freegold.

Umm, paper gold?

Possession is the timeless attribute of wealth because true possession is unequivocal.

So who owns the gold in your scenario. That's right, we have to check the contract.

Paper gold.

Gary said...
This comment has been removed by the author.
Woland said...

Jeff: Sorry to say, but that is the first response which has
crossed over the line from arguing the case, to something
else. What if people lie, cheat and steal, and do not comply
with agreements which they have made? What if even
governments do the same? Well, welcome to the world!!
It's the same for 5000 years, and yet, miraculously, we keep
entering into contracts and agreements nonetheless!! So
what can I say to you that you don't already know.

Jeff said...

Gary, believe whatever you want. Do you understand that in freegold it's not fraud if I don't give your gold back? You have NO LEGALLY ENFORCEABLE CONTRACT if you loan me gold. I can pay you back in fiat, or maybe I just go bankrupt and you collect what you can from the trustee. Again, in fiat.

Jeff said...

The legal system is telling you that it doesn't want gold lent. Why? Because lending gold suppresses the price. So why are you guys so eager to lend your gold, and drive down its price, without even legal standing to get it back? Please Gary, Woland, tell me that. Why wouldn't you just sell some gold?

Gary said...
This comment has been removed by the author.
Gary said...
This comment has been removed by the author.
Woland said...

JR:

I fully agree with the concept that possession is the timeless
attribute of wealth. I do not agree that, in the real world, true
possession is unequivocal. I BELIEVE that it SHOULD be. I think
that, in reality, all wealth involves varying degrees of contingency,
and that physical possession of something small and very
valuable which is easily hidden has the lowest risk of being subject
to that contingency.
So, in the case of my fiduciary, I have had to surrender possession,
but I've obtained possession to a temporary near equivalent:
the cash. An the worst thing that can happen to me is they take my
gold and I keep the cash. Well, guess what? In this worst case
scenario, under Freegold, I am free to buy gold with my cash if
they steal it via contractual fraud. No harm no foul.

Jeff said...

So to dodge a tax (that won't exist) you will decrease the value of your savings and hope you will be repaid for a loan which you have no legal recourse to collect. That about how you see it? Ok, I'm done.

ANOTHER: Gold will not bring your "capital gains tax" as the mines will be taxed to compensate.

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

Hi Woland,

, I have had to surrender possession,
but I've obtained possession to a temporary near equivalent:the cash.
An the worst thing that can happen


Is this.

I'll quote someone a lot smarted and more articulate than me. He too is fond of quoting smart articulate people, so pay *SUPER* close attention to anyone else he cites:

Jeff said...

Hi Woland,

Because if you lend me gold I will pay you back in legal tender fiat, if at all. Thanks for the gold, bro!

FOA: "Keeping gold out of the fiat arena would be more simple than many hard school advocates envision. The key to that is found in the implementation of international law. The leading economic countries (EuroZone in the future) would have but to establish a protocol that forbid the enforcement of collateral attachment anytime physical gold is traded, lent or involved in a trade. In this context, no banker would lend you gold to buy a house if, in a default, he could not claim your house in a court of law. Even private parties would never lend gold if the asset behind the loan could not be claimed for nonpayment. It's that simple. With a stroke of written law, the trading of gold as wealth would become a final payment with no possible credit implications. Our official fiats and wealth without a country would never again function as one.

June 24, 2012 6:36 AM

Gary said...
This comment has been removed by the author.
Woland said...

Jeff: Last point and I'm outta here, until FOFOA or ARI set me
straight (and I would LOVE to be set straight if I'm wrong)
Under Freegold, cash and gold are, moment to moment,
Equivalent. The suppression of gold is over. Any saver, or
person with cash, can buy gold. Yup, the price changes as
the Government mismanages the fiat currency, by way of
compensation, but its gotta flow. So when that evil
fiduciary screws me (and loses his role as a fiduciary as a result:
(BTW, that's his way of earning a living he's destroying)
I'm stuck with the cash, but I can buy gold with it. My
one big risk, which I admit, is if I posted 1 oz of gold for
a $45,000 loan when gold was at $55,000. Stupid me!

Bye for now.

RJPadavona said...

SV and Aaron,

Yes, it was a great show. And yes, SV, Chicken Shack are one of my favorite blues bands. Most people don't know that Christine Perfect McVie got her start with them. She even wrote a song about the $IMFS ;)



Something I'd like to add to FOFOA's comments about Freegold and capitalism vs socialism:

Freegold is about nature finally forcing people and governments (regardless of geographic location) to live within their means or suffer the consequences. Freegold won't affect the Scandinavian countries' way of life. Apparently the people are willing to pay for all those social safety nets with higher tax rates. And they're doing it while having balanced trade and current accounts. And seem to be quite happy with it. More power to them. It seems to serve them well.

Personally, I don't think Americans are willing to pay for these things. Cultural differences and a different mindset are the main reason.

Jeff said...

Hi Gary,

You should be more worried about the counterparty that WILL take your collateral. If you ever want to do that loan, I'll be your counterparty. :)

Woland said...

Hmm. No more pawn shops Globally. So sad. Can I bid on that
gold rolex or double eagle on ebay. dunno.

JR said...

Hi Woland,

Thanks for sharing your thoughts, I enjoy your thoughts and perspective.

Maybe we can look at this from the perspective of Aristotle's "manos" and a FOA quote. I'm stewing on this, I hope you can find some time to as well. I'l adjourn until later.

**For Gold to find its truest value, all savers must retain their Gold for their own use. Its properly retained value will more than make up for the foregone interest income. Gold must not be lent!

**With Gold as the only money, people will not be able to get loans. [In the real world, this is hard to imagine!] As an alternative, they will work up complicated contracts for the item they desire (new home or car?) in which they promise to deliver a certain level of their future productivity against a pledge of real wealth collateral.

**These contracts for the delivery of future man-hours would eventually be organized into their own market, and quantified into standardized units (called something like "manos") functioning as a currency. Everyone would know what the price for a loaf of bread would be in "manos," and they would all revel at the high price of Gold as quoted in "manos".

**As more future productivity is brought forward into today's market, we would see this "manos" currency-supply inflate, and each pledge of future manhours would be seen as less and less valuable when compared to real goods.

**Someone holding Gold in savings who needed to get some work done or to buy goods could purchase it directly with Gold. They could also sell a quantity of their Gold on the free market to buy the Man-hours they needed to get the job done. There will always be people with an excess of "manos" that will want to move them into this supreme monetary asset--Gold.

**Such a system is not prone to shocks (bank runs and currency crises, etc. are like earthquakes where pressure builds and then is suddenly released) because at all points the assets may freely come into balance against each other in the free markets of the world.

There is little difference between a manos in Bangladesh and a manos in Canada where one manos is taken at a moment in time as the work equivalent to a healthy man shovelling sand with a spoon into a soda bottle. Who cares if one manos is actually called one, ten, or 27.34 rupees in one dialect while in another language it is called one, two, or 6.45 dollars? Its really just a mathematical exercise. Whose to stop the real world from pursuing such a system? Its basically what we have now, except the evolution took another route!

The key is that Gold must be assisted in towards its own final and perfect destiny through the straightforward mandate (whether social, governmental or religious) that Gold shall not be lent as it has been, or otherwise attached to various financial derivatives. You can work for it, mine it, buy it, and sell it. You can't borrow it. Monetary perfection for an imperfect planet.

Gold. Get you some. We are moving in this direction faster than you imagine. ---Aristotle

JR said...

Why not buy fiat and rebuy the gold later instead of borrowing money, secured by gold, that you hope to get back when you repay the loan? So you can exploit the modern money concept and monetize your gold to transfer the risk of future gold price changes?

FOA (07/27/01; 15:20:44MT - usagold.com msg#85)
"The Wind Will Blow"

[...]

Because there is a conflict between society's basic desire to use our modern money; or "our modern concept of money as it has evolved".

First:
Our natural drive to use money, in lieu of barter, is to use a simple bookkeeping credit trading medium that keeps track of our barter. This requires our embrace of the fact that every item in our universe of wealth constantly changes in value. Even as gold changes in value; both up and down.

Second:
The unnatural convoluted drive, of many, is to use this same "money value concept" to borrow real wealth "use"; instead of borrowing the actual wealth itself to gain said "use".

This second item comes under the heading of trying to get something for nothing and is everywhere in Western Thought!

If we lend an item of real wealth, say a tractor or chair, it's future value is unimportant to the lender as long as the real item is returned. It is the "use" that is lent, not the money concept in the form of a trading value. In this process we recognize that, because the value of things change, the debt to be repaid is the item of wealth, regardless of it's higher or lower value. Only it's "use" changed hands during the lending and repayment of debt. All is well.

However, lending the value contained in our modern money concept exposes the lender to uncertain gain or loss of tradable value because it's the value that's being lent, not the actual "use". Without some way to lock down the value of money, over long periods of time, the industry of money lending (banking) fails it's purpose and risks it's profit if tradable money value falls.

Woland said...

thanks, JR. I look at this blog as an ongoing education which is
offered for free, and where I have learned far more than i can ever
hope to contribute. Mt attitude is "Show me the way" , but I've got
to be able to SEE it for myself. I'll spend some time as you suggest,
and perhaps have something to add another day. Best regards.

Aquilus said...

@JR
Why not buy fiat and rebuy the gold later instead of borrowing

I think today's borrowing reflex comes from the fact that today we borrow against "assets" like real estate that are not completely liquid and not perfectly divisible.

I cannot sell 1/8th of my house to get cash, I have to borrow against it.

But with gold I can sell say 1/2 oz even if I only have 1oz coins because I get 1/2 oz coin back and cash for the rest. Cannot do this EASILY with most other assets like land, houses, cars, privately owned businesses, etc.

Thus, seen this way, no need to borrow against gold, just trade the required weight for cash and buy back little by little as if you're repaying the loan or all at once - your preference (based on how much do you trust MoE deval in time).

Oh, and why not today? You could, but with the reval hanging over, that would be silly..

@FOFOA

My apologies for not commenting on the blog post (that I so was looking for) yet, but I only had time to give it a quick cursory read - had some family health emergencies. All getting to normal, so I hope to dedicate some time later tonight to really read it. At first glance it looks like a great piece.

AdvocatusDiaboli said...

"ANOTHER: Gold will not bring your "capital gains tax" as the mines will be taxed to compensate."

one of the really absurd assumptions, but it needs to be claimed by the freegold-bugs, because otherwise the nice theory will not work and will not come true (at least not in their lifetime, so they can finally be "rich").
Guess what: Since the last 5000yrs. who decided over the laws? The powerful (in case of gold I guess we can say the WGC&banks?) or the poor little working drones?
But I know, la-la-la ANOTHER & FOFOA said so, therefore the mines will be taxed 1000000%...sure world wide...I wonder if these guys will comply:
http://www.youtube.com/watch?v=fuieirztyHw

Even in the EU, those central planers with totalitarian powers are uncapable to find common tax laws, but in the FG mind, magically suddenly worldwide there will be a sudden consent...
Greets, AD

Edwardo said...

Enough,

There are, in my view, only three ways to obtain complete peace of mind.

A.) One harbors no doubts about the ultimate resolution.

B.) One's cost basis is so low that, for example, in this case, gold falling to _____an ounce doesn't cause unbearable emotional distress.

C.) Hold only as much as you can afford to lose, which is quite similar to B.

Needless to say operating without doubt is a very rare state of mind, and, in many, if not most cases where the distant future is involved, inadvisable. The future, as Jim Morrison, and others before him, observed, is uncertain. No matter how certain we may feel about a given outcome we can only "think" it is certain.

Then, of course, one can accept that a certain amount of turmoil goes with the territory. One just can't have one's cake (be the beneficiary of freegold) and eat it too (not have to worry about whether or not there will actually even be freegold. C'est la vie.

Woland said...

JR: I think you nailed it, though it may not have been precisely
as you intended. Only you can say. The key to my understanding
is by way of your comparison between "selling gold for fiat NOW
and buying it back LATER, versus, borrowing fiat NOW with gold
as the collateral asset, and paying back the same fiat later. It
all has to do with CHANGING prices over time.

Post Freegold, the ratio of gold to any currency will continue to
fluctuate: THAT's THE POINT!!. Poor management, and the
number of currency units for an ounce of gold increases: Good
relative management, and that number may fall.

When I borrow $50,000 and post an ounce of Gold worth $55,000
as collateral, IF the price of gold were to fall to $45,000, due
to the superb fiat management styling of the USG, I would be
incented to take my $50,000, and buy an ounce for $45,000.
keep the $5000 difference, and default on the load. I get to
screw JPM! Whee!! I now have my original ounce, plus $5000
of spending money! Double whee!

Well, it can work just the other way as well. Boo Hoo! I don't
like that nearly as much. Sooo, it better NOT be allowed to
happen. That's where my old office building and gold were
different. My building wasn't money, it was just a collateral
asset. But gold is BOTH. That creates an arbitrage opportunity,
and as Sir Gresham assures us, it WILL be filled.

Polly Metallic said...

AD, without meaning to sound unkind, since you are so unconvinced of the inevitability of Freegold, and you find those who believe that itt will happen annoying and deluded, why do you torment yourself by hanging out on this blog? Aren't there any number of other sites where you could discuss economics and monetary theory from your own non-Freegold perspective?

AdvocatusDiaboli said...

PM,
some thoughts are very propelling to enlarge ones view, however a lot of claims (mostly the ones rejecting common sense) made are the quite the opposite.
Greets, AD

Pat said...

AD, here's a claim embracing common sense.
You're an idiot, the worst sort, a Teutonicly stubborn one, with too much time on his hands.
I would not hold this opinion if you had ever uttered anything that could be construed as instructive or insightful.
Perhaps your village misses you, I doubt it, but go check.
Or go here.... http://www.youtube.com/watch?v=wdoGVgj1MtY

Woland said...

A final note of limited importance, but perhaps pertinent to
those who think International Law has a bearing on the
post Freegold situation. The word is composed to 2 roots:
inter, and national. Inter means between, and National I think
we all understand. WITHIN a sovereign nation, (particularly
a powerful one) the local law, as it pertains to activities which
do not intrude into international space, will govern. Law is
always and everywhere a function of the enforcement apparatus.
Absent same, it is meaningless. When an international law
lacks the enforcement apparatus to function within the
boundaries of a sovereign state, it too becomes meaningless.
Consider the international traffic in cocaine. If international
law declared that settlement of debts for the import or export
of this valuable commodity were non binding, what would that
do to to the settlement process? A lot? Nada? Wanna find out?
Only those transactions involving mutually recognized and
accepted obligations can ever be enforced by international
law: If and when gold becomes the global means of settlement
of trade imbalances via Freegold, then international law will
rule that process. It will still, in my view, have no means of
control within the sovereign state, until each sovereign passes
laws which restrict the claiming of gold collateral as settlement
of private debt.

Dr. Octagon said...

FOFOA - I'd like to go back to the discussion of employment, and my concerns over some of what you have said in this post and comments. My concern is not what's expressed here. It's not that I'm of "the collectivist mindset", or on the other side of an ideological divide. My personal focus and reason for being here is to help me determine what's ahead, or, as Another states in the header at the top of every page, ”Let's see where we are going”. I am not personally as concerned about what's right or wrong, as determined by the perspectives of debtors and savers. My concern then, is that I am hearing a lot from “FOFOA the ideological extremist!”, lately instead of FOFOA, the unbiased reasoner. I'm starting to wonder if your objective ability to see where we're headed is getting clouded lately, by a disgust at what you see. Employment is the latest example of this.

When it comes to employment, my viewpoint is that a business will hire someone, if the business believes that profits will increase as a result of hiring that person. Employment is primarily based on demand, so if demand is higher than current staff can supply, and the additional revenue a new hire enables is above the cost of employing that person, it's time to add more staff. So when Polly Metallic states “wouldn't some people argue that the debtor borrowing to consume does not produce unemployment because he is borrowing to buy things he could otherwise not afford, and therefore increasing consumption and increasing the need for workers to produce goods.”, I would agree with this. Borrowing to consume increases demand, and therefore, employment.

Now, of course, someone is enabling that borrowing. Either a saver is saving in the form of debt (e.g. China), or the money supply is expanding (e.g. Quantitative Easing). Either way, E.B.T cards come easy. The alternative to borrowing is taxing, which would not be accepted, because it's too obvious. The way I look at it, this government transfer is a way to force the value stored up by savers out into the economy. Those who save in currency watch it loose value, while those receiving government benefits receive that value without working. Whether this is right or wrong doesn't change the outcome - that this is good for employment, because it increases demand for goods and services. At least it's good while it lasts.

If you are a saver, and not a fan of this reality, then don't keep your savings in the form of currency or debt. If you save in currency or debt, then you're the one supplying the beneficiaries of government transfers, through a loss in purchasing power. Too bad for China. But China has woken up, and others are waking up too. Eventually all the value that used to be stored in currency is lost to spending today, leaving nothing for future investment. So it can't go on forever, but it can go on for a long time.

FOFOA above: “When the systemic SoV is debt, too much net-production from net-producers ultimately becomes a burden on society. It piles up in the monetary plane as debt owed and, at some point, becomes unserviceable.”. I agree. But that's not an argument for low employment today, that's an argument for eventual collapse in the future.

costata said...

In a nut shell (my emphasis):

On the debt crisis in Europe, the BIS said it’s “hard to escape” the conclusion that the solution to the crisis will have to include a pan-European banking system.

“A currency union that centralizes the lender of last resort for banks must unify its banking system,” it said. “Banks in Europe must become European banks.”


http://www.bloomberg.com/news/2012-06-24/central-banks-face-limits-of-powers-as-debt-persists-bis-says.html

costata said...

And the jockeying for positions in this game will be intense.

"We need to break the poisonous link between sovereigns and banks," said one EU diplomat close to discussions. "It's about solidarity. It can't happen overnight. It is difficult stuff."

http://in.reuters.com/article/2012/06/22/eu-bankingunion-idINL5E8HM7UG20120622

h/t to JSmineset for this link and the one in my comment at June 24, 2012 1:26 PM.

Victory said...

http://www.fdic.gov/news/news/financial/2012/fil12027.html

In the above FDIC link that FOFOA provided in this post there is a table down towards the bottom of the page entitled 'Comparison of Current Rules vs. Proposal.' Does anyone have an idea as to why every proposed change mentioned in the preceding narrative is listed except the one about gold?

-v

Tyrone said...

Palliative
.
Central Banks Face Power Limit as Debt Persists
“Central banks are being cornered into prolonging monetary stimulus as governments drag their feet and adjustment is delayed,” the Basel, Switzerland-based BIS said in its annual report, published today. “Both conventionally and unconventionally accommodative monetary policies are palliatives and have their limits.”
.
Last time I heard that word was here…
Just Another Hyperinflation Post - Part 2
Gonzalo correctly points to "palliative printing" as a wheelbarrow-enlarging event, which comes at the very end stage of a hyperinflation. And he presents it as palliative to the people. But this printing is usually most palliative to the government and its expanding rank of stooges. Sure, there will be "welfare" along the way, but for the most part the freshly printed cash will buy the most goods and services for the first hands it touches. And then less for the second. And even less for the third and so on. And this prime purchasing power will be mostly reserved for the government that prints it.

Gary said...
This comment has been removed by the author.
Ivo Cerckel said...

FOFOA said:
Marx writes, "The history of all hitherto existing society is the history of class struggle." He got this part right! What he got wrong was his delineation of the classes. (1)

The labour theory of value as outlined by Karl Marx in "Das Kapital" says that the bourgeois capitalist system necessarily involves a class antagonism.
This antagonism is due, says the theory, to the fact that that the whole value of a commodity is, as it were, crystallised labour; it is due to the labour expended in its production.
Yet, the capitalist appropriates to himself part of this value, paying the worker a wage that is less than the value of the commodity produced.
He thus defrauds or exploits the worker. And this exploitation cannot be overcome except by the abolition of capitalism.
If the so-called labour theory of value is once accepted, it follows necessarily that the capitalist system involves exploitation or defrauding of the workers. And that the payment of higher wages would not alter this fact. (2)

Doesn’t FOFOA forget that Marx is talking here about the value of commodities
and that one such commodity is (called) ... gold?

Or shall we argue that the payment of (higher} wages in Freegold can alter the fact that the capitalist system necessarily involves exploitation or defrauding of the workers?

NOTES

(1)
WEDNESDAY, JULY 7, 2010
The Debtors and the Savers
http://fofoa.blogspot.com/2010/07/debtors-and-savers.html

(2)
Frederick Copleston, S.J., "A History of Philosophy", Vol. VII "18th and 19th century German Philosophy", London & New York, Continuum books, 2003 (first published 1963), p. 312

Edwardo said...

That's an interesting choice of words from the BIS. The following statement, “Central banks are being cornered into prolonging monetary stimulus." has the distinct whiff of victimization about it what with the use of the word cornered.

So, are these "cornered" CBs in such a state that their sovereign victimizers should be wary - you know what they say about a cornered animal, never more dangerous- or is it just a bit of self pitying rhetoric?

Chico_hawk said...

Edwardo - the banks, especially the BIS, see whats coming & are just trying to get in front of the locomotive & blame the train wreck on governments & their fiscal mismanagement.

The irony is palpable considering governments' biggest fiscal mismanagement was bailing out the banks (& they continue to do so...)

Ivo Cerckel said...

RECAP

Because Marxian theory does not define its notion of class more closely, people have been able to use it for the expression of the most diverse ideas.
June 23, 2012 7:26 PM

Hegel thought of nations as the vehicle of dialectic movement. Marx substituted classes
+
The euro is the first currency that has not only severed its link to gold,
but also its link to the (Hegelian notion of the) nation-state
(and thus to the Marxian notion of class struggle),
June 23, 2012 8:18 PM

Or shall we argue that the payment of (higher) wages in Freegold can alter the fact that the capitalist system necessarily involves exploitation or defrauding of the workers?
June 24, 2012 4:24 PM

2000 Flushes said...

For those of you who are into this sort of thing, have a look at this post analyzing a trio of frescoes in the Bank of America building in Charlotte, North Carolina.

http://vigilantcitizen.com/sinistersites/analysis-of-the-occult-symbols-found-on-the-bank-of-america-murals/

Maybe it's nothing, but pay special attention to the color of the top worker (miner?)'s shovel in the left fresco. :)

Michael H said...

Dr. Octagon,

"So when Polly Metallic states “wouldn't some people argue that the debtor borrowing to consume does not produce unemployment because he is borrowing to buy things he could otherwise not afford, and therefore increasing consumption and increasing the need for workers to produce goods.”, I would agree with this. Borrowing to consume increases demand, and therefore, employment."

FOFOA also agreed with this, but he specified that the increase in employment happened in China, not the US.

Aaron said...

Ivo-

I think I missed something in reading your previous posts. For a moment when I replied to your post I thought you were arguing in favor of a particular Austrian point of view. Perhaps you can spell it out for me so I'm absolutely clear.

Are you arguing in favor or Marxism?

Aaron said...

That should have read:

"Are you arguing in favor of Marxism?"

Ivo Cerckel said...

No, Aaron, I am an opponent of Marxism.
I do prefer Austrian economics which I am still discovering - after so many years.

FOFOA is advocating the existence of "classes", a Marxist concept.
In its effort to replace the incorrect Hegelian concept of the nation-state, this Marxist concept has never risen above the level of a doctrine for the soap-box orator.
The Marxist concept of classes implies that the capitalist system necessarily involves exploitation or defrauding of the workers.

The value of gold does not result from the work involved in extracting it from Mother Earth.

And now, I will read JR whom I overlooked.

FOFOA said...

Hello Dr. O,

"My concern then, is that I am hearing a lot from “FOFOA the ideological extremist!”, lately instead of FOFOA, the unbiased reasoner."

Maybe it's just the nature of the beast that when I discuss the debtor/saver dichotomy someone invariably projects their own biases onto my words. I recall something similar happening with the first Debtors and Savers post.

"I'm starting to wonder if your objective ability to see where we're headed is getting clouded lately, by a disgust at what you see. Employment is the latest example of this."

There's a reason I mentioned employment in this post. Did you miss it?

And where have I revealed emotion? Actually, in contrast to the emotion-filled left/right debate, I have an objective reason for discussing the USG's structural spending habit: dollar hyperinflation.

"I am not personally as concerned about what's right or wrong"

From the post: "Now would probably be a good time to restate that "the debtors and the savers" is a dichotomy, not a moral judgment."

Sincerely,
FOFOA

FOFOA said...

Hi Ivo,

"FOFOA is advocating the existence of "classes", a Marxist concept."

I prefer camps to classes. It is savers who create a de facto dichotomy, and paper savers who erode the economy.

Sincerely,
FOFOA

Ivo Cerckel said...

Dear JR,
Daar FOFOA,

FOFOA’s definition in his May 2011 "Return to Honest Money" post is that honest money is simply money that does not purport to be something it is not.

Article 130 of the 1999 Contract Law of the People’s Republic of China provides that a sales contract is a contract whereby the seller transfers title to the subject matter to the buyer, who pays the price.

When the seller gives a subject matter of value, is the buyer reciprocating this gift if he’s paying the seller with something, in this case paper, of no value? Is the buyer in that case not rather doing what the Golden Rule prohibits, i.e., doing to the seller what he – as the buyer - would not want the seller to do to him, i.e., giving nothing in exchange for something?

For the Austrians, money is not an institution (not the institution of or, rather, for debt settlement).

For the Austrians, money is a good readily acceptable in exchange by everyone in a given geographical area and is sought for the purpose of being re-exchanged.

For Mises, money can only come about after there has been a demand for the money commodity in a barter economy. Money therefore has its roots in useful, valued commodities and it is not something that governments can create and which will be trusted because they command it so.
To make this point and to reply to the "Austrian circle", the accusation raised against the Austrians that they explained the objective purchasing power of money by reference to subjective valuations when those subjective valuations are in turn completely dependent on money, Mises introduced the "regression theorem" which traced the value of money back to the time when, money the commodity was not money but a useful barter commodity.

At that moment there was no de-facto dichotomy created by the savers and there was thus no possibility to save in paper (paper savers could not arise) and thus no possibility (for paper savers) to erode the economy.

At that moment, money the commodity was not money but a useful barter commodity. (Rothbard, "The Essential Mises", pp. 16-17)

I wonder whether Freegold is not a correction of or improvement upon the regression theorem.

The final, i.e., the third revised, edition of "Human Action" was published in 1963. The final, i.e., the second, edition of the (German original) "The Money Theory of and Credit" was published in 1924. That’s all before 15 August 1971 (Mises died in 1973) when Nixon broke Bretton Woods.

As Rothbard says,
Mises regresses to the time when money the commodity was not money but a useful barter commodity
[and THEN returns to present-day money].

Mises used the regression theorem as an intellectual exercise to show the absolute market origin of money, as means of valuing gold for its money-backing merits, allowing it to be controlled by bankers and governments.

My understanding of Freegold is that when Freegold advocates arrive with the regression theorem at the moment when money the commodity was not money but a useful barter commodity,
these advocates stay there and prevent the commodity from becoming money
so that it can be used, not as an institution for debt settlement but in bilateral barter within international trade settlement
- gold would thereby become a real competitor to dollar use in world trade
- gold not as money, but as the most valuable wealth asset in your portfolio
- but this doesn’t bother the central banksters (except those in ...).

Nothing prevents the parties to an international-trade contract to use gold as a barter tool in international-trade settlement, gold thereby reclaiming the status it had for the Ancients as a wealth asset that stands beside money, yet has no modern label or official connection to money.

Once Freegold advocates have regressed to the moment
when money the commodity was not money but a useful barter commodity,
they stay there.

That’s the improvement upon Mises’ regression theorem.

Edwardo said...

Chico Hawk,

Yes, I'm sure they spend a lot of time trying to position themselves, distance themselves even, from what has, and is, taking place. But, as per your following comment...

"The irony is palpable considering governments' biggest fiscal mismanagement was bailing out the banks (& they continue to do so...)"

they are hard pressed to do so convincingly since the reason so many governments saved commercial banks (that they should have let go under) was due to the corrupting influence on government of the big banking sphere. And, at least in this country, the CB has a lot to answer for regarding how commercial banks became such problem children.
after all, once we back out nature, it always comes back to the parents.

Bjorn said...

About pawn shops IMHO they are a special case in that they actually take possession of the collateral. So no paper gold creation! (Do you agree JR?) It´s more like a sell now, and pay a fee to keep an option to buy back later. That way, if you are in dire straits but have a marketable object that is of sentimental value to you, be it gold or otherwise, you can get access to the cash you need to get back on your feet and not have to sell the object. Still doesn´t make sense to pawn gold bullion after revaluation thought IMHO.

Bjorn said...

thought = though

Sarah said...

Jim Sinclair wrote on his site:

"The Fed is out of time. The question is if the management of the Fed is looking to deep six the present administration. No Fed in history has ever failed to support the incumbent. I doubt this is going to be the first time because of the cost of inaction, not because I think the Fed is loyal to the incumbent."

I have to wonder though, if the Fed initiates QE3 before the U.S. Nov. elections, then we could see oil prices spike in the country, which wouldn't be a good thing for Obama's second-term bid. So could we expect QE3 after the November elections this year?

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